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Capacity Planning

Capacity Planning is the process of determining the production capacity an organization needs to meet current and future demand, and then ensuring that level of capacity is available. It involves matching the organization's ability to produce (supply) with the market's demand for its products or services.

Importance of Capacity Planning:

  • Strategic Impact: Adding significant capacity often involves large investments and long lead times, making it a strategic decision.
  • Cost Efficiency: Operating near optimal capacity levels is generally more cost-efficient; excess capacity leads to high fixed costs per unit, while insufficient capacity leads to lost sales or high overtime/subcontracting costs.
  • Meeting Demand: Sufficient capacity is required to meet customer demand in a timely manner.
  • Scheduling Foundation: Capacity availability is a key constraint for realistic production scheduling.

Measurement of Capacity:

  • Design Capacity: The theoretical maximum output rate under ideal conditions (no downtime, no breaks, perfect materials).
  • Effective Capacity: The maximum output rate achievable under realistic operating conditions (considering product mix, scheduled maintenance, breaks, setup times). Always less than Design Capacity.
  • Actual Output: The rate of output actually achieved. Usually less than Effective Capacity due to unplanned downtime, material shortages, absenteeism, quality issues, etc.
  • Key Metrics:
    • Utilization = (Actual Output / Design Capacity) x 100%
    • Efficiency = (Actual Output / Effective Capacity) x 100%
  • (Other Terms: Licensed Capacity - government limit; Installed Capacity - capacity upon setup; Rated Capacity - based on performance trials).

Levels of Capacity Planning:

Capacity planning occurs at different levels corresponding to the planning hierarchy:

  1. Long-Term Capacity Planning (Resource Planning):
    • Horizon: 1+ year.
    • Focus: Major capacity additions or reductions (new facilities, expansions, closures, major equipment purchases). Strategic decisions based on long-term forecasts and technology trends.
  2. Medium-Term Capacity Planning (Rough-Cut Capacity Planning - RCCP):
    • Horizon: Linked to MPS (weeks to months).
    • Focus: Checking the feasibility of a proposed MPS against key or critical resources (bottleneck work centers, critical machines, skilled labor). Less detailed than CRP. Provides early warning if MPS is unrealistic.
  3. Short-Term Capacity Planning (Capacity Requirements Planning - CRP):
    • Horizon: Linked to MRP (weeks).
    • Focus: Calculating the detailed workload for all work centers based on the planned and released orders from the MRP system. Compares required hours vs. available hours for each work center in each time period.
    • Purpose: Identifies potential overloads or underloads, allowing for adjustments (overtime, shifting work, alternate routing, adjusting MPS/MRP).

Capacity Planning Process:

  1. Forecast future demand.
  2. Determine capacity requirements based on forecasts.
  3. Measure current capacity.
  4. Identify capacity gaps (shortfall or excess).
  5. Develop alternative plans to address gaps (e.g., build, buy, subcontract, hire/fire, inventory).
  6. Evaluate alternatives (qualitatively and quantitatively).
  7. Select and implement the best alternative.

Strategies for Matching Capacity to Demand (Medium/Short Term):

  • Adjusting Capacity (Supply Side): Overtime/undertime, hiring/layoffs, shifting workers, using alternate routings, subcontracting, building/using inventory.
  • Managing Demand (Demand Side): Influencing demand through pricing, promotions, back-ordering, creating complementary products/services.

Indian Example: Infosys or TCS engage in capacity planning for their IT services. Long-term planning involves decisions on building new campuses or expanding into new cities based on global demand forecasts. Medium-term (linked to project pipelines/MPS equivalent), they perform RCCP to ensure enough trained personnel (critical resource) are available for upcoming projects. Short-term (linked to specific project tasks/MRP equivalent), CRP checks if specific teams (work centers) have the bandwidth (available hours) to handle assigned tasks, potentially requiring overtime or shifting resources between projects if overloads occur.

Capacity planning ensures that the organization has the physical capability to execute its production plans, bridging the gap between desired output and available resources.

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