Characteristics of Capacity

The choice of a capacity size is usually the result of capital-budgeting decisions, which are reached after studying the expected impact of these capital outlays on operations over a number of years. The choice may be influenced by a combination of two major factors, each involving trade-off decisions and each heavily depending on long-range forecasts of demand, material costs, and labor costs:

1. Provision for seasonal and cyclical fuctuations in demand. The trade-off is between (a) additional costs of physical capacity and (b) the costs of inventory stockouts and/or the carrying costs of inventory safety stocks of such magnitude to compensate for seasonal and cyclical variations, the costs of overtime premium, sirbcontracting, and
2. Provision for upward trends in demand. The trade-off is between (a) the costs of con- structing too much capacity for initial needs and (b) the later extra costs of satisfying demand by alternative means. For example, should a factory designed to make color television tubes have an area of 100,000. 150,000, or 200,000 square feet?

Although it can be defined and measured in a particular situation, capacity is an illusive concept. Consider, for example, the following:

Capacity planning requires definition and measurement of capacity in a manner relevant to questions which arise in the planning process. This problem has two aspects. First, it is necessary to specify capacity in terms of how much the company should be prepared to make and to sell. Second, the capacity ofspecific facilities available or to be acquired must be determined... A variety of altemative combinations of capacity and operating patterns is usually possible

There is much fluidity in the quotation above. To most people, the term capacity 'implies a constraint, an upper limit. We sometimes hear, I'm working at capacity now. I simply can't do more.This same notion of capacity as a constraint is commonly held in industry.

Although the term capacity is usually applied to plant and equipment, it is equally applicable to other resources, such as people and materials. A shortage of direct labor, executive time, or materials may be critical in limiting company Production or sales.

The upper limit of capacity is seldom absolutely rigid, at least from an engineering viewpoint. That is, ways-such as overtime, subcontracting, or paying premium prices for additional materials-can usually be found to expand production. But these ways may be totally unattractive from an economic viewpoint. Hence, the upper limit of capacity is specified by management for current planning and control purposes after considering engineeting and economic factors. In this way, the upper limit is usually imposed by management' not by external forces'

Measurement of capacity usually begins with theoretical capacity (also-called maximum or ideal capacitv) that assumes the production of output 100 percent of the time. Then deductions are made for sundays, holidays, downtime, changeover time' and similar iterns to attain a measure of practical Capacity. The latter is defined as the maximum level at which the plant or department can operate efficiently. Practical capacity often allows for unavoidable operating interruptions such as repair time or waiting time (downtime).

Two other commonly used levels of capacity utilization are

1. NOrmal volume, which is the level of capacity utilization (which is less than 100 percent of practical capacity) that will satisfy average consumer.demand over as pan of time (often five years) that includes seasonal, cyilical, and trend factors; and
2. Master-budget Volume, which is usually the anticipated level of capacity utilization for the coming Year. There are apt to be differences in terms used between companies so be sure to obtain their exact meaning in a given situation. For example, master-budget volume is often called expected annual volume or expected annual capacity or expected annual activity or master-budget activity.