by Merlin Hernandez

Capacity is the volume of output a production system can achieve over a specific period, and is the relationship between input and output e.g. how many labor hours it takes to produce an amount of item units like cars or dolls within a system (labor capacity).  It is measured as the aggregate capacity of all areas of production necessary for meeting productivity needs.  This includes financial and human resources. The objective of capacity planning is to determine an optimum level that best supports the company’s competitive strategy.

Capacity planning is concerned with lean and value-creating manufacturing processes. This involves accurate forecasting, a continuous flow for reduced cycle times and costs, collaborative customer and supplier relationships, line balancing for efficient resource allocation, and stock control for JIT production and delivery. Inadequate capacity can lose customers through failed or late delivery which would allow competitor entry to capture some of the company’s market share. Excessive capacity can result in larger inventories, price reductions to stimulate demand that would erode profit margins, and the costs of an underutilized workforce.

Contemporary competitive challenges for smaller manufacturers dictate the need to develop operational strategies to transform manufacturing processes from one of building inventory to JIT production in ways that give greater capacity utilization at reduced costs with minimal need for safety stock. This may require a shift to mass customization techniques that would provide a stable process for cost efficiencies, but with built-in flexibility for value creation. Mass customization means that a basic product can later be customized with several optional features that would be developed in collaboration with the client base. This enhances the customer relationship, and is a value creating strategy that provides a desired customized product, for faster customer re-supply that is more responsive to market pull signals.

Planning would then integrate the various stakeholders into the value chain – consumer, retailer, supplier, and manufacturer. And Production will be a feature of a synchronous manufacturing process that emphasizes total system performance not on localized measures such as labor or machine utilization. In terms of capacity planning, the combination of JIT production and mass customization would allow for larger lot sizes of the basic product to create the continuous flow needed for lean manufacturing. This will also facilitate production at near capacity, with a narrow capacity cushion, for optimum utilization of facilities, labor, raw material, and operational expenses.

Service Industry

While capacity planning for both manufacturing and service facilities has many similarities, the service industry presents some important differences. In a manufacturing context, the measure is the amount of items produced over a given period. In a service setting, the capacity measure might be the number of customers processed by the system within a certain time-frame. Manufacturing may be more concerned with batch quantities, line balancing, and stock control. These areas are of reduced importance to service delivery which is more involved with availability time, location proximity and access, and volatility of demand – different needs and expectations.

Service thus demands wide variability to process times and capacity needs that might be based on time of day, seasonal demand, weather conditions etc.  There is a shift from more internally- focused, product-based efficiency to a strategic need to derive efficiencies from more external variables like customer needs and the direct and immediate influence of environmental and seasonal factors (weather, holidays, disasters). There is then a day-to-day balance between capacity utilization rate and service quality, and planning often becomes more a feature of contingency.

Even short term capacity planning in manufacturing offers at least weekly or monthly process adjustments and may produce at near capacity with a small capacity cushion. Service industries require a much wider capacity cushion to accommodate wide demand fluctuations and individual service needs. A service business needs to factor optimum operating points e.g. lunch hour at a restaurant, pay days at retail stores, or high pollen days at an urgent care facility.

A manufacturing process may seek to maintain system balance to influence value creation. The service industry works at optimizing quality delivery to maximize customer satisfaction. These are not mutually exclusive goals. But accurate demand forecasts and meticulous calculation of equipment and labor requirements are necessary for effective capacity planning.  It should be noted, however, that strategic capacity planning needs to be resource-based. This will plot the strengths and weaknesses of financial, human resource, knowledge base, information and communication systems, as well as other assets against strategic goals. The point is to ensure  alignment of goals and resources so that the business can support sustained competitive advantage.

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