OM Capacity Session 14

OM - SESSION 14
CAPACITY PLANNING
STRATEGIC CAPACITY
PLANNING
Strategic Capacity Planning
Capacity
• The maximum level of output.

• The amount of resource inputs available
relative to output requirements at a
particular time.
• Capacity is the upper limit or ceiling on

the load that an operating unit can
handle.
CAPACITY (DEFINITION OF)
 The number of units a facility can hold,

receive, store or produce in a period of time.
 It is the upper limit or ceiling on the load that

an operating unit can handle. It includes
 equipment,
 space,
 employee skills
Capacity
Having sufficient capacity ensures that

customers are served and products made in
line with business plans & schedules;
 Too little results in delays & customers
expectations not being met – too much incurs
unnecessary costs;
 Therefore, effectively managing this core
element of operations is critical to the
continued success of an organization.
Capacity Management
Capacity management involves the study

of likely demand patterns for the medium
to long term, the determination of the
capacity required to meet such demand and
the development of strategies for the
deployment of resources, in particular for
accommodating temporary changes in
demand levels.
Measure of Capacity
Operation Input measure Out put measure
of capacity of capacity
Air-conditioner Machine hours No. of units per
plant available week
Hospital Beds available No. of patients
treated / week
Theatre No. of seats No. of customers
entertained /
week
Retail store Sales floor area No. of items sold

per day
Airline No. of seats No. of passengers
available on the per week
sector
Electricity Generator size Megawatts of
electricity
Two Capacity Strategies
Planned unused Forecast of Forecast of

capacity Planned use of
capacity needed short-term options capacity needed
Capacity
Capacity
Time between
increments
Expansionist Strategy Wait-and-See Strategy

CAPACITY MEASURES
Capacity Measures
 Design capacity
• Maximum output rate or service capacity an
operation, process, or facility is designed for.
 Effective capacity
• Capacity a firm can expect to attain given its
product mix, methods of scheduling,
maintenance and standards of quality. Design
capacity minus allowances such as personal
time, maintenance and scrap.
Capacity- related concepts
 Actual output
• Rate of output actually achieved—cannot
exceed effective capacity.
 Utilization
• Actual output as a percent of design
capacity.
 Efficiency
• Actual output as a percent of effective
capacity.
Efficiency
Measure of how well a facility or machine is

performing when used
Actual output
Efficiency =
Effective Capacity
(expressed as a
percentage)
Utilization
 Measure of actual capacity usage of a facility, work
center, or machine
Actual Output
Utilization =
Design Capacity
(expressed as a percentage)
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
Capacity cushion
• Capacity Cushion
– The amount of reserved capacity that
a firm maintains to handle sudden
increases in demand or temporary
losses of production capacity.
• Capacity Cushion = 1 - Utilization

DETERMINING CPACITY
REUIREMENTS
Determining Capacity Requirements
• Forecast sales within each individual

product line.
• Calculate equipment and labor

requirements to meet the forecasts.
• Project equipment and labor

availability over the planning horizon.
Some Short-Term Capacity Options
• lease extra space temporarily,

• authorize overtime,
• staff second or third shift with temporary
workers,
• add weekend shifts,
• alternate routings, using different
work stations that may have excess
capacity,
• schedule longer runs to minimize
capacity losses.
Some Short-Term Capacity Options
• level output by building up inventory in

slack season.
• postpone preventive maintenance
(risky).
• use multi-skilled workers to alleviate
bottlenecks.
• allow backorders to increase, extend
due date promises, or have stock-outs.
• subcontract work.
Demand management strategies
Strategies used to offset capacity

limitations and that are intended to
achieve a closer match between supply
and demand
 Pricing
 Promotions
 Backorders
 Offering complementary products
 Discounts
 Other tactics to shift demand from peak
periods into slow periods
Planning for Capacity
Capacity Planning
• The basic questions in capacity planning

are:
– What type of capacity is needed?

– How much is needed?
– When is it needed?
– How does productivity relate to
capacity?
Capacity Strategy Formulation
Capacity strategy for long-term demand
will depend on …
• Expected demand patterns,
• Expected growth rate and variability of
demands,
• Facilities
– Cost of building and operating
• Technological changes
– Rate and direction of technology
changes
• Behavior of competitors,
• Availability of capital and other inputs.
Key Decisions of Capacity Planning
• Amount of capacity needed,

• Timing of changes,
• Need to maintain balance
throughout the system,
• Extent of flexibility of facilities and
the workforce.
Types of Planning over a time
horizon
Long Range Add Facilities

Planning *
Add long lead time equipment
Intermediate Sub-Contract Add Personnel

Range Planning Add Equipment Build or Use Inventory
Add Shifts
Schedule Jobs
Short Range *
* Schedule Personnel
Allocate Machinery
Planning
*Limited options Modify Capacity Use Capacity

exist
Capacity Planning - Need
 To satisfy the future demand of products

without any shortages;
 Investments in facility capacity are long term
and cannot be reversed easily;
 To keep the initial investment in the facility
as low as possible to achieve lower break-even
volume;
 To find the optimal capacity of the facility so
that the sum of costs of under-capacity and
over-capacity is the minimum.
Steps of Capacity Planning
• Estimate future capacity requirements.

• Evaluate existing capacity and facilities and
identify gaps.
• Identify alternatives for meeting
requirements.
• Conduct financial analysis.
• Assess key qualitative issues.
• Select the best alternative for the long term.
• Implement the alternative chosen.
• Monitor results.
Many factors determine whether to make
yourself or buy (outsource)
• Available capacity/Cost of capacity,
• Expertise/Lack of expertise,
• Quality considerations – can we achieve high
quality requirements?
• Nature of demand – steady or variable?

• Cost savings of outsourcing,
• Risks of losing control over operations;
disclosing proprietary information/intellectual
capital.
Service capacity planning
 Service capacity planning can present a

number of challenges related to:
 The inability to store services.
 The need to be near customer.
 The degree of demand volatility.
Service capacity planning
 Time: Inability to store services for later consumption.
Capacity must be available to provide a service when it
is needed (capacity must be matched with the timing of
demand).
 Location: Need to be near customers for convenience.
Capacity and location are closely tied. Service goods
must be at the customer demand point and capacity
must be located near the customer.
 Volatility of Demand: (Much greater than in
manufacturing)
 Volume and timing of demand.
 Time required to service individual customers.

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OM - SESSION 14

• The maximum level of output.

• Capacity is the upper limit or ceiling on

 The number of units a facility can hold,

 It is the upper limit or ceiling on the load that

Having sufficient capacity ensures that

Capacity management involves the study

Retail store Sales floor area No. of items sold

Planned unused Forecast of Forecast of

Expansionist Strategy Wait-and-See Strategy

Measure of how well a facility or machine is

Design capacity = 50 trucks/day

Actual output 36 units/day

Utilization = Actual output 36 units/day

• Capacity Cushion = 1 - Utilization

• Forecast sales within each individual

• Calculate equipment and labor

• Project equipment and labor

• lease extra space temporarily,

• level output by building up inventory in

Strategies used to offset capacity

• The basic questions in capacity planning

– What type of capacity is needed?

• Amount of capacity needed,

Long Range Add Facilities

Intermediate Sub-Contract Add Personnel

*Limited options Modify Capacity Use Capacity

 To satisfy the future demand of products

• Estimate future capacity requirements.

• Nature of demand – steady or variable?

 Service capacity planning can present a

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