WHAT IS CAPACITY?

It is the maximum amount that something can contain.

Capacity is often defined as the capability of an object, whether it is a machine, work
center, or operator, to produce output for a specific time period, which can be an hour, a
day, etc.

Some companies—especially those that don't have supply chain optimization as

a core business strategy—ignore the measurement of capacity, assuming that their
facilities have enough capacity. But, oftentimes, they don't. Measuring Capacity in
Manufacturing for Supply Chain (thebalancesmb.com)

Capacity Simple Formula:

Capacity = Time Available / Time of Task

WHAT IS CAPACITY MANAGEMENT?

Capacity management refers to the act of ensuring a business maximizes its
potential activities and production output—at all times, under all conditions. The
capacity of a business measures how much companies can achieve, produce, or sell
within a given time period. 

CAPACITY DEFINED INTO THREE CATEGORIES

Capacity is defined under 3 categories; design capacity, effective capacity and
actual capacity. The operations utilization of resources and the efficiency of its
processes can then be calculated using these.

1. Design Capacity

This is a theoretical number and not one that is applied to the daily production of
an operation. Design capacity is the output that an operation can produce continuously,
at maximum rate without stopping for any shift changeovers, maintenance or any other
delays. What the process is capable of producing under perfect conditions. In some
cases, this might be interpreted as maximum capacity.

2. Effective Capacity

This considers how the operation will run on a long term basis, how it will be
staffed and how it will be maintained. All planned stoppages under the normal working
time frame are taken into consideration. This can also be known as available capacity.
These stoppages may include shift changeovers, lunch breaks, set up times and many
other operational factors.

3. Actual capacity

This is the same as effective capacity but contains unplanned losses as well as
planned ones. These could include poor work rate, absenteeism or new staff training for
example.
MEASURES OF CAPACITY
When measuring capacity, the unit of measure can be either an input or an
output to the process. The key is to take the most logical unit that reflects the ability of
the operation to create its product or service. However, where the input is more
complicated to measure, such as machine hours on a process layout, then output is a
more suitable measure. The unit of time could be a minute, an hour, a day or a week, or
whatever time scale fits the operation, but the unit of output and time scale needs to be
consistent.

1. Input measures of capacity

When using input measures of capacity, the measure selected is defined by the
key input into the process. Where the provision of capacity is fixed, it is often easier to
measure capacity by inputs, for example; rooms available in a hotel or seats at a
conference venue. Input measures are most appropriate for small processes or where
capacity is relatively fixed, or for highly customized or variable outputs such as
complicated services.

2. Output measures of capacity

The output measures count the finished units from the process such as mobile
phones produced in a day or cars manufactured per week. This measure is best used
where there is low variety in the product mix or limited customization.

TWO MEASURES OF SYSTEM EFFECTIVENESS

Capacity often refers to an upper limit on the rate of output. Even though this
seems simple enough, there are subtle difficulties in actually measuring capacity in
certain cases. These difficulties arise because of different interpretations of the term
capacity and problems with identifying suitable measures for a specific situation.

In selecting a measure of capacity, it is important to choose one that does not

require updating. For example, dollar amounts are often a poor measure of capacity
(e.g., capacity of $30 million a year) because price changes necessitate updating of that
measure.

Where only one product or service is involved, the capacity of the productive unit
may be expressed in terms of that item. However, when multiple products or services
are involved, as is often the case, using a simple measure of capacity based on units of
output can be misleading. An appliance manufacturer may produce both refrigerators
and freezers. If the output rates for these two products are different, it would not make
sense to simply state capacity in units without reference to either refrigerators or
freezers. The problem is compounded if the firm has other products. One possible
solution is to state capacities in terms of each product. Thus, the firm may be able to
produce 100 refrigerators per day or 80 freezers per day. Sometimes this approach is
helpful, sometimes not. For instance, if an organization has many different products or
services, it may not be practical to list all of the relevant capacities. This is especially
true if there are frequent changes in the mix of output, because this would necessitate a
frequently changing composite index of capacity. The preferred alternative in such
cases is to use a measure of capacity that refers to availability of inputs. Thus, a
hospital has a certain number of beds, a factory has a certain number of machine hours
available, and a bus has a certain number of seats and a certain amount of standing
room.

No single measure of capacity will be appropriate in every situation. Rather, the

measure of capacity must be tailored to the situation. Table 5.1 provides some
examples of commonly used measures of capacity.

Up to this point, we have been using a general definition of capacity. Although it

is functional, it can be refined into two useful definitions of capacity:

1. Design capacity

The maximum output rate or service capacity an operation, process, or facility is

designed for.

2. Effective capacity

Design capacity minus allowances such as personal time, and maintenance.

Design capacity is the maximum rate of output achieved under ideal conditions.
Effective capacity is always less than design capacity owing to realities of changing
product mix, the need for periodic maintenance of equipment, lunch breaks, coffee
breaks, problems in scheduling and balancing operations, and similar circumstances.
Actual output cannot exceed

DETERMINANTS OF EFFECTIVE CAPACITY

Many decisions about system design have an impact on capacity. The same is true for
many operating decisions. This section briefly describes some of these factors, which
are then elaborated on elsewhere in the book. The main factors relate to facilities,
products or services, processes, human considerations, operational factors, the supply
chain, and external forces.

a. Facilities
b. Product and Service Factors
c. Process Factors
d. Human Factors
e. Policy Factors
f. Policy Factors
g. Operational Factors
h. Operational Factors
i. Supply Chain Factors
j. External Factors

CAPACITY PLANNING

When capacity needs to be increased or decreased, the operation must consider

how this is going to be achieved. This is a key decision as the organization will have to
make investment decisions based upon what level of capacity is to be selected and
when it is to be provided. The operation has several ways in which it can respond to the
changes in demand with its provision of capacity. The decision to provide capacity
depends upon the selected strategy and the ability to store the product or timeliness of
service production. The timing decisions of how and when to provide capacity need to
be determined in line with demand.

CAPACITY PLANNING METHODS

The organization has 3 main choices;

1. It can provide capacity ahead of the forecast so that it is ready to respond
immediately which is known as a capacity leads demand strategy.
2. It can provide capacity as demand changes so that it expands and contracts its
capacity to follow demand, which is a capacity matches demand strategy.
3. It can wait to see what demand is and then respond after it is confirmed, a
capacity lags demand strategy.

Capacity Leads Demand

It is possible to have capacity ready to react to an increase in demand as ready

and available capacity. This is where a buffer is provided in order to allow the operation
to react quickly to increases in demand. This strategy adds capacity in anticipation of
extra demand and is therefore an opportunistic strategy with the purpose of attracting
customers away from competitors. This capacity strategy has an advantage in that the
operation is ready to satisfy customer demand and meet short term opportunities.

However, there is a risk of demand not rising and the operation is then left with
the wasted costs of unused capacity.

It is a more expensive way of providing capacity as it requires investment to be

made ahead of demand, but it is a useful strategy if the organization is trying to build
market share and the benefit of establishing a customer relationship outweighs the cost
of providing excess capacity.
An example of a capacity leads demand approach would be an extension to a
lecture theatre being built before student numbers were confirmed.

Capacity Matches Demand

For the provision of capacity in line with demand then this strategy is adopted.
This is done by adding capacity in measured amounts in response to changing demand
in the market. This is usually accomplished by flexible addition of capacity either from
flexible labor or flexible facilities that are able to meet the demand upon requirement.
Either good planning is in place or there is a risk of underutilized resources.

This strategy relies heavily on forecasting and accurate information as

investment decisions are made in line with the forecast. Incorrect forecasting will cause
missed opportunities or wasted resources.

This often happens in services where staff are the flexible resource and can be
brought in to cover peak demand yet sent home in quieter times, such as a toy store
catering to Christmas demand or a restaurant expanding and contracting capacity in line
with anticipates peaks and troughs in customer demand.

Capacity lags demand

Here increments of capacity are only added after the demand has increased by
providing capacity after the demand rises. This allows the organization to provide
capacity with certainty and reduces the risk of incorrect investment into capacity
increases. However, this method does rely on the ability to provide products and
services on short lead-time and assumes that the customer is prepared to wait. This is
less risky than providing investment ahead of demand; however, it has the
disadvantage that customers may not be prepared to wait for the product or service and
opportunities can therefore be lost. Producing products on a lead time can be frustrating
for customers, it can be almost impossible to buy a sofa from a store and have it
delivered on the day, most have a four week lead time to allow the manufacturers to
plan their capacity ahead of time. This is becoming an increasingly unusual strategy for
consumer goods as consumers are often less tolerant of waiting.