Capacity Planning and Analysis PDF

STRATEGIC CAPACITY
PLANNING
Engr. Muhammad Sajid

Lecturer
Department of Chemical Engineering, UOG
CAPACITY PLANNING
 Capacity is the upper limit or ceiling on the
load that an operating unit can handle.
 The basic questions in capacity handling are:

 What kind of capacity is needed?
 How much is needed?
 When is it needed?
2
TYPES OF CAPACITY PLANNING OVER TIME
HORIZON
Long Range Add Facilities
Saba Bahouth – UCO

Planning Add equipment *
Intermediate Sub-Contract Add Personnel

Range Planning Add Equipment
Add Shifts Build or Use Inventory
Short Range Schedule Jobs

Planning *
Schedule Personnel
Allocate Machinery
*Limited options Modify Capacity Manage with existing

Capacity 3
DEFINITIONS AND MEASUREMENTS
Capacity: The “throughput,” or number of units a facility
can hold, receive, store, or produce in a period of
time.
Design Capacity: Maximum theoretical output
Effective Capacity: Capacity a firm can expect to receive given

its product mix, methods of scheduling,
maintenance, scrap, personal time.
Actual Output: What is actually being produced, in units.
4
DEFINITIONS AND MEASUREMENTS
Efficiency: Actual Output / Effective Capacity
(Actual Output in units / Standard Output in
units)
Utilization: Actual Output / Design Capacity

(Hours used / Total hours available)
5
SIMPLE EXAMPLE
A dentist assistant schedules a patient every 10 minutes.
This dentist treated 40 patients today.
The dentist works 8 hours a day.
The office is set up to handle a maximum of 60 patients a
day.
What is the efficiency of this dentist office?

What is the utilizations of this dentist office?
6
EFFICIENCY/UTILIZATION EXAMPLE
Design capacity = 50 trucks/day

Effective capacity = 40 trucks/day
Actual output = 36 units/day
Actual output 36 units/day

Efficiency = = = 90%
Effective capacity 40 units/ day
Utilization = Actual output = 36 units/day

= 72%
Design capacity 50 units/day
7
SPECIAL REQUIREMENTS FOR
MAKING GOOD CAPACITY DECISIONS
 Forecasting demand accurately

 Cycles; overestimating growth; seasons; complementary
products
 Building for change
 Understanding capacity increments
 Finding the optimal operating level (volume)
8
DETERMINANTS OF EFFECTIVE CAPACITY
 Facilities
 Product and service factors
 Process factors ( output quality )
 Human factors
 Operational factors ( late delivery for the
raw materials )
 Supply chain factors
 External factors
9
UNDERSTANDING CAPACITY INCREMENTS
Expected Demand Expected Demand
New Capacity New Capacity
Demand
Demand
Time in Years Time in Years

Capacity leads demand with an incremental expansionCapacity leads demand with a one-step expan
Expected Demand Expected Demand

New Capacity
New Capacity
Demand
Demand
Time in Years Time in Years

Capacity lags demand with an incremental expansion
Attempts to have an average 10
capacity, with an incremental
expansion
ECONOMIES OF SCALE
Cost per unit
Small
plant Medium
plant Large
plant
0 Output rate
11
TOOLS FOR CAPACITY DECISIONS
1. Break-even Analysis
Single-product case
Break-even in units: Total Fixed Cost
Price  Variable Cost
Break-even in Dollar Total Fixed Cost

Sales: 1
Variable Cost
Price
2. Decision Theory
Decision Making Tools
3. Financial Analysis F
NPV 
Net Present Value (NPV): (i  1)
N
4. Queueing / Waiting lines

(Simulation)
Saba Bahouth – UCO

COST-VOLUME RELATIONSHIPS
Amount
($)
0 BEP
(Quantity in units) 13
CROSSOVER CHART
Process A: low volume, high variety
Process B: Repetitive
Process C: High volume, low variety
Cost
Fixed cost - Process C

Fixed cost - Process B
Fixed cost - Process A
Process A Process B Process C Quantity
14
BREAK-EVEN PROBLEM WITH STEP FIXED
COSTS
Revenues
TC
1 machine 2 machines 3 machines

15
Quantity
ASSUMPTIONS OF COST-VOLUME ANALYSIS
1. One product is involved

2. Everything produced can be sold
3. Variable cost per unit is the same regardless of
volume
4. Fixed costs do not change with volume
5. Revenue per unit constant with volume
6. Revenue per unit exceeds variable cost per unit
16
MANAGING EXISTING CAPACITY
Demand Management Capacity Management

• Vary prices  Vary staffing
• Vary promotion  Change equipment
• Change lead times & processes
(e.g., backorders)  Change methods
• Offer complementary  Redesign the product for
products faster processing
17
PLANNING SERVICE CAPACITY
 Need to be near customers
 Capacity and location are closely tied
 Inability to store services
 Capacity must be matched with timing of
demand
 Degree of volatility of demand
 Peak demand periods
18
FINANCIAL ANALYSIS
 Cash Flow - the difference between cash received

from sales and other sources, and cash outflow for
labor, material, overhead, and taxes.
 Present Value - the sum, in current value, of all

future cash flows of an investment proposal.
19
 A department works one eight hour shift ,250 days a
year, and has these figures for usage of a machine that
is being considered :
Standard
Annual processing time
Product Demand per unit (hr.)
#1 400 5.0
#2 300 8.0
#3 700 2.0
20
CALCULATING PROCESSING REQUIREMENTS
Standard
Annual processing time Processing time
Product Demand per unit (hr.) needed (hr.)
#1 400 5.0 2,000
#2 300 8.0 2,400
#3 700 2.0 1,400

5,800
21
 Annual capacity =8× 250=2000
 Number of machines required =5800÷ 2000=2.9
22

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STRATEGIC CAPACITY

Engr. Muhammad Sajid

 The basic questions in capacity handling are:

Long Range Add Facilities

Saba Bahouth – UCO

Intermediate Sub-Contract Add Personnel

Short Range Schedule Jobs

*Limited options Modify Capacity Manage with existing

Design Capacity: Maximum theoretical output

Effective Capacity: Capacity a firm can expect to receive given

Actual Output: What is actually being produced, in units.

Utilization: Actual Output / Design Capacity

What is the efficiency of this dentist office?

Design capacity = 50 trucks/day

Actual output 36 units/day

Utilization = Actual output = 36 units/day

 Forecasting demand accurately

 Finding the optimal operating level (volume)

Expected Demand Expected Demand

New Capacity New Capacity

Time in Years Time in Years

Expected Demand Expected Demand

Time in Years Time in Years

Cost per unit

Break-even in Dollar Total Fixed Cost

4. Queueing / Waiting lines

Saba Bahouth – UCO

Fixed cost - Process C

Process A Process B Process C Quantity

1 machine 2 machines 3 machines

1. One product is involved

Demand Management Capacity Management

 Cash Flow - the difference between cash received

 Present Value - the sum, in current value, of all

#1 400 5.0 2,000

#2 300 8.0 2,400

#3 700 2.0 1,400

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