Module 3 - Background

Capacity & Forecasting



FROM: George Washburn

SUBJECT: Capacity project

I have come to the conclusion that we will soon be faced with a major capacity issue based on the information that I have gotten from our Forecasting Manager. That means that even as we increase productivity we still need to consider how to deal with capacity as our demand increases. I am reviewing some data and finalizing my thoughts. I will give you the assignment shortly.

Let me know if you have any questions


Learning Wizard

Watch these two videos on Capacity (Part 1 and Part 2), by Dr. Jack Elson

Capacity, Part 1:

Capacity, Part 2:

Let’s take a systems dynamic look at production. There are two basic concepts to the dynamics of system flow: the rate of production (or the flow of materials over time) and the level of the material that accumulates or dissipates as it flows through. We talked about the levels of material in Module 2, Inventory. Materials flow into inventory from outside vendors. These materials go through production processes at various rates of production, and accumulate in work in process inventories and then finally into finished goods inventories.

In this diagram, the flows are based on production rates. The level is the level of inventory as it accumulates and as it is used up. Sometimes the outflow occurs at the same time as in the inflow. Other times the inventory is accumulated by the inflows, moved to another process, and then it flows out, through the process and back into another inventory. Traditional manufacturing processes work this way and add cost (value) to the work-in-process inventory. Capacity can be determined in two ways: the rate of flows, based on number of machines (work-stations) in the process and the speed of the machine (or manual process), and the physical size of the facilities, as determined by floor space and cubic volume.

Review the video, Part 3, by Dr. Elson, which discusses capacity briefly. Just move the time slider to 12:45 and watch until 14:35.

OPM500-Systems View of OPs - Pt 3 (2011), Elson, J. retrived from

What is Capacity from a flow perspective? Capacity is usually determined on a process by process basis. It is calculated as the number of parts that can be produced in a given period of time. For weekly capacity, this calculation is (number of machines or workers) * speed (parts/hour) * number of shifts * hours/week/shift. Without using any factors, this gives you the raw maximum capacity per week. If there is an efficiency factor that accounts for downtime (non-production time), then is applied. For example, the efficiency factor may be 90%, which means that 10% of the available time, the process is down. This Wikipedia article provides a good overview of Capacity and capacity planning.

Capacity Planning. (2011). Wikipedia, retrieved from

Capacity from a level (container) perspective. Capacity is also analyzed from a physical space view. The amount of inventory that can be held often depends on the size of storage facility that holds it. This creates inventory costs, the holding cost, based on owning and maintaining physical facilities. There is also another reason physical facilities and space is important, mostly in the long run. The amount of space available will determine how many machines and work stations can be used. One way to increase capacity is to add another machine or work station. But when you run out of space, you can’t or you need to obtain more space.

There are different levels of capacity, e.g. maximum and normal. The maximum capacity is the just that, how much can be produced when the process is running at peak levels of production. Most manufacturing companies do not run at maximum, since problems can occur. Most companies like to set a Normal level of capacity, say 80% or 85% of maximum. This allows for unplanned downtime, and also provides reserve capacity if and when the demand increases in the short term. This article provides a discussion on capacity utilization.

Capacity Utilization. (2011). Wikipedia, retrieved from

Capacity of a production line – bottlenecks. The problem with measuring capacity of individual processes is that processes are connected in order to generate the finished product. As an example, take the Plasti-Brack product line. Each of the processes in producing the finished product and bulk-packing it, have different capacities. But when you look at these altogether as one big process, one of the processes becomes the controlling process in terms of production capacity. That is the one with the lowest production capacity. This process is called a bottleneck. This article explains this further:

Goldman, A. (n.d.). Gaebler Ventures, retrieved from

How can you increase capacity? The answer is simple: more machines (or more work stations), faster machines (or workstations), more up time, more time per day or week (shifts or overtime), or more space so you can add more machines or work stations. This article explains more about capacity planning:

Inman, R.A. (n.d.). eNotes, retrieved from

How do you determine if the long-term demand will require more capacity? Forecasting is the process of determining what is going to happen in the future. But it is somewhat different that predicting. Predicting is usually considered an attempt at determining the outcome of a specific event, like who is going to win the Super Bowl. Forecasting, at least in business (and weather), is determining future patterns of behavior, e.g. what will the demand be in three to five years for our products. Forecasting has been developed over many years and is now done with the help of computers and complex algorithms. The most advanced forecasting techniques use facts about the trends and desires of consumers which are correlated to demand patterns. This article provides a good in depth overview of forecasting techniques:

Walonick, D. (1993). An Overview of Forecasting Methodology, Statpac, retrieved from

How forecasting is important to capacity planning? Determining what the future demands will be for the various products and product lines can then be converted into requirements for capacity. When forecasted capacity exceeds actual capacity, something must be done or customers will become dissatisfied as it takes longer and longer for them to receive their orders. In other words, when demand levels outstrip capacity, customer orders begin to build into a backlog. Customers will eventually cancel orders and/or find other suppliers. In order to prevent this, the capacity issue must be addressed, in both the long term and the short.