Capacity Planning

One of the functions of capacity management is capacity planning. Capacity planning is the study of the level of capacity the organization provides at each stage of production, or service delivery system to meet its objectives. Capacity planning is a long term strategic decision that establishes a firm’s overall level of resources. The decisions are strategic because they often commit the resources of the organization for long periods .For example, Reliance’s decision to put up an ethylene cracker required an investment of hundred of crores of rupees. Similarly, large investments are required to build a refinery, or a caustic soda plant. As these expenditures are usually for fixed assets (plant and equipment) they are extensive to sustain or even more expensive to change. Capacity decisions affect product lead times customer responsiveness, operating cost and firm’s ability to compete effectively with the competitors. They also impact the survival of the firm; too much capacity can result in low return on assets, low morale, damaging lay-offs and facility closures (which are often expensive); while too little capacity can result in lost sales; , high operating cost and result in erosion of customer loyalty. From the economic point of view, capacity planning is focused on the level of capacity that we provide at each stage of production or service delivery systems. It relates to planning decisions on total assets employed by the firm. The management should invest in assets up to the point that marginal efficiency or productivity of capital employed equals interest rate.

Time Horizon in Capacity Planning

Capacity planning issues vary markedly with respect to the time horizon in which the decisions are made. It is useful to divide the time horizon into long-term, medium –term and short-term to understand the nature of issues to be addressed with respect to capacity planning in table 9.1 illustrates the salient features of capacity planning under the three time horizons.

In the long term, the emphasis in capacity planning is on making the right amount of capacity available to meet the projected growth. Typically, organizations initially make a certain investment of capacity. However, as operations stabilize and market share increases, firms need to take decisions in advance to plan for augmenting capacity.

These options differ in the amount of additional capacity that is brought into the system and the cost and technological aspects of capacity build-up. De-bottlenecking is a commonly employed method in process industries as it is easy to identify the flow and bottleneck points in the system.

Capital budgeting exercises are an integral part of the decision – making process at this stage Further, addition in capacity is likely to shift the breakeven points as fixed costs in the system go up. Therefore, it is also common for management accounting professionals to work on the breakeven points as fixed costs in the system go up. Therefore, it is also common for management accounting professionals to work on the breakeven impact of capacity augmentation decisions. Operations and maintenance personal plan in advance for the installation of additional capacity and dovetailing the new equipment with the existing system.


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