What are the factors considered to decide the effective capacity of a plant? Give some examples.
Answer. Capacity planning is the process of adjusting the capacity of an organization to do work in response to changing or predicted demands.
In the context of capacity planning, capacity is taken to mean the amount work that an organization is capable of completing in a given period of time. In a simple model, it might be calculated as (number of machines and/or workers) x (number of shifts) x (utilization) x (efficiency).
The demand for work of organization experiences will vary under many circumstances. Notable events that might cause the demand for work to vary greatly include starting a new organization, extending the operations of an existing business, considering additions or modifications to product lines, and introducing new techniques, equipment and materials.
Discrepancy between capacity of an organization and the demands of its customers results in an inefficiency, either in under-utilized resources or unfulfilled customers. The goal of capacity planning is to therefore minimize this discrepancy.
The broad classes of capacity planning are lead strategy, lag strategy, and match strategy.
• The lead capacity strategy is adding capacity in anticipation of an increase in demand. Lead strategy is an aggressive strategy with the goal of luring customers away from the company’s competitors. The possible disadvantage to this strategy is that it often results in excess inventory, which is costly and often wasteful.
• Lag strategy refers to adding capacity only after the company is running at full capacity or beyond due to increase in demand. This is a more conservative strategy that decreases the risk of waste but may result in the loss of possible customers.
• The match strategy (also known as the tracking strategy) is adding capacity in small amounts in response to changing demand in the market. This is a more moderate strategy.
EFFECTIVE CAPACITY OF A PLANT
Ultimately, the output from a production facility or system is not determined simply by the physical size of the facility, the sizes or types of machines, or the number of employees working. Production capacity, especially effective capacity, is affected by the design of the products and processes, the training of employees, the management of quality, and many other factors. The most important factors affecting effective production capacity are:
1. Process design. In multistage production processes the maximum rate of output that can be achieved is governed by the slowest lowest capacity stage.
2. Product design. With exactly the same personnel and equipment, the capacity for making a product that is well designed for production will be greater than for a poorly designed one.
3. Product variety. The fewer types of products made by a production unit and the more similar they are, the more specialized equipment and jobs can be, and the less time lost on product changeovers and machine set-ups.
4. Product quality. The way products are made, tested, and inspected will affect the rate at which products of acceptable quality can be produced.
5. Production scheduling. Scheduling that keeps product flows well balanced and synchronized and unproductive time minimized will utilize machines and personnel better and result in greater effective capacity.
6. Materials management. Shortages of materials can cause work stoppages, while excess inventories can cause congestion and wasted time searching for materials.
7. Maintenance. Equipment breakdowns and defects due to machine wear are two majors sources of lost production.
8. Job design and personnel management. The amount of output a production system actually produces is greatly determined by the personnel operating the system. Inadequate training, poor job design, overwork, and absenteeism all lead to lost production.
Examples - The agony of too much – and too little – capacity
Carnival Cruise Line has a fleet of cruise ships that ply the waters off Florida. The capacity of these ships is huge. The Destiny is its largest, which displaces 1,00,000 tons and can carry over 3,100 passengers. But Carnival has been sailing in choppy seas during the last year, plagued by three onboard fires and technical problems. The most pressing problem, however, is the glut of new ships being added throughout the industry. Carnival alone is bringing in a cadre of 15 new amenity-filled ships, boosting its fleet to 61. With other cruise lines also adding to their fleets, the number of available beds jumped by 12 percent in 2000. But historically, passenger volume has grown at only about 8 percent annually. Carnival argues that with the baby boomers now approaching their peak cruise-vacation years, the industry has lots of room to grow beyond the 6.5 million people who will book a cruise this year. “What is important to us is that we are building over the next five years $6.5 billion worth of new ships”, says COO Frank. “We are going to continue
to grow our business, and we are going to grow it profitably”. Not everyone is convinced. Some experts worry about the over-capacity issue and Carnival’s decreasing return on investment. For now, Carnival is filling its berths by slashing prices. After years of rising prices in this industry, the capacity glut is causing the steep discounts. For a seven-day cruise, the cheapest fare has dropped from $599 to $549, and discounted tickets have gone as low as $359. Carnival is also adding a variety of shorter and cheaper voyages as a way to expand the market, because high utilization is a key to success when its resources are so capital-intensive.
The aircraft industry experienced the opposite problem in the late 1980s – not enough capacity. The world’s airlines re-equipped their fleets to carry more passengers on existing planes and vie to buy a record number of new commercial passenger jets. Orders received by Boeing, Airbus, and McDonnell Douglas surged to more than 2,600 planes. McDonnell Douglas alone had a backlog of some $18 billion in firm orders for its MD-80 and new MD-11 wide body – enough to keep its plant fully utilized for more than three years. Despite the number of orders, Douglas’s commercial aircraft division announced a startling loss; Airbus struggled to make money, and even mighty Boeing fought to improve sub par margins. Capacity shortage caused many problems for McDonnell Douglas: Its suppliers were unable to keep pace, its doubled workforce was inexperienced and less productive, and considerable work had to be subcontracted to other plants. The result was that costs skyrocketed and profits plummeted. In 1997, Boeing acquired McDonnell Douglas.
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