Strategic Capacity Planning

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Capacity could mean an ability to perform or produce, something that can receive hold or absorb. In the organizational context capacity refers is the maximum level of output of goods and services that a given system can potentially produce over a set period of time. Two major aspects of capacity in an organisation includes a particular system in which an organisation can produce (or provide) goods (or services) and the time taken to produce (or provide). Accordingly, there is subjectivity involved especially in accordance to requirement of human resources and their relevant skills and capacities (as discussed in class). There are three types of capacities:

  1. Maximum capacity: Also known as design capacity, it is the maximum level of output of goods or services that a given system can potentially produce or provide over a set period of time. This means that a given system can contain or accommodate a maximum amount of goods or maximum number of services. For example, a bottle has a total capacity of 750 millilitres of water.
  2. Effective capacity: Effective capacity is usually less than maximum capacity as it attempts to reflect the realities of changing product/service mix or requirements. Accordingly, this capacity takes certain factors into consideration based on which the real capacity of the system is (pre)determined. The factors include, lunch breaks, coffee breaks, problems in scheduling and balancing operations and other similar circumstances (also discussed in class).
  3. Actual capacity: Also known as demonstrated rate, this capacity is the rate of output actually achieved and cannot ideally exceed effective capacity. This capacity is observed on real-time basis and to current factors that affect output. For example, heavy rains disrupted transportation of primary stakeholders of a business leading to absenteeism or delays in the system. Another example is when workers shirk work and show lack of commitment during a given work activity leading unproductivity across workers in other systems.

Measuring Capacities

Two measures are used to determine the use of capacity of a business unit. The values for both are obtained in percentages.

  1. Utilisation rate: Also known as capacity utilisation refers to the ratio of actual output and maximum output OR. (Actual output/Maximum output) X 100. In economics, utilization rate is studied to understand demand dynamics. For example, if demand for a product/service weakens then the utilisation rate also slackens and vice versa. In engineering, utilisation rate is observed in terms of utilisation of fixed capital. Capacity measurement is incomplete without considering efficiency rate
  2. Efficiency rate: This rate refers to the ratio of actual output and effective output OR (Actual output/Effective output) X 100. This rate takes the operational constraints into consideration that include human factors/errors, demand, logistics, quality, uniformity and management requirements. While this rate may reflect inhuman methods of production or providing service, this rate can be considered to reflect on those possible methods by examining the existing and expected approaches in the system to make relevant corrections or decisions.

Capacity measurement can be further substantiated by a process called strategic capacity planning as discussed below.

Strategic Capacity Planning

The meaning of strategy is derived from the science and art of military and accordingly refers to a plan of action to accomplish a specific goal. It requires an art or skill to use strategies in businesses for obtaining relevant goals. In the context of a capacity of system, strategic capacity planning is a process that attempts to obtain balance in the system from use of available and suitable resources that could result in optimum output. Strategic planning accordingly requires attention to each detail in the production or provision of products or services. This attention is key to develop minimal wastes, minimal inventory and reduces the overall costs of production. This also implies that the planning requires a strategic process to understand customer demand or preferences and correspondingly match it up with the business’ ability to adjust and adapt.

There are three indicative strategies considered by businesses that are discussed below:

  1. Lead strategy: Also known as an aggressive strategy, it involves adding capacity in anticipation of an increase in demand. This strategy attempts to allure customers away from a business’ competitors. The possible disadvantage of this strategy is excess inventories leading to additional costs and wastage.
  2. Lag strategy: Also known as conservative strategy, this involves running a business full capacity or beyond due to increase in demand. This strategy may decrease the risk of waste but may result in the loss of possible customers
  3. Match strategy: Also known as moderate or tracking strategy, which involves adding capacity in small amounts in response to changing demand in the market.

To decide on any one or a combination of above mentioned strategies businesses need to consider certain steps that could facilitate smooth functioning of a business. Businesses need to evaluate and revaluate their existing capacities and determine possible alternatives to make improvements in processes. Evaluation could also include a study on the finances of the business and forecasting possible demand and/or supply for the future. In addition, businesses need to consider qualitative issues (changes in environment, technology, tastes and preferences, political scenario, etc.) along with financial analysis and forecasts. Strategic planning accordingly requires monitoring and relevant implementation of select processes in capacities.