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Whether your organization supplies a tangible product or an intangible service, describe the services or products you are responsible for in your sector of the organization in which you work. Then, think through and describe how capacity is managed in your sector of the organization.

6/25/22, 7:34 PM
Capacity Planning
Capacity Planning
All production systems are designed with a design-capacity that directly affects
production output. Manufacturers invest in expensive plant, property, and equipment, all
of which have capacity constraints involved. Whether it’s units of production per day,
week, or month, there are only 24 hours in a day, seven days a week, and limits on the
investment of facilities and equipment.
The Design Capacity of a production unit is designed (engineered) rate of production in
units, pounds, tons, or linear-feet that the company expects to sell for the foreseeable
future. Therein lies the problem that many manufacturers face, the uncertainty of future
demand. The organization that has under-planned their capacity will find many
customers dissatisfied with delivery times and sometimes quality issues as the producer
adds weekends that wear employees out or additional shifts filled with poorly trained
personnel.
The System Effective Capacity of a manufacturing operation is frequently different than
the Design Capacity. System capacity is less than design capacity because of limitation
of product mix, quality specifications, setup and change-over times, absenteeism, and
maintenance breakdowns. Manufacturers always have in mind two defining measures of
a system’s effectiveness: the efficiency of the operation and the utilization of the
operation. Efficiency is the ratio of measured (actual) output to effective capacity. The
Utilization measurement is the ratio of actual output to design capacity.
Efficiency= (Actual Output)/(Effective Capacity)
Utilization= (Actual Output)/(Design Capacity)
When the actual capacity of a plant is taxed due to unexpectedly high demand levels,
manufacturers have several short-term capacity strategies. The first strategy and the
most obvious is to stock finished goods to allow the inventory to absorb uneven demand.
The second is to allow the backlog of demand to grow if there are customers willing to
wait for their orders to be delivered at a future date. Then, there is employment
utilization and level. Weekends and extended hours during the regular workweek can be
utilized for short periods of time. Adding additional employees on extra shifts or on
unused equipment can often be employed if demand is expected to continue for a longer
period of time. Then there is subcontracting and sourcing to capable alternate facilities
who are interested in supplying additional demand. This is often the case with
machining, painting, assembly, and packaging operations where excess demand can be
sourced to local businesses needing to fill their operations with a profitable business.
Capacity considerations have a significant impact on businesses as the economy
accelerates or slows. Having capacity designed into either type of industry is a significant
consideration in plant, property, equipment, and employee decision making. Capacity
decisions can have significant impacts on product or service costs and generally require a
long-term commitment of resources to allow for growth of a company’s market share or
new market (international) penetration. Additionally, capacity issues can have a very real
effect on competitiveness. A barrier to entry by foreign competition is often thwarted
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6/25/22, 7:34 PM
Capacity Planning
through a company’s commitment to having excess capacity to take advantage of upticks in demand.
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6/25/22, 7:34 PM
System Design & Capacity
System designs and
Capacity considerations
The common elements between manufacturing and service systems are the requirement
for the arrangement of facilities, equipment, and people in an efficient, organized
manner. However, there are major differences in Manufacturing systems and Service
systems. A manufacturing system employs facilities, tooling, equipment, and machinery
that must be invested in, and that adds significantly to the product’s fixed costs. In
addition to fixed costs, variable costs are added to a product as labor is employed.
Service operations produce consumer services often in person. Hospitals, banks,
insurance companies, restaurants, and the like, store minimal inventories but have
significant facility and labor overhead costs. All service-related industries employ some
equipment and frequently some facilities; however, these are generally not used to
produce products; they supply a service. Think of a bank’s safe or computer system;
these are all employed in the delivery of service. Likewise, a fast-food restaurant
includes equipment to fry burgers and French fries or dispense drinks, but even these
pieces of equipment focus on supplying the hungry customer with a service – food.
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6/25/22, 7:34 PM
Capacity Management
Week 3: Systems Design & Capacity
Week 3 Overview: System Design &
Prior to selling a product or group of products, someone must create a design, build a
new or expand an existing facility, develop manufacturing standards and specifications,
organize a manufacturing operation, find and quality vendors, buy raw materials and
components, train operators, purchase and store tooling, and a myriad of other tasks.
This week we delve into planning for both manufacturing and service systems, how they
are different, and how capacity is measured for each.
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