Before products can flow into a market, someone must design and invest in the facilities and organisation to produce them. This chapter concerns the planning of the systems needed to produce goods and services. Capacity planning for manufacturing and service systems are different. Both must be designed with capacity limitations in mind. The approaches for longterm and short-term capacity planning will help the managers to make best use of resources.

Manufacturing and Service Systems
Manufacturing and service systems are arrangements of facilities, equipment, and people to produce goods and services under controlled conditions. Manufacturing systems produce standardized products in large volumes. This plant and machinery have a finite capacity and contribute fixed costs that must be borne by the products produced.

Variable costs are added as labour is employed to combine or process the raw materials and other components. Value addition will takes place during the production process for the product. The cost of output relative to the cost of input can be measured, as the actual cost is known i.e. productivity is measurable quantity.

Service systems present more uncertainty with respect to both capacity and costs. Services are produced and consumed in the presence of the customer and there is little or no opportunity to store value, as in a finished goods inventory. As a result capacity of service systems like hospitals, restaurants and many other services must be sufficiently flexible to accommodate a highly variable demand. In addition, many services such as legal and medical involves professional or intellectual services judgments that are not easily standardized. This makes more difficult to accumulate costs and measure the productivity of the services.

Design and Systems Capacity
Production systems design involves planning for the inputs, transformation activities, and outputs of a production operation. Design plays a major role because they entail significant investment of funds and establish cost and productivity patterns that continue in future. The capacity of the manufacturing unit can be expressed in number of units of output per period. In some situations measuring capacity is more complicated when they manufacture multiple products. In such situations, the capacity is expressed as man-hours or machine hours.

Design capacity
Designed capacity of a facility is the planned or engineered rate of output of goods or services under normal or full scale operating conditions. For example, the designed capacity of the cement plant is 100 TPD (Tonnes per day). Capacity of the sugar factory is 150 tonnes of sugarcane crushing per day. The uncertainty of future demand is one of the most perplexing problems faced by new facility planners. Organisation does not plan for enough regular capacity to satisfy all their immediate demands.

Design for a minimum demand would result in high utilisation of facilities but results in inferior service and dissatisfaction of customers because of inadequate capacity. The design capacity should reflect management‘s strategy for meeting the demand. The best approach is to plan for some in-between level of capacity. System/effective capacity: System capacity is the maximum output of the specific product or product mix the system of workers and machines is capable of producing as an integrated whole.

System capacity is less than design capacity or at the most equal it because of the limitation of productmix, quality specification, and breakdowns. The actual is even less because of many factors affecting the output such as actual demand, downtime due to
machine/equipment failure, unauthorized absenteeism. The system capacity is less than design capacity because of long-range uncontrollable factors. The actual output is still reduced because of short-term effects such as breakdown of equipment, inefficiency of labour. The system efficiency is expressed as ratio of actual measured output to the system capacity.

These different measures of capacity are useful in defining two measures of system effectiveness: efficiency and utilization. Efficiency is the ratio of actual output to effective capacity. Utilization is the ratio of actual output to design capacity.
Efficiency =Actual output/Effective capacity
Utilization =Actual output/ Design capacity

It is common for managers to focus exclusively on efficiency, but in many instances, this emphasis can be misleading. This happens when effective capacity is low compared with design capacity. In those cases, high efficiency would seem to indicate effective use of
resources when it does not.

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