Operations Management and Capacity Planning

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In any business organization, various departments have their significance and roles that contribute to the success of the organization. Therefore, it is impossible to declare one department as domineering in an organization. Departments have to work jointly to achieve success. Decisions on capacity have a long- term influence and the coordination of activities aims to increase efficiency in the performance of a company and enhance the flow of operations. A business must embrace strategic planning for operations management to succeed. Also, achieving organizational goals requires effective and useful operations management, which implies that this activity in a business supersedes other activities in terms of importance. In operations management, the firm considers capacity planning, organizing, and control of resources as the main areas allocate tasks so that the business can serve its market with tangible goods and services (Gallopin, 2006).

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The importance of capacity planning

The importance of capacity planning is to ensure that an organization understands and meets fluctuations in demand to minimize production risk. Demand uncertainty reduces with capacity planning. Overall capacity planning is important because it supports the overall competitive strategy of a firm. Capacity planning is important for the following reasons.

Cost implications

Once the capacity planning exercise occurs, a company obtains sufficient information to influence the budgeting process. It provides certainty in budgeting and allows any organization to evaluate the options of cutting costs in the proposed changes for managing current and future demand fluctuations. It is easier to make long-term decisions regarding the cost of operations with close estimates of the total expenses that a business will incur in the short term and long term. A business can then evaluate cost implications against its existing corporate strategy (Slack, Chambers, & Johnston, 2011).

Revenue implications

Production personnel in an organization have to find a correct product mix that generates enough revenue to meet the organizational objectives. Capacity planning works with the product life cycle. Products go through an introduction phase, plateau phase, and a shrinking phase. A business has to anticipate changes in demand and make the right production decisions to ensure that it controls revenues during the changes in product demand. Capacity planning ensures that organizations are not stuck with production capacities at plateau levels when there is a growing phase because it will jeopardize the ability to capitalize on increased revenue potential (Gassenheimer, Siguaw, & Hunter, 2013).

Customer dissatisfaction

Many products are time-sensitive in their expected delivery to retail outlets or shipments to customers. Capacity planning assists organizations come up with appropriate ways of ensuring that customers expect products and receive them as expected. This also applies to services. Capacity planning takes care of queues and ensures that customers depending on a service are not frustrated by delays. In different organizations, capacity depends on several factors that firms or customers control (Hill & Hill, 2012). The essential action that an organization has to make is to ensure that it meets its end of the bargain by providing services or goods when they are needed. It can also shift demand so that customers are not dissatisfied with delays.

Uncertainty associated with future demand

With capacity planning, a firm can reduce uncertainty by forecasting. The practice also informs a business of the required measures to shift the excess demand in particular periods to the periods that have low demand. Companies can then create activities that help to balance demand or segment the marketplace so that it serves customers with regular and predication demand patterns. Companies can also come up with separate capacity plans for customers with highly unpredictable demand patterns (Horton, 2005).

Long-term commitment of expensive resources

Before organizations can commit resources to develop production capacity, they have to make the right choices for matching demand. Capacity planning plays a role in assisting an organization to decide the right strategy for matching demand and product so that it is possible to estimate different risk levels of committing expensive resources of the firm. Projecting demand in the future and using historical data to determine possible changes in demand helps firms to come up with an accurate demand forecast. Therefore, a firm cannot mistakenly commit resources when it is embracing capacity planning as part of its production strategy. In the service sector organizations, the commitment of expensive resources requires predictable and constant demand for the service, which capacity planning can determine (Silvester, Lendon, Bevan, Steyn, & Walley, 2004).

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Capacity planning is usually purchased in chunks

A firm has to deal with the additional cost of operations once it purchases or installs additional capacity. It cannot stop or sell excess capacity in the short-term. It stresses the importance of making capacity planning to ensure that the wrong choices are not taken. The addition of capacity is a risky strategic choice; therefore, it is important to first find out the implications of the additional capacity before going on with the purchase decision (Silvester et al., 2004).

Using aggregate production planning and demand management

Companies have to deal with the seasonality of demand, which causes production challenges. Companies can determine production, inventory, and workforce levels that will meet fluctuations in demand using aggregate production planning (APP). This happens over a specified planning horizon, which could be a year. The intention is to make sure that the output matches the seasonal forecasted product demand cost-effectively (Hill & Hill, 2012). The production planning consists of long-term or strategic planning, medium-term or tactical planning, and short-term planning or operational planning. According to the hierarchical production planning (HPP) theory, the aggregation helps firms improve demand forecasts, data gathering, and decision analysis. A firm that has an understanding of APP works towards meeting its forecasted demand by adjusting production levels. It may also adjust inventory, labor, or other resources that can help it achieve its objective; hence the importance of taking capacity planning seriously as a firm’s function (Horton, 2005).

Firms that have the APP background can use the following production strategies. First, there is the chase strategy, where firms change production volumes as per the demand. There is also the level strategy, where firms seek a smooth production schedule that achieves total demand volume in a defined planning horizon. Lastly, there is a mixed strategy that combines the advantages presented by the other two strategies (Takey & Mesquita, 2006).

Firms may use design capacity or effective capacity when dealing with capacity planning. The role of design capacity is to determine the highest output that can be realized in ideal circumstances. The firm realizes maximum output by taking temporary measures such as overtime, overstaffing, and subcontracting. Effective capacity, on the other hand, is described as the highest rate of production that a firm can maintain in the ideal circumstances. Effective capacity considers realistic work schedules and machine maintenance breaks in a firm. Also, a firm has to choose a preferred way of dealing with increases in demand or issues of excess capacity (Slack, Chambers, & Johnston, 2007).

A business has to follow the planning sequence to achieve a better operating level. It starts by coming corporate strategies and policies with aggregate demand forecasts and the prevailing or expected competitive and political conditions. These factors contribute to the formation of a business plan. The next involves the firm going on to make an aggregate plan, which establishes the capacity of the operation of the firm. After that, the firm makes the master schedule that sets the schedules for specific products. The firm has to consider the range of planning as measured by its planning horizon while performing this task (Liao & Yu, 2013).

Operations managers must embrace a particular strategy for dealing with variation after understanding the basics of aggregating. The common strategies include the maintenance of a particular amount of excess capacity to match the expected increase in demand. In an ideal situation, a firm should embrace the best operating level. In such a position, a firm can have excess capacity when it anticipates there will be an increase in demand. Here, a company will keep its production schedule and follow its effective capacity, while increasing output to match demand. It will not incur additional fixed costs. A firm would be aiming for an output level that has the lowest average unit cost. At the best operational level, a company obtains a balance between economies of scale and diseconomies of scale (Stevenson, 2011).

Another coping strategy is to maintain a degree of flexibility so that a firm can handle changes. It can hire temporary workers or use over time. A third strategy would be to wait as long as possible before committing to a given level of supply capacity. When doing this, a firm will schedule products or services, according to known demand and then delay scheduling for other products until the certainty of their demand improves (Smit & Wandel, 2006).

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It is important to know the inputs and outputs of aggregate production planning before evaluating the effectiveness of each strategy and its relevance to a firm. The inputs and outputs will be useful as parameters for the analysis (Roh, Tokar, & Swink, 2013). APP aims to meet demand, use capacity efficiently, and meet inventory policy while minimizing the total costs. At the same time, a company can act proactively by altering demand to match the capacity.

The firm will consider several demand management options when going with a proactive approach. A firm can shift demand from peak to off-peak periods using advertising, campaigns, and pricing. To use pricing as a technique, the product or service must have an elastic price elasticity of demand. This will ensure that lower prices during off-peak periods entice people to schedule their purchasing at off-peak times. A firm may also offer products and services for counter-seasonal demand patterns. Alternatively, it can opt for back-ordering by taking the current orders and promising to deliver them later. It is not possible to implement back-ordering if the clients cannot wait. Otherwise, firms fall into the risk of losing their customers by making them wait for products or services. Other options available for demand management are the creation of new demand and collaborating with suppliers to lower information distortion along the supply chain.

Backordering allows a firm to avoid overtime and keep the capacity constant, but it relies on customer support. It has become a common strategy for firms that use the back ordering process to lock-in customers by causing them to pay in advance. Products that are made during low seasons are important because they allow the business to use its resources maximally. Unfortunately, the firm has to obtain external expertise to perform tasks that are not in its area of operations. It also increases the risk of loss because firms face an uphill task of finding products and services that have opposite demand patterns (Waters, 2008).

Adjusting capacity to meet demand and supply options

Companies can produce at a constant rate and use inventories to absorb fluctuations in demand to meet demand. The advantage of this strategy is the gradual change in human resources and reduced disruption of production schedules (Hill & Hill, 2012). Unfortunately, the business will have to incur inventory-holding costs, and the business will lose sales revenue when shortages arise. This approach is useful mostly in companies that deal with goods, but not service operations. The other supply option is to vary the workforce size to make sure production matches demand. The best thing about the choice is that it allows a business to avoid using other alternatives. Unfortunately, the choice adds costs to the business because of having to train the newly hired workers. Moreover, it is only applicable to a business that is operating in an environment that has a large labor supply. One of the other ways of increasing a company’s capacity is making the employees work overtime. All idle times should also be utilized fully. It can match seasonal fluctuations without having to hire and train employees. However, the existing workers may become fatigued because of overtime. Also, the overtime may not provide enough hours for workers to meet the increased demand. Nevertheless, the option is good because it allows a firm to have some flexibility as it implements its aggregate plan (Slack, Chambers, & Johnston, 2007).

Part-time employees can help companies embrace flexibility in their production capacity. The company will enjoy the flexibility and a smooth output schedule in the case of sub-contracting, but it will lose quality and control. Also, features of sub-contracting within the service and goods industries vary. Part-time workers help a company to be more flexible because it can hire temporary workers to do causal jobs. However, this option has a high turnover and high training costs. It also affects quality negatively, which makes scheduling difficult (Reid & Sanders, 2012).

Picking the right strategy

In the end, overcapacity will be favorable when the fixed costs of capacity are not high and subcontracting is not possible. It is also useful when the time needed is long, and there is no option of missing delivery. Under capacity is good when the time to build capacity is short, and the cost of creating capacity is extremely high. It is also ideal in situations where technology changes fast (Hill & Hill, 2012).


Capacity decisions are critical to any business organization because they affect the actual capacity. Also, capacity is the supply side of the demand-supply equation, which ideally should match demand at all times. Based on this statement and the discussion in this paper, I agree with the statement that capacity planning is the most crucial for managing an operation successfully. However, the statement only applies when considering capacity planning as a requirement for operations management, but not as a business unit in a firm.

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Smit, B., & Wandel, J. (2006). Adaptation, adaptive capacity and vulnerability. Global Environmental Change, 16(3), 282-292.

Stevenson, W. (2011). Operations management (11th ed.). New York, NY: McGraw Hill/Irwin.

Takey, F. M., & Mesquita, M. A. (2006). Aggregate planning for a large food manufacturer with high seasonal demand. Brazilian Journal of Operations & Production Management, 3(1), 05-20.

Waters, D. (2008). Operations management: Producing goods and services. New York, NY: Prentice Hall.

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