What is Capacity for us?
To understand the capacity easily, let's understand as the human body what is our capacity?
1.) How much food can we eat?
2.) How many miles can we run?
3.) How much time can we stand?
This is the capacity of the human body
Meaning of Capacity planning
Planning of capacity should be such that it observes demand. The company has to face issues while analyzing that what should be the capacity level of the organization. The capacity level should be such that it meets the requirement of the present and future demand. There should be a proper balance between the demand and the ability to fulfill that demand.
Capacity planning is a long and short-term strategy. It is a process used to determine
1.) How much is needed?
2.) When is it needed?
3.) When to increase the capacity?
Excess capacity results in underutilization of resources and lower capacity fail to meet the demand requirement.
Example of Capacity planning
The demand for cement used for construction activities depends upon the situation of the economy. If the economy is in a boom period, there will be lot of construction of the dam, road, bridges, buildings, etc. It will increase the demand for cement then the capacity required will be high. But in a recession, there will be less demand for cement, then the company can cover demand with less capacity also.
Importance of Capacity Planning
1.) Ability to meet future demand
2.) Help in preparing the budget
3.) Monitoring Cost
4.) Competitive advantage
5.) Impact in long run
1.) Ability to meet future demand
A capacity planning includes the forecast of demand that can arise in near future. If a company is in a situation that it can meet future demand, then it will provide an advantage to the company. So the capacity planning helps the company to know the requirement of capacity.
2.) Help in preparing the budget
Capacity planning helps the management to know the requirement of the capacity and related aspects like manpower, equipment, tools, etc. It helps in estimating the cash required to fulfill these requirements. So, it is an important aspect while preparing the budget.
3.) Monitoring Cost
Management should take care that there is always a balance of capacity and demand. Excess capacity results in the underutilization of resources like manpower, machine, inventory, etc. Lack of capacity fails to fulfill the demand. In both situations, cost increases and profit reduce.
4.) Competitive advantage
A capacity planning decision helps the company to beat the competition. If the company has the proper capacity to meets its current or future requirements, then it can satisfy the market demand. The quality and speed of services also add to its competitive advantages.
5.) Impact in long run
Good capacity planning help the organization to survive in the long run. It makes the company confident. Having proper capacity planning makes the company comfortable as compare to when there is excess or lack of capacity. It ensures that the company can perform its job in a smooth manner.
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