Capacity Planning

Unit III
Capacity planning
Aggregate Planning
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?
Importance of Capacity Decisions
1. Impacts ability to meet future demands
2. Affects operating costs
3. Major determinant of initial costs
4. Involves long-term commitment
5. Affects competitiveness
6. Affects ease of management
7. Impacts long range planning
Capacity
• Design capacity
– maximum output rate or service capacity an
operation, process, or facility is designed for
• Effective capacity
– Design capacity minus allowances such as
personal time, maintenance, and scrap
• Actual output
– rate of output actually achieved cannot
exceed effective capacity.
Efficiency and Utilization
Actual output
Efficiency =
Effective capacity
Actual output
Utilization =
Design capacity
Both measures expressed as percentages

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
Determinants of Effective Capacity
• Facilities
• Product and service factors
• Process factors
• Human factors
• Operational factors
• Supply chain factors
• External factors
Steps for Capacity Planning
1. Estimate future capacity requirements
2. Evaluate existing capacity
3. Identify alternatives
4. Conduct financial analysis
5. Assess key qualitative issues
6. Select one alternative
7. Implement alternative chosen
8. Monitor results
Make or Buy
1.Available capacity
2.Expertise
3.Quality considerations
4.Nature of demand
5.Cost
6.Risk
Economies of Scale
• Economies of scale
– If the output rate is less than the optimal level, increasing
output rate results in decreasing average unit costs
• Diseconomies of scale
– If the output rate is more than the optimal level, increasing
the output rate results in increasing average unit costs
Evaluating Alternatives
Cost-Volume Relationships
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
Aggregate Planning
• Aggregate planning is intermediate-range capacity planning
that typically covers a time horizon of 2 to 12 months.
• It is particularly useful for organizations that experience
seasonal or other fluctuations in demand or capacity.
• The goal of aggregate planning is to achieve a production plan
that will effectively utilize the organization’s resources to
match expected demand.
Long range
Intermediate
range
Short
range
Now 2 months 1 Year

Overview of Planning Levels
• Short-range plans
– Machine loading/ scheduling jobs, workers and
equipment
– Job assignments
• Intermediate plans
– Employment
– Output/ inventories
• Long-range plans
– Long term capacity
– Location / layout
Planning Sequence
Aggregate Planning Inputs
• Resources • Costs
– Workforce – Inventory carrying
– Facilities – Back orders
• Demand forecast – Hiring/firing
• Policies – Overtime
– Subcontracting
– Inventory changes
– Overtime
– subcontracting
– Inventory levels
– Back orders
Aggregate Planning Strategies
• Proactive
– Alter demand to match capacity
• Reactive
– Alter capacity to match demand
• Mixed
– Some of each
Demand Options
• Pricing
• Promotion
• Back orders
• New demand
Capacity Options
• Hire and layoff workers
• Overtime/slack time
• Part-time workers
• Inventories
• Subcontracting
Techniques for Aggregate Planning
1.Determine demand for each period
2.Determine capacities for each period
3.Identify policies that are pertinent
4.Determine units costs
5.Develop alternative plans and costs
6.Select the best plan that satisfies objectives.
Otherwise return to step 5.
Aggregate Plan to Master Schedule
Master schedule: The result of

disaggregating an aggregate plan; shows
quantity and timing of specific end items
for a scheduled horizon.

Capacity Planning

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Unit III

Both measures expressed as percentages

Actual output = 36 units/day

Utilization = Actual output = 36 units/day

Now 2 months 1 Year

Master schedule: The result of

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