Capacity Management

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What is Capacity Management?

Capacity Management (CM) is the function of establishing, measuring, monitoring, and adjusting limits or levels of capacity in order to execute all manufacturing schedules; i.e., the production plan, master production schedule, material requirements plan, and dispatch list.

Four levels of CM:

• Resource Requirements Planning,

• Rough-cut Capacity Planning,

• Capacity Requirements Planning,

• Input/Output control.

The Importance of Capacity Utilization

Capacity utilization can be critical for an organization to survive. Therefore, companies need to think about the degree of capacity utilization. Pennings and Natter (2001) mention two particular reasons why it is important to critically think about the degree of capacity utilization:

1. Return On Investment. The degree of capacity utilization influences the return of investment of a company.
   For example, if there is a high degree of unused or excess capacity, the return on investment will be lower.
2. Demand patterns. The effectiveness of setting a certain degree of capacity utilization depends highly on the demand patterns of all other  products of a certain company and differ per product. Therefore, one must take into account the demand patterns of all products produced in a certain company.
   For example, if a certain firm produces a product that is characterized by substantial seasonality of demand, there will be longer periods of overcapacity followed by periods of undercapacity. Switching part of production of the low-demand product to other products can be a good choice, provided the overall benefits are higher than the costs of switching.

Source: Pennings, E. And M. Natter (2001) “Strategic Diversification and Capacity Utilization” International Journal of Production Economics Vol. 73, Issue 3

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