 Capacity is the ability of a process or system to hold, receive, store or accommodate.  In business terms, it is the amount of output that a system is capable of achieving over a period of time. › E.g. in service set-ups, it is the number of customers handled in a day or time of a day. › In manufacturing firms the no. of units which can be produced in a single shift.

 Capacity is related to the time dimension. i.e. it is stated relative to some time period. Such as: › Long term capacity › Intermediate capacity › Short term capacity  The concept of capacity varies over type of business and nature of process under consideration.

 Capacity is planned at different levels, and it has a different meaning for different people, e.g. › The GM of a production unit will plan for over all capacity of all the plants producing a single product. › A production manager will consider capacity of a single plant. › A shift manager will be concerned with capacity of a single shift in a plant etc.  Accounting, finance, marketing, operations, purchasing, and human resources all need capacity information to make decisions.

 It is important for any firm to plan for capacity as too little capacity or too much capacity is dangerous for business.  Too little capacity means a low output, which means lost customer sales and not able to meet demand.  Too much capacity means wastage of resources and extra cost of operations as well as access supply of goods, increasing inventory costs.

 Output measures of capacity:  Capacity can be measured in terms of final goods produced in a day or week, e.g. no. of cars produced in a day.  Useful for firm who produce standardized product with little variety or customization.  Input measures of capacity  Used for low volume, flexible processes such as producing furniture.  Here the capacity can be measured in terms of no. of labor hours and no. of workers needed etc.  Utilization: Degree to which equipment, space or work force is currently being used, is measured as the ratio of average output rate to max. capacity. Utilization =  100% Average output rate Maximum capacity

 Economies of scale › 1.Spreading fixed costs › 2.Reducing construction costs › 3.Cutting costs of purchased materials › 4.Finding process advantages Diseconomies of scale  Complexity  Loss of focus  Inefficiencies Please see page 266 (book-1)for details

Figure 5.1 – Economies and Diseconomies of Scale 250-bed hospital 500-bed hospital 750-bed hospital Output rate (patients per week) Average unit cost (dollars per patient) Economies of scale Diseconomies of scale

 Sizing capacity cushions › Capacity cushions are the amount of reserve capacity a process uses to handle sudden changes › It measures the amount by which the average utilization falls below 100 percent. Capacity cushion = 100% – Average Utilization rate (%)

 Expansionist strategy › Involves large, infrequent expansions in capacity.  Wait-and-see strategy › Involves smaller and more frequent expansion in capacity. Please see page 269 (book-1)for details

Planned unused capacity Time Capacity Forecast of capacity required Time between increments Capacity increment (a) Expansionist strategy

Time Capacity (b) Wait-and-see strategy Planned use of short-term options Time between increments Capacity increment Forecast of capacity required