Capacity Management - Explained
What is Capacity Management?
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Table of ContentsWhat is Capacity?What is Capacity Management?How to Measure Demand?Measuring CapacityTheoretical vs Effective Capacity?What is Capacity Requirements Planning? Aligning Capacity with DemandWhat is Level Capacity?What is Chase Demand?What is Demand Management?
What is Capacity?
Capacity is the ability, based upon the need for resources (such pastime, people, systems, equipment, etc.) to carry out an objective (such as, serve customers, process information, or make products) to the extent required.
What is Capacity Management?
Capacity Management is planning that seeks to identify, obtain, or ready resources to meet future demands.
Capacity management can be either long-range, medium-range, or short-range. Aggregate Capacity Management is medium-term in nature. Its time period ranges between 6-18 months.
Three resources used for aggregate capacity management are:
- capacity, and
The three step process involved in Aggregate Capacity Management:
- Measuring aggregate demand
- Identifying alternative capacity plans
- Choosing the appropriate capacity plan
The stages of capacity planning include:
How to Measure Demand?
Forecasting demand should be carried out by the marketing department.
Forecasts can either be developed through a qualitative approach or a quantitative approach Importantly, the demand fore forecast should express demand requirements in terms of the capacity constraints (machine hours, work hours, etc.).
The forecast will be broken down into the various activities required for any part of the organization.
The operations manager will ensure that enough capacity is available to meet demand at a particular point in time at a minimal cost.
The quantity of resources (capacity) allowed should take into account the negative effects of losing an opportunity due to too little capacity versus cost of providing this capacity.
Capacity is generally dependent upon various characteristics of the organization.
One approach is to measure capacity in terms of input measures, which provides some indication of the potential output.
An alternative approach is estimating demand in output terms, with an explanation of inputs required to produce an output.
Theoretical vs Effective Capacity?
The theoretical design capacity of an operation is the capacity for which the organization is designed. Organizations are rarely able to meet this capacity due to operational inefficiencies.
Effective capacity is a realistic projection of capacity based upon the availability of resources. This capacity may be interrupted, however, by unplanned contingencies.
What is Capacity Requirements Planning?
Capacity requirements planning (CRP) is a method or application mostly used by manufacturing companies to determine the capacity of the company in meeting its production goals. Simply put, it examines how much a company needs to produce and the available production capacity of the company.
Aligning Capacity with Demand
The following are three methods for reconciling capacity and demand :
- Level Capacity
- Chase Demand
- Demand Management
What is Level Capacity?
Leveling capacity means fixing capacity (production) at a constant level (generally the average demand) throughout a period regardless of fluctuations in forecast demand.
During periods of low demand any overproduction can be held in anticipation of later time period.
The downside of this approach is the potential for holding costs and obsolete inventory.
What is Chase Demand?
Chasing demand means altering production capacity to match the demand over time.
This approach requires balancing a variety of resource availability (staff availability, equipment levels, etc.).
This approach is risky in terms of availability of resources when needed, the cost of readying, and the loss of control.
What is Demand Management?
Demand management adjusts demand to meet available capacity. Demand Management strategies include:
- Varying the Price – Raising or lowering price will alter customer/consumer demand.
- Selective Marketing - The amount of marketing affects demand. Increased marketing effort to product lines with excess capacity and reduce marketing with lower capacity.
- Repurpose Capacity - Use the existing capacity to develop alternative product during low demand periods.
- Operational Modification - Change operations to add benefits that generate increased demand. (E.g., Offer instant delivery of product during low demand periods. – Use an appointment system to level out demand).
Operational Methods Affecting Capacity
Several operational approaches or methods affect capacity, including:
- Lean operations
- Total Preventative Maintenance
- Just-in-Time Production