CHAPTER 8
CAPACITY
THE CONCEPT

Maximum rate of output for a process
 Inadequate capacity can lose customers and limit
growth while excess capacity can drain company’s
resources and prevent investments in more lucrative
ventures
 To meet current and future demands
 Output measure : when a firm provides a relatively
small number of standardized products/services or
applied to individual process within the firm
THE CONCEPT (continued)

Input measure : low volume, flexible process (machine
hours or number of machine)
 Utilization : the degree to which equipment, space or
labor is currently being used = the percentage of
average output rate to maximum capacity
 Maximum capacity is defined as peak capacity or
effective capacity
 Peak capacity : the maximum output under ideal
conditions, sustained for a short time, marginal method
(overtime, extra shifts, reduced maintenance, etc)
THE CONCEPT (continued)

Effective capacity : maximum output that a firm can
economically sustain under normal conditions or the
greatest level of output the firm can reasonably sustain
by using realistic employee work schedule and the
equipment currently in place
 Increasing maximum capacity : line balancing,
minimizing the idle time lost at upstream operations,
maintaining the availability of materials & tools,
avoiding/minimizing unproductive activities (setup,
handling
ECONOMIC OF SCALE
The average unit cost can be reduced by increasing its
output rate because :
 the fixed costs are spread over more units
 reducing construction cost
 cutting cost of purchased materials
 finding process advantages
DISECONOMIES OF SCALE
The average cost per unit increases as the facility’s
size increases for it brings complexity, loss of focus,
inefficiencies, loss of flexibility to respond changing
demands
CAPACITY STRATEGIES

Sizing capacity cushions : average utilization rate should
not get too close to 100% to avoid declining
productivity. So the capacity cushion is the amount of
reserve capacity that a firm maintains to handle sudden
increase in demand or temporary losses of production
capacity. Larger cushion when demand varies, future
demand uncertain
 Timing and sizing expansion : expansionist (capacity
lead, average capacity, one step expansion) strategies and
wait-and-see (capacity lag, incremental) strategies
CAPACITY STRATEGIES (continued)

Linking capacity and other strategies : competitive
strategies, quality management, capital intensity,
resource flexibility, inventory, scheduling, location
decisions
STRATEGIES FOR MEETING DEMANDS
(see Russell & Taylor)
Aggregate production planning determines the resource
capacity needed to meet demand over an intermediate
time horizon. It becomes a challenge when demands
fluctuate which can be met by :
 producing at a constant rate and using inventory to
absorb fluctuations (level production)
 hiring and firing workers (chase demand)
 maintaining resources for high demand level
STRATEGIES FOR MEETING DEMANDS (continued)

increasing and decreasing working hours (overtime)
 subcontracting works
 using part time workers
 providing the service/product at a later time period
(backordering)
A SYSTEMATIC APPROACH TO CAPACITY DECISION

Estimate future capacity requirements
 Identify gaps
 Developing alternative plans for filling the gaps
 Evaluate each alternative and make the final choice
TOOLS FOR CAPACITY PLANNING

Waiting line models and simulation : random and
independent consumer behavior
 Decision trees : to anticipate any possible events such as
competitor’s actions