Monday, 3 June 2013


Capacity is defines as the ceiling on the maximum load a production unit can handle at a given
point of time. In other words, capacity is defined as an upper limit on the rate of output.
The capacity question does not arise alone. It comes in conjunction with:
New facility planning
Leasing or buying the equipment required to maintain the output.
Expansion of the existing facilities
While introducing new product or services
While finalizing the fund and energy requirements
The above mentioned situations, if come across alone, are easy to tackle. It becomes complicated
when more than one situation is encountered at the same time.
A facility’s Capacity is the rate of productive capability of a facility. Capacity is usually expressed as
maximum productive volume of output per time period. Operations managers are concerned with capacity
for capability, usually several reasons. First, they want sufficient capacity to meet customer demand in a
expressed as volume of out put per period of timely manner. Second, capacity affects the cost efficiency of
operations, the case or time. Difficulty of scheduling output, and the costs of maintaining the facility.
Finally, capacity requires an investment. Since managers seek a good return on investment, both the costs
and revenues of a capacity planning decision must be carefully evaluated.
Facility planning includes, determination of how much long-range production capacity is needed,
when additional capacity is needed, where production facilities should be located and the layout and
characteristics of the facilities.
Capacity in general is the maximum production rate of a facility or a firm. It is usually expressed as
volume of output per period of time.Capacity indicates the ability of a firm to meant market demand.
Operations managers are concerned with capacity because.
(a) They want sufficient capacity to meet customer demand in time
(b) Capacity affects cost efficiency of operations, the case or difficulty of scheduling output and the
costs of maintaining the facility.

(c) Capacity requires an investment of capital.
2A.3 Capacity planning
Capacity planning design is the first level planning for the inputs, conversion activities and outputs
of a production operation. Design decisions are very important because they re often associated with
significant investment of funds. The initial outlay and operating expenses are established based on design
decisions, and these in turn affect productivity of the concern in future. So they affect fixed cost and
variable cost.
DESIGN CAPACITY: preliminary estimate of capacity is done based on long-range forecast extending 5 to
10 years into the future.
The design capacity of a system is the rate of output of goods or services under full scale
operating conditions. For example, a cement factory may be designed to produce 200 tons per day. The
projected demand for period anywhere from 5 to 10 years is taken as the estimate for the design capacity,
since frequent expansion will lead to productivity loss.
SYSTEM CAPACITY: In practice, it may not be possible to achieve production to the extent of design
capacity mainly because of mismatch between required resources and available resources. The maximum
output of a specific product or product mix that the system of workers and equipments is capable of
producing as an integrated whole is called system capacity. This may be less than that of the design
The actual output may be even less than the system capcity since it is affected by short-range factors such
as actual demand, equipment breakdowns, and personal absenteeism or productivity.
Capacity planning is necessary when an organization decides to increase its production or
introduce new products into the market. Once capacity is evaluated and a need for new or expanded
facilities is determined, decisions regarding the facility location and process technology selection are taken.
Capacity planning is the first step when an organization decides to produce more or a new product.
Once capacity is evaluated and a need for new or expanded facilities is determined, facility location and
process technology activities occur. Too much capacity would require exploring ways to reduce capacity,
such as temporarily closing, selling, or consolidating facilities. Consolidation might involve relocation, a
combining of technologies, or a rearrangement of equipment and process.
The importance of capacity planning lies in the fact that it is more fundamental. Every organization
looks at the future with its’ own focus and develop and adjusts ‘its’ strategies to reach the goal. Capacity
planning relates to the organization potential impact on the ability of the organization to meet the future
demands for it’s product / service. This is because of the fact that the possible rate of output is limited by
the capacity.
a. There is also link between the capacity and the operating cost. Every managers wants to minimize
the operating cost of the final product. Also they are interested in utilizing the established capacity
to the fullest possible extent. This trade – off puts the whole process, into a vicious circle.

b. Minimizing the operating cost is not possible always, as the demand is a variable factor. The
demand variation is due to:
Increased competition (through the entry of new players; (or) due to the change in the strategies of
the existing players).
Technological changes (through some inventions (or) entry of MNC’s through joint ventures)
User’s perception (which changes from time to time)
Nature of the product (accordingly the demand will be seasonal or cyclical)
Possible demand patterns are:
c. The Initial Investment involved. This is due to the fact that, the capacity is a major determinant of
the cost of a product, which will decide about the organization’s position in the market.
d. Long term commitment of resources. Once a capacity is created, it is very difficult – not impossible
– to modify. In future, if modification is needed, it calls for heavy investment.
Capacity planning involves activities such as:
(a) Assessing existing capacity
(b) Forecasting future capacity needs
(c) Identifying alternative ways to modify capacity
(d) Evaluating financial, economical and technological capacity alternatives
(e) Selecting a capacity alternative most suited to achieve the strategic mission of the firm.
Capacity planning involves capacity decisions that must merge consumer demands with human,
material and financial resources of the organization.
Often decisions about capacity are inseparable from decisions about locations: Capacity depends
upon demand and demand often depends on location. Commercial banks, for example, simultaneously
expand capacity and demand by building branch banks. Decisions about the size and location of the

branch are made according to projections about neighborhood population densities and growth,
geographic locations of market segments, transportation (traffic) flows, and the locations of competitors.
Adding a new branch offers greater convenience to some existing customers and, management hopes,
attracts new customers as well. Obviously this decision affects the revenues, operating costs and capital
costs of the organisatoin.
In the public sector, the capacity decision involves similar considerations. Municipalities face
ever-increasing demands for public services, strong public sentiment for tightening budgets, and greater
performance accountability. Consequently, officials have increased their efforts to rearrange public
resources so that service capacity is increased but the cost of operating is not. Municipal emergency
services, for example, are periodically expanded by adding to show population growth and shifts. Next,
municipal officials plan where to locate new stations, taking into consideration both areas of greatest need
and costs of operation and facilities. Although the capacity may not involve direct revenues, cost savings
for citizens can be considered a form of indirect revenues. These cost savings can result in reduced tax
burdens of lower insurance rates in areas with improved emergency services.
Modeling techniques, are playing a central role in these planning processes. One study, for
example, explain how mathematical programming is used for greater ambulance effectiveness considering
time-to-scene, time-to-hospital, an distance-to-hospital factors, thereby increasing effective service
system capacity. Another study shows how mathematical modeling can determine optimal fleet sizes and
vehicle routes for a commercial common carrier. Yet another study demonstrates the value of queuing
models in a computer-based information system for the St. Louis County Police Department. The system
gives a way to allocate police patrols, thereby using existing capacity more efficiently or reducing the size
of operations without diminishing existing service levels. All these examples show how systematic analysis
and planning can lead to effective use and improvement of capacity.
Capacity is a measure of the ability to produce goods or services or, it may be called as the rate of
output. Capacity planning is the task of determining the long – and short – term capacity needs of an
organization and then determining how these needs will be satisfied.
Long-term capacity strategies: Top management may have the following strategies to cope up with major
changes in products and services that it can provide to customers in the long run which will have
significant impact on the capacity. The major changes will altogether revise the demand and resource
requirements. There are:
develop new product lines
expand existing facilities
construct or phase out production plants
Technological obsolescence may force some industries to use phase-in strategy for introducing the next
model of the same product or service to retain and/or improve its market segment. The phase – in
strategy is nothing but het planning for the next model even when the present model is moving well.
Especially, in electronics industry, any company should do continuous research and development to
improve the operational features of the product through advanced technology so that the company will be
in a position to bring out products into the market with the latest technology without any time lag.

At the same time, all the products will not have continued demand for ever. Moreover, continuing the
production of some products will be uneconomical over a period of time. This will force a company to
diversify and/or phase out some of the existing products. Phasing out of a product should be done over a
period of time properly by taking the re-employment features into account.
Short – term capacity strategies: In short-term planning, horizon, capacity decisions are taken by
considering the fluctuations in demand caused by seasonal and economic factors. The purpose of
short-term capacity planning is to respond to variations in demand during the short-term planning
horizon. Strategies like, overtime, subcontracting, hiring firing, etc. can be used to cope up with the
fluctuations in demand.
The capacity variables are:
(a) CONTROLLABLE FACTOR’S such as amount of labour employed, facilities installed, machines,
tooting, shifts worked per day, days worked per week, overtime work, sub-contracting, alternative
routing of work, preventive maintenance and number of production set-ups.
(b) LESS CONTROLLABLE FACTORS are absenteeism, labour-performance, machine break-down,
material shortage, scrap and rework and unexpected problems such as strike, lockout, fire
accidents etc.
Once the long-range capacity needs are estimated through long-range forecasts, there are many
ways to provide for the needed capacity. Firms may have a capacity shortage situation where present
capacity is insufficient to meet the forecast demand for their products and services or have excess capacity
i.e., capacity in excess of the expected future needs. Long-range capacity planning hence may require
either expansion or reduction of present capacity levels.
1. FIXED CAPACITY: The capital asset (buildings and equipments) the company will have at a particular
time is known as the fixed capacity. They cannot be easily changed within the intermediate time
range. Capacity represents an upper limit to the internal capacity, that the company concentrates
can use in its efforts to meet demand
2. ADJUSTABLE CAPACITY: It is on and the size of the workforce, the number of hours per week they
work, the number of shifts and the extent of sub-contracting.
3. DESIGN CAPACITY: it is the planned rate of output of goods or services under normal full-scale
operating conditions. It is also known as installed capacity. It sets the maximum limit to capacity
and serves to judge the actual utilization of capacity.
4. SYSTEM CAPACITY: It is the maximum output of a specific product or product-mix that the system
of workers and machines i.e., the productive system is capable of producing as an integral whole. It
is less than or equal to the design capacity of the individual components because the system may
be limited by:
(a) The product mix

(b) Quality specifications and
(c) The current balance of equipment and labor
5. POTENTIAL CAPACITY: It is that, which can be made available within the decision horizon of the top
6. IMMEDIATE CAPACITY: It is that, which can be made available within the current budgeted period.
7. EFFECTIVE CAPACITY: is the capacity, which is used within the current budget period. It is also
known as practical capacity or operating capacity. No plant can work upto the maximum or the
theoretical capacity (installed or design capacity) because of the loss of capacity due to scheduling
delays, machine break-down and preventive maintenance. This result in the plant working at an
efficiency of loss than 100%. Also, the actual output will be less than the designed output due to
rejections and scrap.
8. NORMAL CAPACITY OR RATED CAPACITY: This is the estimated quantity of output or production,
that should be usually achieved as per the estimation done by the Industrial Engineering
department. Actual capacity is usually expressed as a percentage of rated capacity. For example,
the rated capacity of a steel plant may be expressed as 1 lakh ton of steel per month. This is also
sometimes called as average capacity of the plant.
9. ACTUAL OR UTILIZED CAPACITY: This is the actual output achieved during a particular time period.
The actual output may be less than the rated output because of short-range factors such as actual
demand, employed absenteeism, labour inefficiency and low productivity levels.
Design capacity is Reduced by long-range effects, and System capacity is Reduced by short-range
Long-range effect: Product-mix, long range market conditions, tight quality specifications,
inherent imbalance between equipment and labour.
Short-range effect: Actual demand, management performance vis scheduling, staffing, strategy and
control, labour inefficiencies, wear scrap loss machine breakdown etc.
System efficiency is the ratio of the actual measured output of goods/services to the system
Major considerations in capacity decisions are:
(a) What size of plant? How much capacity to install?
(b) When capacity is needed? When to phase-in capacity or phase-out capacity?
(c) At what cost? How to budget for the cost?
Market demand for a product service

The amount of capital that can be invested
Degree of automation desired
Level of integration (i.e. vertical integration)
Type of technology selected
Dynamic nature of all factors affecting determination of plant capacity, viz., changes in the product
design, process technology, market conditions and product life cycle, etc.
Difficulty in forecasting future demand and future technology
Obsolescence of product and technology over a period of time
Present demand and future demand both over short-range, intermediate-range and long-range
time horizons.
Flexibility for capacity additions.
Equipment selection is the process of identifying a set of suitable equipments which are most
suitable for processing a set of products.
In the case of mass production, our task is to establish a product line for a single product or for a
set of products which are having similar processing requirements. While determining the process sequence,
the equipment availability must be taken into account. At each and every stage of a product line, it is
possible to identify different equipments to satisfy the processing requirements. But, one should carefully
select a machine which can fully satisfy the processing requirement. But, one should carefully select a
machine which can fully satisfy the processing requirements at a particular operation, or can club
processing of two or more consecutive operations in the line. This will reduce the line length. In fact, this
is the concept followed in machine centres. Machine centres will have several processing capabilities. If a
product line is formed with few machine centres, then the products will travel minimum distance before
they are completed. For this type of production, it is obvious that the production volume of the products
should be high enough to utilize the capacities of the machine/machine centers in the product line.
In the case of batch production using process layout, it is very difficult to dedicate a special
machine for a particular product. Several products will be snaring a given machine. So, at the time of doing
process planning, we should select the machines by simultaneously taking the availability of the machines
and processing requirements of the products into consideration, so that the products travel minimum
distance and they are produced with minimum set-up times.
In all the situations, the economy of cost must be taken into consideration. So, we will have to list
out different alternatives for equipment selection and finally, the best one is to be selected.

Capacity determinations is a strategic decisions in plant planning or factory planning. Capacity
decisions are important because:
(a) They have a long-term impact.
(b) Capacity determines the selection of appropriate technology, type of labor and equipments, etc.
(c) Right capacity ensures commercial viability of the business ventures.
(d) Capacity influences the competitiveness of a firm.
Capacity of a plant can be expressed as the rate of output viz., units per day or per week or per
month, tones per month, gallons per hour, labour hours/day, etc. But for organizations whose product
lines are more diverse, it is difficult to find a common unit of output. More appropriate measure of
capacity for such firms is to express the capacity in terms of money value of output per period of time (day,
week or month).
Capacity may be measured in terms of inputs or outputs of the conversion process.
Since, capacity is defined along with the constraints, the capacity measurements becomes
subjective, as different interpretations of the terms are made by different people in the organization.For
example, if the capacity is measured on the sale of products in rupees ro dollars, the forex fluctuations
will result in different results on capacity.
In situations where the organization has more than one product in the product mix, a question
arises on which product the capacity should be measured? If done on one product alone, it may not cover
the whole infrastructure created and may mislead.For example, if a refrigeration company produces Deep
Freezers and Refrigerators using the same machineries, capacity has to be expressed by taking into
consideration of both the products and not a single one.
Details of the industries and the capacity measurements are given in Table 2.1
Table 2.1
Examples of Commonly used measured of capacity
Type of business Measurement of capacity
Resource available output
Education Faculty, Infrastructure Number of Students Year
Automobile Man-Machine hours Number of cars / shift
Agriculture Acres
Tone of Grains / Year
Litres of Milk / day

Steel Mill Furance Size Tons / Shift
Theatre Number of Seats Number of Tickets sold / day
Restaurant Number of Tables Number of meals sold / day
Oil Refining Size of Refinery Fuel oil / day
For more organizations capacity is simple to measure. Amul can use “tons of cheese per year”.
General Motors Corporation can use “number of automobiles per year.” But what about organizations
whose product lines are more diverse? For these firms, it is hard to find a common unit of output.
As a substitute, capacity can be expressed in terms of input. A legal office may express capacity in
terms of the number of attorneys employed per year. A custom job shop or an auto repair shop may
express capacity in terms of available labor hours and / or machine hours per week, month, or year.
Capacity, then, may be measured in terms of the inputs or the outputs of the conversion. Some
common example of capacity measures are shown:
Measures of operating capacity
Automobile manufacturer-number of autos
Brewery-Barrels of beer
Cannery-Tons of food
Steel producer-Tons of steel
Power company-Megawatts of electricity
Airline-Number of seats
Hospital-Number of beds
Job shop-Labour and/or machine hours
Merchandising-Square feet of display or sales area
Movie theater-Number of seats
Restaurant-Number of seats or tables
Tax office-Number of accountants
University-Number of students and/or faculty

Warehouse-Square or cubic feet of storage space.
It’s often difficult to measure capacity realistically because of day-to-day variations. Employees are absent
or late, equipment breaks down, facility downtime is needed for maintenance and repair, machine setups
are required for product change over and vacations must be scheduled. Since all these variations occur
from time to time, you can see that the capacity of a facility can rarely be measured in precise terms, so
measurements must be interpreted cautiously. It’s not unusual, for example, for a facility to operate at
more than 100% capacity.
Capacity planning can be classified as:
(a) Long-term capacity planning
(b) Short-term capacity planning
(c) Finite capacity planning
(d) Infinite capacity planning
Long-term or long-range capacity planning is concerned with accommodating major changes that
affect the overall level of output in the longer run. Major changes could be decisions to develop new
product lines expand existing facilities and construct or phase out production plants.
Short-term or short-range capacity planning is concerned with responding to relatively
intermediate variations in demand. In the short-term planning horizon, capacity concerns involve the
fluctuations in demand caused by seasonal or economic factors.
Ways of adjusting the capacity to the varying demands in the short-term time horizon are:
(i) Use of overtime or idle time
(ii) Increasing the number of shifts per day to meet a temporary strong demand.
(iii) Sub-contracting to other firms.
Service industries use flexible work hours, part-time employees and overtime work scheduling to meet
peaks in demands.
In operations planning, two conflicting constraints are time and capacity. If time is fixed by the
customer’s required delivery date or processing cycle. It is possible to accept time as the primary
constraint and plan backwards to accommodate these times. In such cases, planning backwards to infinite

capacity offers a potential solution to the problem. On the other hand, if the processing time is not a
constraint in cases where products are produced to stock and sell, it is simpler to use a forward plan
based on finite capacity i.e., based on available resources.
Several models are useful in capacity planning Present value analysis is helpful whenever the time
value of capital investments and fund flows must be considered. Aggregate planning models are useful for
examining how best to use existing capacity in the short term. Breakeven analysis can identify the
minimum breakeven volumes when comparing projected costs and units produced per time period (output
The major inputs for CRP process are:
(a) Planned orders and released orders from MRP system
(b) Loading information from the work centre status file
(c) Routing information from the routing file
(d) Changes which modifies the capacity, give alternative routings or altered planned orders.
All these inputs must be given in time if the system is to function effectively.
Capacity requirements can be evaluated from two extreme perspectives-short-term and long-term.
SHORT-TERM REQUIREMENTS: Managers often use forecasts of product demand to estimate the
short-term work load the facility must handle. By looking ahead up to 12 months, managers anticipate
output requirements for different products or services. Then they requirements with existing capacity and
detect when capacity adjustments are needed.
Estimated cost for building the entire addition now are $50/Square foot. If expanded incrementally,
the initial 50,000 square feet will cost $60/Square foot. The 50,000 square feet to be added later are
estimated at $80/square foot. Which alternative is better? At a minimum, the lower constructions costs
plus excess capacity costs of total construction now must be compared with higher costs of deferred
construction. The operations manager must consider the costs, benefits, and risks of each option.
The costs, benefits, and risks of expansion pose an interesting decision problem. By building the
entire addition now, the company avoids higher building costs, the risk or accelerated inflation (and even
higher future construction costs), and the risk of losing additional future business because of inadequate
capacity. But there may also be disadvantages to this alternative. First, the organization may not be able to
muster the financial investment. Second, if the organization expands now, it may find later that its demand
forecasts were incorrect, if ultimate demand is lower than expected, the organization has overbuilt. Finally,
even if forecasted demand is accurate, it may not fully materialize until the end of the five-year planning
horizon. If so, the organization will have invested in an excess-capacity facility on which no return is

realized for several years. Since funds could have been invested in other ways, the organization has
forgone the opportunity of earning returns elsewhere on its investment.
Constant Capacity
Capacity Contraction most often involves selling off existing facilities, equipment, and inventories, and
firing employees. as serous declines in demand occur, we may gradually terminate operations. Permanent
capacity reduction or shutdown occurs only as a last resort. Instead, new ways are sought to maintain and
use existing capacity. Why? Because a great deal of effort, capital, and human skills have gone into
building up a technology. Often this technology and skill base are transferable to other products or
services. As one product reaches the decline phase of its life cycle, it can be replaced with others without
increasing capacity. This phasing in and out of new and old products is not by accident. Staff for product
research and development and market research should engage in long-range planning to determine how
existing capacity can be used and adapted to meet future product demand.
Planning is of two types:
Infinite loading
Finite loading
Infinite loading is the process of loading work centres with all the loads when they are required without
regard to the actual capacity of work centres. This given information about actual released order, demands
upon the production system, so that, decisions about overtime, using alternative routings, delaying
selected orders, etc., can be taken.
FINITE LOADING can be done automatically with computerized loading systems, limiting the load assigned
to work centres in each period as per the installed/available capacity at each work centre. This method of
loading forces changes back into the MPS, which is not always the best solution to scheduling problems
and hence not useful at CRP stage. Finite loading is more useful to single work-centres in the capacity
control stage where jobs are being scheduled.
1. Rescheduling information which calls for capacity modifications or revision of MPS.
2. Verification of planned orders for MRP system
3. Load reports
Aggregate capacity planning involves planning the best quantity to produce during time periods in
the intermediate-range horizon and planning the lowest-cost method of providing the adjustable capacity
to accommodate production requirements.

Traditional aggregate plans for a manufacturing operation involve planning the work force size,
production rate (working hours per week) and inventory levels. Two types of aggregate plans that are
commonly used are:
1. ‘Level capacity’ plan
2. ‘matching capacity with aggregate demand plan
Level capacity plans have uniform capacities per day from time period to time period. The
underlying principle of level capacity plan in produce to stock and sell firms is ‘operate production
systems at uniform production levels and let finished goods inventories rise and fall as they will, to buffer
the differences between aggregate demand and production levels from time period to time period’.
The capacity of a unit is its ability to produce or do that which the consumer requires, and clearly
there must be some match between needs characterized by market forecast and abilities characterized by
capacity. A statement of capacity is rarely simple, and it is useful to distinguish between three different
capacity levels:
Potential capacity is that which can be made available within the decision horizon of the most
senior executive. Immediate capacity is that which can be made available within the current budget period.
Effective capacity is that which is used within the current budget period. The production/operations
controller is generally concerned with the second and third of these levels, since he must deal with
immediate, rather than long-term, problems. Furthermore, it should also be recognized that one of the
objectives of the marketing department is to try to ensure that the effective and immediate capacities
coincide. It should be noted that the more ‘nearly effective’ approaches ‘immediate’, the more rigid must
the organization become flexibility can only be achieved when immediate capacity is not fully used.
Immediate capacity is limited by:
(a) The plant/equipment size;
(b) Availability of equipment;
(c) Availability of manpower;
(d) Availability of cash;
(e) Financial policies;
(f) Purchasing policy;

(g) Sub-contracting policy;
(h) The technical demands of the tasks;
(i) The number of different tasks being undertaken.
For example, the capacity of a restaurant is limited by the size of the ‘eating’ area, or the number
of tables.
Effective capacity can be influenced by:
(a) Technical abilities in the pre-operations stages;
(b) Organizational skills in the planning stages;
(c) Purchasing skills;
(d) Sub-contracting skills;
(e) Maintenance policies and abilities;
(f) Versatility of workforce;
(g) Efficiency of workforce.
A great deal to work has been carried out on the utilization of equipment, i.e. the differences
between effective and immediate capacity. Frequently these studies have involved the use of activity
sampling to establish the proportion of time the equipment was being used productively, and to identify
the reasons for and quantify the extent of non-productive time. These reasons range across preparation
time, planned maintenance, emergency maintenance, idle (no planned work), idle (operator absent), and so
on. The picture that emerges is that effective capacity is frequently less than 50 percent of immediate
capacity. While it is unlikely that these two capacities will ever coincide, it is clear that significant increases
in capacity are possible, often by improved production/operations control. It is also clear that to measure
capacity solely on the basis of available time is likely to give gross errors. Allowance must always be made
for current local performance.
Within a production / operations environment, it seems probable that:
1. The ability of an individual to chance capacity is directly related to that individual’s position in the
organization’s hierarchy

2. The time necessary to implement a capacity increase in proportional to the magnitude of the
3. The number of acceptable capacity changes which can be handled at any one time is finite.
Every programme implies a certain level of capacity and, if the above statements hold true, it is
important that the implicit capacity decisions are made by an individual at the correct level in the
organization. To present he production/operations controller with a programme which requires a capacity
change greater than his hierarchical position will permit him to effect, can only result in frustration and the
non-achievements of the programme. Similarly, if the need for a capacity change is recognized too late, it
will not be achieved either, and failure must again result.
Capacity changes may be achieved in a number of ways and stages, ranging from a number of
small incremental changes to a large step changes depending on environmental constraints. If a university
reached the limit of its physical teaching capacity, it could increase the hours of availability (from
9.00-5.00 to 8.00-7.00) or by constructing further buildings.
Capacity, being the ability to produce work in a given time, must be measured in the units of work, i.e.
resource-standard time units available in unit time. Thus, a work centre with a capacity of 1,000 machine
hours in a 40-hour week should be able to produce 1,000 standard hours of work of the type appropriate
to that work station during a 40-hour week. In order to calculate the volume of actual work, it is necessary
to know:
(a) The work content of the product;
(b) The ancillary times involved in the production;
(c) The effectiveness of the work station
The measurement of capacity and the above factors is frequently undertaken by the production
engineering department in manufacturing organizations, and it is useful to confirm these measurements
by records of actual performance.
The above comments can also be interpreted in non-manufacturing contexts. Consider measuring
the capacity of a small taxi firm which has four cars available from 9.00 to 5.00 five days per week. It
could be argued that the capacity is 4 X 5 X 8 hours per week (ignoring breaks). The work (or number of
‘trips’) will depend on the start and finish locations, traffic conditions, and so on.
As with load, it is not uncommon to find capacity quoted in terms of quantity of products made in
unit time. Such statements should be treated with great caution; changes in methods, procedures,
materials, quantities etc. can result in changes in effective capacity. Unless the work unit is dedicated to a
single product, it is safer always to refer to units of work rather than to units produced.
In detailed planning, two conflicting constraints – time and capacity – have to be considered. If time
is fixed, for example by the customer’s required deliver date or transaction-processing cycle, then it is
possible to accept time as the primary constraint and also plan backwards to accommodate these times.
However, this can be somewhat difficult in practice, since it is not generally possible to determine

beforehand whether all of the tasks can be fitted in with the currently available capacity, and much time
can be spent trying to solve an insoluble problem. Indeed, even after recognition that capacity needs to be
temporarily increased, the extent of this increase and its timing still has to be established, clearly there are
variety of options open to the decision-maker, all with different cost implications.
Planning backwards to infinite capacity offers a partial solution to this problem. Man manufacturing
and transaction-handling proceses go through a number of stages in a sequential manner. If the plan is
being prepared on a period-by-period basis (say week), then the backward plan can be prepared on the
basis of one stage per period. This means that the final stage (operation) of the task is allocated to the
period representing the delivery date, the penultimate task is allocated one period earlier, and so on. This
produces a slightly more realistic plan of what might happen. This pro indicates where overloads are likely
to be and give a far better picture of when and to what extent extra resources will be required. However, to
confirm or propose revised delivery dates, a finite capacity plan must be developed. Generally, it is far
simpler to produce a forward (rather than a backward) plan to finite capacity. For this, tasks are put into
some priority order and, following this sequence, added to the plan in such as way that they are started as
soon as possible at each stage, but only using as much resource as is available. Clearly the criterion used
for prioritizing the tasks will have a significant effect on the performance of the plan. This will be
discussed in a later section.
A schedule is a representation of the time necessary to carry out a task, and should take account of
the technical requirements of the task, marketing forecast and available capacity. It is not simply a list of
the operations required, since additionally it takes into account the technological relationships between
these various operations.
The nature of a product may allow several operations in its manufacture to be carried out
concurrently, whilst other operations may need to be completed before the next one can be started. A
route or list of work to be done would not show this situation, whereas a schedule would take this into
account. The graphical presentation of the bar chart for the schedule is essential for this clarity. With
complex interdependencies between operations, use of a ‘precedence diagram’ rather than a bar chart may
be desirable.
A job schedule shows the plan for the manufacture of a particular job. This is the work study input
into production / operations control, indicating method and times insufficient detail for the function to be
adequately carried out. Once this schedule has been produced, it need not be changed unless there is a
change in either the job (for example in the product being produced) or in the method of manufacture. A
company which makes a range of products cold draw up a number of schedules which are kept filed and
used as the basis for production/operations control. These schedules should show elapsed time the time
between successive – operations – rather than specific.
1. Relationship between capacity and locations decisions : Decisions about capacity are often
inseparable from location decisions. Usually, capacity is expanded by installing new units at new
locations taking into consideration location factors such as market segment, transportation costs,
location of competitors etc.

2. Relationship between capacity and plant layout The plant capacity determines the physical relation
between various processes used in the conversion process, which in turn determines the layout of
the plant. In product-layout or product-focused productive system, the capacities of various work
centres or machines have to be balanced to get approximately the same rate of output from
various work centres or machines. Once the layout is installed, it is not possible to change the
capacity in the short tern time horizon.
3. Relationship between capacity and process design: In some cases, the rated capacity depends on
the type of conversion process selected. for eg., the conversion processes selected for manufacture
of steel is different for the mini-steel plants from that used for major steel plants.
4. Relationship between capacity and equipment selection: The installed capacity of plant determines
the standard labour or equipment hours that can be achieved and also determines the number of
machines or equipments that must be installed to get the desired output capacity.
Service organizations, for the capacity measurement, can be divided into the companies offering:
Homogenous Services
Heterogeneous Services
In the case of Insurance companies, the service offered is homogenous i.e. it is based on the
number of policies serviced per year.
Banks and Transport companies offer heterogeneous services. Their offer is restricted by the
availability of limited resources under their possession. For example, in banks, it is measured by the
man hours available per week; and in case of transport companies, it is tonnage per kilo-meter.
The nature of service itself, i.e. the output cannot be stored.
Average demand for the service will be far less than the peak demand. This will lead to lower
capacity utilization during the off-peak demands. This results in low productivity. (Example:
Electricity Production and Consumption)
Demand fluctuation during the course of time. (Example: Placement of funds by the Financial
i) Predict future demands
ii) Determine the available capacity
iii) Translate prediction into physical capacity requirement.
iv) Develop alternate capacity plans for matching required and available capacities.
v) Analyse the economic effects of alternate capacity plans.

vi) Analyse the risk and other Strategic consequences of alternate plans
vii) Recommend a course of action
viii) Implementation of the selected course of action.

2B. Facility Planning
2B. Facility Planning
One of the major strategy decisions that must be made by any organization is where to locate its
producing and storage facilities. For manufacturers, the problem is broadly categorized into factory
location and ware house location; within this categorization, we may be interested in locating the firm’s
first factory or warehouse or locating a new factory or warehouse relative to the locations of existing
facilities. The general objective in choosing a location is to select that site or combination of sites that
minimizes two classes or costs – regional and distribution or sites that minimizes two classes or costs –
regional and distribution costs. Regional costs are those associated with a given locate and include land,
construction, manpower, and state and local expenses and regulations. Distribution costs are those
directly related to the shipping of supplies and products to customers and other branches of the
distribution network. Since the location of the firm, economic analysis of facility location has focused on
the problem of adding warehouses or factories to the existing production-distribution system.
In service organization, the facility location decision is also a major one, but as a rule, the choice of
a locate is based upon nearness to the customer rather than on resource considerations. With the shift in
the U.S. economy away from manufacturing and toward service, there is little questions that opening of
new service facilities has become for more common that opening new factories and warehouses. Indeed,
there are few communities in rapid growth in public private branch offices, franchises, and entertainment
Location decisions represent an integral part of the strategic planning process of virtually every
organization. Although it might appear that location decisions are mostly one-time problems pertaining to
new organizations, the fact is that existing organizations often have a bigger stake in these kinds of
decisions than new organizations have.
Existing organizations become involved in location decisions for a variety of reasons. Firms such as
banks, fast food restaurants, super market and retail stores view locations as a marketing strategy, and
they look for locations that will help them to expand their markets. A similar situation occurs when an
organization experiences a growth in demand for its products or services that can not be satisfied by
expansion at an existing location. The addition of a new location to complement an existing system is
often a realistic alternative.
Some firms become involved in location decision through depletion of raw materials. For example,
in the case of mining, in the long run, the company has to change its place of operation due to reduced
availability of minerals.
Location decisions for many types of businesses are made rather infrequently, but they tend to
have a significant impact on the organization. There are two primary reasons that make location decisions
a highly important part of production systems design. One is that they entail long-term commitment,
which makes mistakes difficult ot overcome. The other is that location decisions often have an impact on
operating costs (both fixed and variable) and revenues as well as on operations. For instance, a peer choice
of location might result in excessive transportation costs, shortage of qualified labour, loss of competitive
advantage, inadequate supplies of raw materials or some similar conditions which would be detrimental to

Profit oriented organizations base their decisions on profit potential, while non-profit organization
strive to achieve a balance between cost and the level of customer service they provide. The organizations
will try to identify the best location available.The location options for nay organization are as follows:
Expanding the existing facility
Add new locations while retaining existing ones, as is done in many retail stores
Shut down one location and move to another.
Option of doing nothing and maintaining the status quo.
(a) Availability of Raw Material: Nearness to the place of the raw material will give advantage on the
transportation cost, so that overall profitability can be improved. When the raw material is heavy or
is consumed in bulk, then plant location has to be nearer to the raw material site.
(b) Nearness to Markets: It reduced the cost of transportation as well as the chances of the finished
products getting damaged and spoiled on the way, especially the perishable products. Moreover, a
plant being near to the market can capture a big market share and render quick service to the
(c) Transport Facilities: A lot of money is spend both in transporting the raw materials and the finished
goods. Depending upon the size of raw material and finished goods, a suitable method of
transportation like roads, rail, water or air is selected and accordingly the plant location is decided.
One point which must be kept in mind is that cost of transportation should remain fairly small in
proportion to the total cost.
(d) Availability of Labour: Stable labour force, of right kind, of adequate size and at reasonable rates
with its proper attitude towards work are a few factors which govern plant location to a major
(e) Availability of Fuel and Power: The main sources of energy are electrical power, coal, oil, etc. In the
case of power intensive industries like steel manufacturing units or continuous process industries
like petrochemical and cement, the availability of fuel and power will be one of the major deciding
factories in plant location.
(f) Climate: Depending on the type of industry and the products that are being manufactured, this is a
different factor. For instance, in the case of textile mills climatic conditions with adequate humidity
is a basic essential criterion. That is the reason many textile mills have been put up in Bombay,
Coimbatore region.
(g) Water Availability: In industries like textile dying, paper or chemicals, the requirements of good
quality water is one of the basic requirement for plant location. The water is required for
processing or for effluent rejection into the rivers or specifically for waste disposal.
(h) Government Policies: The central and state governments may declare many talks as backward and
give numerous concessions like tax holiday, uninterrupted power supply, capital subsidy, easy
availability of loans, etc. for balanced development of regions in the country.

(i) Land: Topography, area, the shape of the site, cost, drain age and other facilities, the probability of
floods and earthquakes will influence the selection of the location.
(j) Community Attitude: Industries like matches, crackers, hosiery and leather have flourished because
of the positive attitude of the community towards these.
(k) The presence of related industries will give many advantages like availability of skilled labourers,
standard components.
(l) Housing facilities
(m) Security
(n) Local by-laws, taxes, building restrictions
(o) Existence of other service facilities like hospital marketing centres, schools, banks, post offices,
These factors, depending on the product to be manufactured or the industry, may separately or
collectively have to be given the required weightage. In the process, many alternatives may emerge. The
management decisions will be taken after weighing all the alternatives and selecting the best among them.
In plant location, apart from the availability of technology, etc. the major deciding factor will be the
cost of the final product. The ideal plant location is the one which results in lowest cost of production and
distribution of the items in the market. For some production facilities, the basic necessity itself may be
that it has to be located nearer to the market, that is, the facility has to be created in the urban area. For
some others, it can be located at remote rural areas. Cost is associated with each decision. Other than this,
there are other advantages as well as disadvantages.
The following are the advantages that can be derived by locating the plant in the urban area:
Close to the market where the product can be sold.
Skilled/specialized labour force is available
Well connected by air/rail/road which is an essential one, if the raw material is brought from other
places (or) finished goods are transported to other metros.
Easy availability of power and water;
Already established service facilities like hospitals, schools, banks etc.
Existing buildings can be hired or can be taken on lease for factory/office usage.
Accessibility to the various skilled professional, well equipped laboratories for testing purpose, etc
is easy.

For making purchases of standard items, market is readily available.
Many small scale industries, with spare capacities, are available, which can be converted into
ancillary units.
There are a few disadvantages also if we decide an urban location:
The overall cost of establishing the facility is high compared to locating it in a rural area.
Land available is limited. Future expansion, sometimes may not be possible.
Land cost and construction cost will be high.
Cost of labour is high due to high cost of living in towns
Local taxes are high, like corporate tax which may not be there in rural centres.
Labour unions and their related problems are more
Conductive industrial climate may not prevail.
2B. Site selection in rural area
Easy availability of land for present construction and future expansion
Land cost is cheap.
Unskilled labour availability is more. But they have to be trained to make them skilled/semi –
Government subsides/concessions are there
Not much union problem; good industrial relations
Taxes will be low; at some places tax holidays are also made available by the respective
The disadvantages are:
Cost involved in training the unskilled labour into skilled will involve high cost..
Proper rail/road links may not be there; to establish them, high cost is involved.
Availability of power may be a problem.
Far away from the actual markets
Ancillary services may not be available
Facilities like hospitals, banks, post offices have to be established.

The manpower turnover among the top executive will be more because of their attitude towards
living in rural areas.
The advantages of both urban and rural areas can be combined and derived if we decide about a
location in the sub-urban area. From the cost point of view, the exorbitant cost involved in the purchase of
land in case of urban selection and the non-availability of work force in rural area can be offset by locating
the plant in the semi-urban area.
1. Define the location objectives and associated constraints
2. Identify the relevant decision criteria, which may be:
3. Relate the objectives to the criteria using appropriate models like
Economics cost models
Break Even analysis
Linear Programming
Qualitative Factor Analysis
4. Fox for undertake research to generate relevant data and use the models to evaluate the
5. Select the location that satisfies the criteria.
a. Industry Precedence – Succeedence Technique
Basic Assumption: If the location is best for many companies in the same industry, then it holds
good for a new company too.
No need for conducting detailed location study
Locations choice is subject to the “Principle of Precedence.”
b. Preferential Factor
Decision is dictated by Personal factor
Individual preference
Not a Professional approach; but widely used

c. Dominant Factor
Availability of raw material may be a dominant factor in case of Cement, Oil exploration, Mining
Contrast to preferential factor
Existence of good infrastructure and skilled personnel is a dominant factor for establishing IT
For evaluating qualitative factors, the techniques used are:
Factor Ranking
Factor Weight Rating
The specific methods that can quantify the qualitative decisions are:
Equal weights method
Variable weights method
Weight cum Rating method
Factor point Rating method
Composite measure method.
We have already seen the factors which will influence the site selection for putting up the plant. The
economic comparison of location alternatives is facilitated by the use of Cost-Volume-Profit analysis which
is also known as ‘Locational Break-even Analysis’. The graphical approach will enhance the understanding
of the concept, and it provides an indication of the ranger over which one of the alternative is superior to
the others.
Location Location

The procedure for the locational break – even analysis involves the following steps.
(i) Determine the fixed cost and variable costs associated with each location alternative.
(ii) Plot the total cost lines for all location alternatives on the same graph.
(iii) Determine which location has the lowest total cost for the expected level of output.
Following the above steps, the total costs of rural, semi-urban and urban site locations can be fixed.
In the case of urban location, the initial fixed is very high and the variable cost is comparatively low.
In the case of rural location, the initial cost is low but there is an increase in the slope, which is due to the
high variable cost. The semi-urban locational cost will be in between the two.
To conclude, if the volume (i.e. annual output) is low, then we can select the rural locations for the
purpose of establishing the factory. If the volume lies beyond a point, we can choose the urban centre for
locating the plant. If the annual output lies between, it is better to locate the factory in a semi-urban area

so as to reap the maximum benefits.