Capacity planning is the process of determining the production capacity needed by an

organization to meet changing demands for its products. In the context of capacity planning,

design capacity is the maximum amount of work that an organization is capable of completing
in a given period. Effective capacity is the maximum amount of work that an organization is
capable of completing in a given period due to constraints such as quality problems, delays,
material handling, etc. In operations, management capacity is referred as an amount of the
input resources available to produce relative output over period of time.

In general, terms capacity is referred as maximum production capacity, which can be attained
within a normal working schedule.

Capacity planning is essential to be determining optimum utilization of resource and plays an

important role decision-making process, for example, extension of existing operations,
modification to product lines, starting new products, etc.

Strategic Capacity Planning

A technique used to identify and measure overall capacity of production is referred to as

strategic capacity planning. Strategic capacity planning is utilized for capital intensive resource
like plant, machinery, labor, etc.

Strategic capacity planning is essential as it helps the organization in meeting the future
requirements of the organization. Planning ensures that operating cost are maintained at a
minimum possible level without affecting the quality. It ensures the organization remain
competitive and can achieve the long-term growth plan.

There are three principle methods to approach capacity planning. Each method is based on
reacting to or planning for market fluctuations and changing levels of demand.
These capacity planning strategies are Match, Lag, and Lead.

Match

Matching is a strategy that involves monitoring the market for demand increases and decreases
on a regular basis. Capacity is then changed to match demand.

Matching capacity is considered to be a moderate strategy that requires near-constant,

incremental adjustments. It can require a considerable amount of work, but it is a low-risk
strategy that is ideal for many organizations.

Lag

As its name suggest, the lag strategy involves waiting until there is true demand before adding
additional capacity. This is the most conservative strategy, as hiring is only initiated when
demand is at 100%. This method virtually ensures the lowest possible staffing costs but can lead
to the loss of potential customers, if there is not enough talent on hand to deliver products or
services.

Lead

Lead capacity planning is the most radical of the capacity planning strategies, as it involves
changing capacity in anticipation of market demand. Hiring can be a slow process, and lead
capacity planning allows organizations to be prepared for growing or rapidly evolving markets.
When demand increases, businesses that successfully deploy lead capacity planning will be
ready to meet client needs. Granted, incorrect or off base assumptions by management can
result in overstaffed teams and have a significant negative impact on the bottom line.

Capacity Planning Classification

Capacity planning based on the timeline is classified into three main categories long range,
medium range and short range.

Long Term Capacity: Long range capacity of an organization is dependent on various other

capacities like design capacity, production capacity, sustainable capacity and effective capacity.
Design capacity is the maximum output possible as indicated by equipment manufacturer
under ideal working condition.
Production capacity is the maximum output possible from equipment under normal working
condition or day.

Sustainable capacity is the maximum production level achievable in realistic work condition and
considering normal machine breakdown, maintenance, etc.

Effective capacity is the optimum production level under pre-defined job and work-schedules,
normal machine breakdown, maintenance, etc.

Medium Term Capacity: The strategic capacity planning undertaken by organization for 2 to 3

years of a time frame is referred to as medium term capacity planning.

Short Term Capacity: The strategic planning undertaken by organization for a daily weekly or
quarterly time frame is referred to as short term capacity planning.

Goal of Capacity Planning

The ultimate goal of capacity planning is to meet the current and future level of the
requirement at a minimal wastage. The three types of capacity planning based on goal are lead
capacity planning, lag strategy planning and match strategy planning.

Factors Affecting Capacity Planning

Effective capacity planning is dependent upon factors like production facility (layout, design,
and location), product line or matrix, production technology, human capital (job design,
compensation), operational structure (scheduling, quality assurance) and external structure
(policy, safety regulations)

Procedure for Capacity Planning

Assessment of Present Capacity

The capacity of a department can be measured in their output or inputs. Output measure is
allowed in case of manufacturing firms such as automobile plant (number of vehicles), iron and
steel plant (tons of steel), brewery (barrels of beer), cannery (tons of processed foods), Power
Company, (megawatts of electricity), and a lot more.

Also, service industry such as hospitals (number of beds), airports (number of planes), cinemas
(number of seats), restaurants (number of tables and chairs), university (number of students),
warehouse (spaces), and a lot more, can be used to measure capacity in terms of inputs.
Estimating Future Capacity Needs

Short term capacity requirements can be estimated by forecasting product demand at different
stages of the product life cycle. It is more challenging to anticipate long-term capacity
requirements due to the uncertainties of market and technology.

Capacity forecast helps to determine the gap between the existing capacity and estimated
capacity so that necessary adjustments may be made. For example, a company that engages in
the manufacturing of two products may find that one product has low demand in summer (e.g.,
coffee or tea) while another product has low demand in winter (e.g., cold drink).

Identifying Alternative ways of Modifying Capacity

In a situation where the present capacity is not enough to meet the estimated demand
capacity, an expansion will be needed to meet up with the shortage. This way, more shifts or
overtime will be needed to improve the capacity. In the same vein, the expansion will offer to
scale and help in meeting the demand forecast, but it needs extra investment and a danger of
falling short of expectations in future demand.

When the present capacity more than the one forecasted, there is a need to cut down on
excess capacity. Building new products, selling present facilities, laying off workers, or getting
more jobs from other companies are all ways to stay on top of this.

Evaluation of Alternatives

Different alternatives for capacity improvement or reduction are calculated from economic,
technical, and other standpoints. The reactions of staff and locals should be considered during
the evaluation to get the correct analysis. Some main evaluation techniques include cost-
benefit analysis, queuing theory, decision theory, and others.

Choice of Suitable Course of Action

After carrying out the cost-benefit analysis of different alternatives to increase or reduce the
capacity, the best alternative is now closed.
Application of Capacity Planning at General Motors India

"Capacity limitation was the main reason for lower Spark sales. It was not the best strategy a
company in GM India’s position should have adopted. You need to have the product available in
the showroom."

- Mohit Arora, Senior Director, JD Power Asia-Pacific, in 2007

On April 17, 2007 when ‘Chevrolet Spark’ was launched by General Motors India Private Ltd.,
which intensified price war in the small car segment. GM India priced the model around Rs
12,000 less than Zen Estilo from its closest competitor, Maruti Suzuki.

However, despite of a sparkling debut and sending a lot on media and promotions and thus
creating a buzz which was planned to remain there for at least a year, Spark failed to deliver to
the promises. Prior to this launch, the company was way down in terms of media voice, market
share, product line up, and capacity constraints, and was badly affected by the phase-out of its
once popular Opel brand.

Moreover, due to capacity constraints, Spark was offered only in the northern and western
parts of the country. While GM India hoped to increase its revenues with the launch of
the Spark, its sales failed to live up to expectations. However, it managed to bag some
prestigious awards like the J.D. Power Initial Quality Study (IQS) Award for four consecutive
years from 2007 for its top-quality features. The Spark also began receiving good reviews from
auto experts and consumers for its comfort and performance and GM recorded an annual
growth of 68% in 2007. To overcome the existing capacity constraints, the company had built a
facility at Talegaon in Maharashtra by 2009. As a result, there was a reversal of the situation
and the company had excess production capacity. With excess capacity, GM India planned to
extend its portfolio. However, during 2010-2011, its production facilities in Gujarat faced labor
unrest and the company was left with production losses. GM India, therefore, proposed to lay
off some of its employees at its plants. With such problems surfacing, industry observers feared
that GM India might again face capacity constraints.