Utilisation:

Capacity planning needs knowledge of the current capacity of a procedure and its utilization. Utilization, the degree to which equipment, space, or labour is currently being utilized, is expressed as a ratio of average output rate to maximum capacity.

Utilisation = (Average output rate/ Maximum capacity) × 100%

Capacity Planning

Average output rate and the capacity should be measured in the same terms like time, customers, units or rupees. Therefore utilization rate indicates the need for adding extra capacity or eliminating unneeded capacity. The following two terms are required to define the maximum capacity.

Peak Capacity

Maximum output that a procedure or a facility may achieve under ideal condition is called peak capacity. while the capacity is measured relative to equipment alone, the suitable measure is rated capacity. Peak capacity may be sustained for only small time interval such as few hours in a day, or few days in a month. A procedure reaches it by using marginal methods of production, such like extra shifts, excessive overtime, overstaffing, and subcontracting. Although these may help with temporary peaks, these options cannot be sustained for too long. Generally, employees do not want to work extremely for larger period of time. The premium of overtime and excessive work is large for the firm. In the mean time quality also drops.

Effective Capacity

Maximum output that a process or a firm may sustain under normal operative conditions is its effective capacity. Effective capacity implies one or three shift operation(s) depending on the firms. For this reason the capacity is described as the greatest level of output the firm can reasonably sustain by employing realistic employee schedules and equipments currently in place. While the firm is running close to the peak capacity, it can make minimal profits or may lose money despite of high level of sales.