Category Archives: Facility Decisions: Location and Capacity

Capacity Planning

Capacity Planning

The objective of capacity planning is to specify which level of capacity will meet market demands in a cost-efficient way. Capacity planning can be viewed in three time duration long range (greater than one year), intermediate range (the next 6 to 12 months). and short range (less than six months).

Our focus in the chapter  long-range capacity planning where the firm makes its major investment decision . In addition to planning large chunks of capacity (such as a new factory). typical long-range capacity planning efforts also must address the demands for individual product lines individual plant capabilities and allocation of production throughout

Strategy

Strategy

the plant network. Typically  these are carried out according to the following steps:
1. Forecast ale for each product line.
2. Forecast sale for individual products within each product line.
3. Calculate labor and equipment requirements to meet product line forecasts.
4. Project boor and equipment instabilities over he planing horizon.

Reactive

Reactive

When a reactive strategy is adopted plant capacity is not added until all of the planned output from the facility can be sold. Thus with this strategy the plant is not brought on line until demand equals 100 percent of its capacity as shown in Exhibit 7.7C.
Operating costs are minimized with this approach, as the plant is producing at its desired optimal output beginning with its first day of operation. This strategy is most conducive to process-oriented operations that have very high fixed costs regardless of the volume produced and low variable costs. Examples include paper mills breweries, and refineries. The main problem with this strategy as with the neutral strategy is how best to meet the unfilled demand before the plant is in operation. One approach if the firm has other plants that produce the same product(s) is to manufacture the products temporarily (albeit inefficiently) at these other locations utilizing additional shifts and overtime as necessary.

Neutral

Neutral

A neutral strategy for adding capacity simply takes a middle-of-the-road approach. As seen in Exhibit 7.7B, additional capacity becomes available when demand is about 50 percent of total capacity. The issue here a with reactive strategy i how best to satisfy demand before the plant is up and operating.

Proactive

Proactive

With a proactive strategy, management anticipates future growth and builds the facility so that it is up and running when the demand is there, as seen in Exhibit 7.7A With the strategy, opportunity costs resulting from lost sales due to an inability to meet demand are minimized, although the firm does have to allocate fixed costs over a relatively small volume of units during the plant’s initial period of operation. This strategy is most compatible for a plant where the labor costs are a significant portion of total manufacturing costs, such as in low-volume assembly operations (e.g., footwear manufacturing.

Capacity Strategies

Capacity Strategies

For manufacturing firms, there are three major strategies for adding capacity: proactive, neutral, and reactive. Each has its strengths and weaknesses. Which strategy to adopt is dependent, to a large extent, on the operating characteristics of the facility and the overall strategy of the firm.