Capacity Management in Operations

Capacity – the ability to hold, receive, store, or accommodate

In business, viewed as the amount of output that a system is capable of achieving over a specific period of time

Capacity management needs to consider both inputs and outputs


Capacity Planning Time Durations


Long range

Greater than one year

Intermediate range

Monthly or quarterly plans covering the next 6 to 18 months

Short range

Less than one month

Strategic Capacity Planning

Determining the overall level of capacity-intensive resources that best supports the company’s long-range competitive strategy



Labor force size

Capital and Cash


Capacity Planning Concepts

Capacity utilization rate – a measure of how close the firm is to its best possible operating level

Economies of scale – the idea that as a plant gets larger and volume increases, the average cost per unit tends to drop

Diseconomies of scale – at some point, the plant becomes too large and average cost per unit begins to increase


Capacity Planning Concepts

Capacity focus – the idea that a production facility works best when it is concentrated on a limited set of production objectives

Focused factory or plant within a plant (PWP) concept

Capacity flexibility – the ability to rapidly increase or decrease product levels or the ability to shift rapidly from one product or service to another

Comes from the plant, processes, and workers or from strategies that use the capacity of other organizations


Capacity Flexibility


Flexible Plants

Flexible Processes

Flexible manufacturing systems

Simple, easily set up equipment

Flexible Workers

Ability to switch from one kind of task to another quickly

Multiple skills (cross training)

Ability to quickly adapt to change

Zero-changeover time

Considerations in Changing Capacity


Maintaining System Balance

Similar capacities desired at each operation

Frequency of Capacity Additions

Cost of upgrading too frequently

Cost of upgrading too infrequently

External Sources of Capacity


Sharing capacity

Decreasing Capacity

Temporary reductions

Permanent reductions

Manage bottleneck operations

Frequent versus Infrequent Capacity Expansions


Determining Capacity Requirements


Use forecasting to predict sales for individual products

Calculate labor and equipment requirements to meet forecasts

Project labor and equipment availability over the planning horizon

Planning Service Capacity


Manufacturing Capacity

Goods can be stored for later use.

Goods can be shipped to other locations.

Service Capacity

Capacity must be available when service is needed – cannot be stored.

Service must be available at customer demand point.

Volatility of demand is relatively low.

Much higher volatility is typical.

Capacity Utilization and Service Quality

The relationship between service capacity utilization and service quality is critical.

Utilization is measured by the portion of time servers are busy.

Optimal levels of utilization are context specific.

Low rates are appropriate when the degree of uncertainty (in demand) is high and/or the stakes are high (e.g., emergency rooms, fire departments).

Higher rates are possible for predictable services or those without extensive customer contact (e.g., commuter trains, postal sorting).


Service Quality

Rate of service utilization and service quality are directly linked.


Arrivals exceed services – many customers are never served

Sufficient capacity to provide quality service

Service quality declines – disruptions or high arrival levels lead to long wait times

Capacity cushion

A capacity cushion is planned excess capacity

Calculated as the difference between the Best Operating Level and the Capacity Used.

Expressed as a percent. The difference between Capacity Utilization Percent and 100%.

The less cushion, the less flexible the response to changing demand.

The more cushion, the more flexible – BUT creates higher costs.

Large cushions are necessary for dynamic market demand.

Key operations consideration is how to expand and contract capacity as needed.