Production Capacity

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Production Capacity.

PRODUCTION CAPACITY

The maximum rate of output of a process or a

system.

Volume of products that can be generated by a

production plant or enterprise in a given period by

using current resources.

Capacity

The maximum level of output.

The amount of resource inputs available

relative to output requirements at aparticular time.

Capacity is the upper limit or ceiling on the

load that an operating unit can handle.

Examples of Capacity Measures


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CAPACITY PLANNING.

Design of the production system involves

planning for the inputs, conversion process

and outputs of production operation.

The effective management of capacity is the

most important responsibility of production

management.

The objective of capacity management (i.e.,

planning and control of capacity) is to matchthe level of operations to the level of demand.

Capacity planning is to be carried out keeping in

mind future growth and expansion plans, market

trends, sales forecasting, etc.

It is a simple task to plan the capacity in case

of stable demand.

But in practice the demand will be seldom

stable.

The fluctuation of demand creates problems

regarding the procurement of resources to

meet the customer demand.

Capacity decisions are strategic in nature.


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Capacity is the rate of productive capability of

a facility.

Capacity is usually expressed as volume of

output per period of

time

Production managers are more concerned

about the capacity for

the following reasons:

Sufficient capacity is required to meet the

customers demand in time.

Capacity affects the cost efficiency of

operations.

Capacity affects the scheduling system.

Capacity creation requires an investment

Capacity planning is the first step when an

organization decides to produce more or new

products.

Capacity Planning

The basic questions in capacity planning are:

What type of capacity is needed?

How much is needed?


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When is it needed?

How does productivity relate to capacity?

Measurement of Capacity Planning

Design capacity

maximum obtainable output

System capacity

Maximum capacity given product mix,

scheduling difficulties, and other doses ofreality.

Actual output

rate of output actually achieved--cannot

exceed effective capacity.

Capacity and output relationship.


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Measurement of Capacity Planning

The capacity of the manufacturing unit can be

expressed in number of units of output per

period.

In some situations measuring capacity is more

complicated when they manufacture multiple

products.

In such situations, the capacity is expressed as

man-hours or machine hours.

1.Design capacity:

Designed capacity of a facility is the planned

or engineered rate of output of goods or


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services under normal or full scale operating

conditions. For example, the designed capacity

of the cement plant is 100 TPD (Tonnes per

day). Capacity of the sugar factory is 150tonnes of sugarcane crushing per day.

2. System capacity:

System capacity is the maximum output of the

specific product or product mix the system of

workers and machines is capable of producing

as an integrated whole.

System capacity is less than design capacity or

at the most equal, because of the limitation of

product mix, quality specification, breakdowns.

The actual is even less because of many

factors affecting the output such as actualdemand, downtime due to machine/equipment

failure, unauthorized absenteeism.

he system capacity is less than design capacity

because of long range uncontrollable factors.

The actual output is still reduced because of

short-term effects such as, breakdown of

equipment, inefficiency of labor.


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The system efficiency is expressed as ratio of

actual measured output to the system

capacity.

System Efficiency (SE) = Actual output /

System capacity

3 Licensed capacity:

Capacity licensed by the various regulatory

agencies or government authorities. This is the

limitation on the output exercised by the

government.

4. Installed capacity:

The capacity provided at the time of

installation of the

plant is called installed capacity.

5. Rated capacity: Capacity based on the

highest production rate established by actual

trials is referred to as rated capacity

Effective utilization of Capacity.

Capacity Utilization

Capacity used_


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rate of output actually achieved

Best operating level_

capacity for which the process wasdesigned (effective or maximum capacity)

Average output or Capacity

Used Utilization =

________________________________ X 100%

Maximum capacity or Best

Operating Level

Utilization is a measure of ratio of average

output rate to maximum

capacity(expressed in percentage).

The Average output or capacity used and

maximum capacity must be measured in the

same terms.

The utilization rate indicate the need for adding

extra capacity or eliminating unused capacity.

For example, if a firm could produce 1200 unitsper month, but is actually producing 600 per

month, its capacity utilization is as follows:


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Capacity utilization % = 600 units per month x

100% / 1200 units per month

= 50%

A firms level of capacity utilization determines

how much fixed costs should be allocated per

unit, so as a firms capacity utilization

increases, the fixed costs (and therefore also,

total costs) per unit will decrease.

If a firm is running at full capacity, there area number of potential drawbacks :

There may not be enough time for routine

maintenance, so machine breakdowns

may occur more frequently and orders will be

delayed .

It may not be possible to meet new or

unexpected orders so the business cannot

grow without expanding its scale of

production .

Staff may feel under excessive pressure,

leading to increased mistakes, absenteeism

and labor turnover.


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If the factory space is overcrowded, work may

become less efficient due to the untidy working

conditions .

It may be necessary to spend more on staff

overtime to satisfy orders, increasing labor

costs .

In general, businesses would feel most

comfortable at something between 80 to 90%

capacity utilization because fixed costs per unit

are relatively low and there is some scope to

meet new orders or carry out maintenance and

training.

A firm that has just invested in major new

facilities in anticipation of major growth could

take some time before reaching a good level ofutilization, so it is important to consider sales

trends when discussing capacity utilization.

Causes of under-utilization of capacity.

There are a number of reasons why a firm might be

experiencing low capacity utilization, including the

following:

New competitors taking market share or

causing over-supply in the market.


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Fall in market demand due to changes in

consumer tastes or fashion .

Unsuccessful marketing one or more aspect

of the marketing mix may simply mean that

the firm is not successful .

Seasonal demand this is especially apparent

in the tourist industry where firms like hotels

and leisure parks are full in the summer but

see much lower utilization at other times of the

year .

Problems arising from low capacity utilization

:

Higher fixed costs per unit mean reduced

profitability; if prices were raised to cover

these costs, this would probably lead toreduced sales unless the product was price

inelastic .

Spare capacity can portray a negative image,

particularly in a business where it can be seen

that it is no longer busy such as a shop or a

health club - signifying loss of popularity

Staff can become bored and demoralized if

they dont have as much to do, especially if

they fear losing their jobs .


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Benefits of low capacity utilization.

Low capacity utilization is unlikely to be desirable

in the long term as the higher unit costs will make

it difficult to compete.

However it is not all bad , and possible short term

benefits include:

A firm may have more time for maintenance

and repairs and for staff training, to prepare for

an upturn in trade.

There may be less stress for employees than if

they were working at full capacity .

The firm can cope with new orders; firms in

expanding markets may expect to have low

utilization whilst they build their sales.

Dealing with high capacity utilization .

If a firm is struggling to keep up with demand, it

could use the following approaches:

Extra shifts or longer opening hours - using

extra labor in the form of staff overtime or

additional staff.

As long as it doesnt go on for too long, staff

may welcome the extra pay which is usually

at a higher rate.


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There will be an increase in labor and other

fixed costs such as extra heating and lighting

- and the firm might find there is insufficient

time for maintenance and training.

It is nevertheless a suitable approach to meet

increased demand while the firm determines

whether there will be a longer term need for

extra capacity.

In some industries, local residents might object

to additional noise and traffic caused by

night or weekend working.

Seasonal workers if the capacity shortage

is seasonal, then temporary staff may be taken

on to meet the need.

This is common in industries such as retail atChristmas, and farming in the summer.

The main problem is finding enough good

temporary workers who have the right skills to

maintain the firms levels of service and

quality.

Outsourcing or subcontracting this means

passing one or more aspect of the production

process to another firm.


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For example an engineering firm could send

components to another specialist firm for

plating and concentrate itself on the other

aspects of production.

Motor manufacturers have increasingly

sourced bodywork panels and other

components through subcontractors,

concentrating on assembly and finishing of

vehicles.

Expansion investment in larger or additional

factories, new machinery, further shops or offices.

This will involve recruitment and training of

new employees.

Although there is considerable expense

involved, this may be an appropriate strategy ifdemand is growing steadily and is expected to

be sustained.

Dealing with low capacity utilization .

If a firm cannot find enough orders, it will be

suffering from increased fixed costs, or

overheads, per unit of production.

Some possible solutions include:


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New business - of course, the most obvious

solution is to try and find new business or

change the marketing proposition so that the

firms product or service is more competitive!

However, if this is not successful, other measures

may have to be taken to cut overheads, such as:

Rationalization or downsizing - this

means shutting down or selling off parts of the

business. Staff may have to be made

redundant, losing skilled and trained staff, so

long term expectations must be taken into

account before taking such drastic measures.

Short-time working cutting out a shift or

reducing working hours. This will mean eitherreducing the workforce, or asking them to

accept reduced wages and/or a loss of

overtime. Obviously, this is likely to damage

staff morale but might be preferable to

permanent job losses as long as there is the

possibility of an upturn in trade. Laying off workers this will reduce labor

costs but not other fixed costs unless other

actions are also taken.


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Method of Capacity Planning.Capacity Planning Environment

Process of Capacity Planning

Capacity planning is concerned with defining

the long-term and the short-term capacityneeds of an organization and determining how

those needs will be satisfied.

Capacity planning decisions are taken based

upon the consumer demand and this is merged

with the human, material and financial

resources of the organization.

Capacity requirements can be evaluated from

two perspectives

long-term capacity strategies and

short-term capacity strategies.

1. LONG-TERM CAPACITY STRATEGIES .

Long-term capacity requirements are more

difficult to determine because the future

demand and technology are uncertain.


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Forecasting for five or ten years into the future

is more risky and difficult.

Even sometimes companys todays products

may not be existing in the future.

Long range capacity requirements are

dependent on marketing plans, product

development and life- cycle of the product.

Long-term capacity planning is concerned with

accommodating major changes that affectoverall level of the output in long-term.

Marketing environmental assessment and

implementing the long-term capacity plans in a

systematic manner are the major

responsibilities of management.

Following parameters will affect long range

capacity decisions.

1.Multiple products:

Companys produce more than one product

using the same facilities in order to increase

the profit.

The manufacturing of multiple products will

reduce the risk of failure.


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Having more than one product helps the

capacity planners to do a better job.

Because products are in different stages of

their life-cycles, it is easy to schedule them to

get maximum capacity utilization.

2. Phasing in capacity:

In high technology industries, and in industries

where technology developments are very fast,

the rate of obsolescence is high.

The products should be brought into the

market quickly.

The time to construct the facilities will be long

and there is no much time as the products

should be introduced into the market quickly.

Here the solution is phase in capacity on

modular basis.

Some commitment is made for building funds

and men towards facilities over a period of 35

years.

This is an effective way of capitalizing ontechnological breakthrough.

3.Phasing out capacity:


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The outdated manufacturing facilities cause

excessive plant closures and down time.

The impact of closures is not limited to only

fixed costs of plant and machinery.

Thus, the phasing out here is done with

humanistic way without affecting the

community.

The phasing out options makes alternative

arrangements for men like shifting them toother jobs or to other locations, compensating

the employees, etc.

SHORT-TERM CAPACITY STRATEGIES.

Managers often use forecasts of productdemand to estimate the short-term workload

the facility must handle.

Managers looking ahead up to 12 months,

anticipate output requirements for different

products, and services.

Managers then compare requirements with

existing capacity and then take decisions as to

when the capacity adjustments are needed.


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1. Inventories: Stock of finished goods during

slack periods to meet the demand during peak

period.

2. Backlog: During peak periods, the willing

customers are requested to wait and their

orders are fulfilled after a peak demand period.

3. Employment level (hiring or firing): Hire

additional employees during peak demand

period and layoff employees as demand

decreases.

4. Employee training: Develop multi-skilled

employees through training so that they can be

rotated among different jobs. The multi-skilling

helps as an alternative to hiring employees.

5. Subcontracting: During peak periods, hirethe capacity of other firms temporarily to make

the component parts or products.

6. Process design: Change job contents by

redesigning the job.

Strategic Capacity Planning.

Strategic Capacity Planning .


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Capacity Utilization & Best Operating Level.

Economies & Diseconomies of Scale.

The Experience Curve.

Capacity Focus, Flexibility & Planning.

Determining Capacity Requirements.

Decision Trees.

Planning Over a Time Horizon

Two Capacity Strategies


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Production Capacity

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