5 Capacity Planning

CAPACITY PLANNING
PROCESS SELECTION
Capacity refers to an upper limit or ceiling on the load
that an operating unit can handle.
plant, department, Number of

machine, store, or Products/Services
worker
CAPACITY PLANNING
The goal of strategic capacity planning is to achieve a match

between the long-term supply capabilities of an organization
and the predicted level of long-term demand.
CAPACITY PLANNING
Organizations become involved in capacity planning for various

reasons such as;
• Changes in demand
• Changes in technology
• Product/Service Design
• Changes in the environment
• Competitive forces
CAPACITY PLANNING
Capacity Planning should be a Proactive Strategy

Capacity Strategy Formulation
Leading Strategy
Following Strategy
Tracking Strategy
What is Capacity Cushion?

IMPORTANCE OF CAPACITY DECISIONS
Capacity Decisions are Strategic
Because Capacity Decisions;
1. Involve long term financial implications
2. Impacts organizations future production size.
3. Affect operating costs. (Initial & Variable)
4. Are long term commitment of resources.
5. Can affect competitiveness of an organization.
How to Measure Capacity
No single measure of capacity will be appropriate in every situation. Rather, the
measure of capacity must be tailored to the situation.
Single Product:
Number of Products or Services Produced
Multiple Products:
Number of Total Products or Services
Single Product:
Number of Products or Services Produced
Multiple Products:
Number of Total Products or Services
Availability of Inputs
Two Types of Capacity
Design Capacity
The maximum output that a process can achieve under ideal conditions.
Effective Capacity
The maximum output that a process can achieve under Real conditions.
Actual Capacity
Actual Capacity can NEVER exceed Effective Capacity
Measuring Two Types of Capacity
Design Capacity Efficiency = Output) x 100

(Actual
(Effective Capacity)
Effective Capacity Utilization =

(Actual Output) x 100
(Design Capacity)
Measuring Two Types of Capacity
Given the following information, compute the efficiency and the utilization of the
vehicle repair department:
Design capacity = 50 trucks per day

Effective capacity = 40 trucks per day
Actual output = 36 trucks per day
Determinants of Capacity
Facilities
Product and Service Design.
Process Factors (Speed of response and Quality)
Policy factors
Human Factors
Operational Factors
External Factors
Cost
Revenue
Working Capital
Economies of Scale
Diseconomies of Scale
Cost
Revenue
Working Capital
Economies of Scale - - - o Spreading Fixed Costs
Diseconomies of Scale o Reducing Construction Costs
o Cutting Cost of Purchased Materials
o Finding Process Advantage
Cost
Revenue
Working Capital
Economies of Scale
Diseconomies of Scale
Steps in Capacity Planning Process
1. Identify future capacity requirements.
2. Evaluate existing capacity and identify gaps.
3. Identify alternatives for meeting requirements.
4. Conduct financial analyses of each alternative.
5. Assess key qualitative issues for each alternative.
6. Select alternative to pursue that will be best in long term.
7. Implement the selected alternative.
8. Monitor and Evaluate Results.
Developing Alternative Capacity Strategies
1. Design for Flexibility.
2. Take Stages of Life Cycle into Account
3. Take Big-Picture Approach into Account.
4. Be Prepared to Deal with Capacity Chunks.
5. Be Prepared to deal with unevenness in Demand.
6. Identify Optimum Operating Level.
7. Choose Strategy for Expansion
Increased only Sell Capacity

if it reduces Or
cost or creates Use for
Small Major Competitive Other
Capacity Increases Advantage purposes
1. Design for Flexibility. Organization is a System.
Set of interconnected and interdependent parts
2. Take Stages of Life Cycle into Account Working together as a unified whole

Bottleneck Operations
2. Take Stages of Life Cycle into Account An operation in a sequence of
operations whose capacity
3. Take Big-Picture Approach into Account. is lower than that of the
other operations.
Evaluating Alternatives
1. Cost-Volume Analysis
2. Financial Analysis
3. Decision Theory
4. Waiting Line Analysis
5. Simulation
FC = Fixed Cost = Fixed Cost
VC = Variable Cost =Qxv
TC = Total Cost = FC + VC
TR = Total Revenue =RxQ
R = Revenue per product = R/Q
v = VC per product = VC/Q
Q = Quantity of Production
P = Profit = TR - TC
QBEP = Break-Even Quantity
3. Decision Theory
5. Simulation
2. Financial Analysis is about allocation of resources.
3. Decision Theory Time Value of Money
A dollar received today has greater value than a
4. Waiting Line Analysis dollar received tomorrow
• Present Value
5. Simulation • Future Value
• Rate of Return
3. Decision Theory
It4.
involves
Waitingidentifying a set of possible future conditions that could
Line Analysis
influence results, listing alternative courses of action, and developing a
5. Simulation
financial outcome for each alternative–future condition combination.
Decision theory is described in the supplement to this chapter.
3. Decision Theory
4. Waiting Line Analysis Waiting Lines are Symptoms of Bottleneck Operations.
5. Simulation
3. Decision Theory
5. Simulation

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CAPACITY PLANNING

plant, department, Number of

The goal of strategic capacity planning is to achieve a match

Organizations become involved in capacity planning for various

Capacity Planning should be a Proactive Strategy

What is Capacity Cushion?

Design Capacity Efficiency = Output) x 100

Effective Capacity Utilization =

Design capacity = 50 trucks per day

Increased only Sell Capacity

3. Take Big-Picture Approach into Account.

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