1. PRODUCTION AND OPERATIONS
MANAGEMENT
CAPACITY PLANNING

2. CAPACITY
AMOUNT OF OUTPUT A SYSTEM IS CAPABLE OF
ACHIEVING OVER A SPECIFIC PERIOD OF TIME.
Capacity planning
Capacity planning is central to the long-term success of an
organization. Capacity plans are made at two levels:
(i) Long-term capacity plans :
which deal with investments in new
facilities and equipments covering the requirements for at
least two years into the future and
(ii) Short-term capacity plans :
which focus on work-force
size, overtime budgets, inventories etc.

3. CAPACITY PLANNING
A long term strategic decision that establishes a
firm’s overall level resources.
Three major capacity decisions are:
i. How much capacity to be installed,
ii. When to increase capacity and
iii. How much to increase

4. TYPES OF CAPACITY
1) Production capacity: Maximum rate of
production or output of an organization.
(e.g., 100 cars per day etc .. )
2) Design capacity: The maximum output
that can possibly be attained.
3) Effective capacity: The maximum
output given a product mix, scheduling
difficulties, machine
maintenance, quality
factors, absenteeism etc.
4) Maximum capacity: The maximum
output that a facility can achieve under
ideal conditions. Also known as peak

5. DETERMINANTS OF EFFECTIVE CAPACITY
 Many decisions about design of the production system and
operation of the production system may have an impact on
capacity. The main factors relate to the following:
(i) Facilities,
(ii) Product or services,
(iii) Process
(iv) Human resource considerations,
(v) Operations and
(vi) External forces.

6. ECONOMIES AND DISECONOMIES OF SCALE
 Economies scale: The concept which states that “the
average unit cost of product can be reduced by
increasing the rate of output”.
 Best operating level: The annual output which results in
the least average unit cost.
 Diseconomies of scale: Above a certain level of
output, additional volume of output results in ever-
increasing average unit costs. This phenomenon is
referred to as diseconomies of scale.

7. DEVELOPING CAPACITY ALTERNATIVES
 To enhance capacity management, the following
approaches to capacity alternatives could be developed:
1) Designing flexibility into the system
2) Differentiating between new and mature
products or services
3) Taking a “big-picture” approach to capacity
changes
4) Preparing to deal with “chunks” of capacity
5) Attempting to smooth out capacity requirements