OPERATIONS

MANAGEMENT
CAPACITY

PLANNING

CAPACITY

No of beds in the hospital

Size of bus
No of counters in a bank
No of copies to be printed every hour
by a printer
Bandwidth of a communication
network
No of cars to be produced per day

CAPACITY
Maximum rate of output from a process
within a defined time
Theoretical capacity vs. Effective capacity
250 ml glass
Output of assembly line
Ground realities decide the effective capacity
Capacity choices influence financial
performance
Can affect the Industry

CAPACITY
Capacity can vary
Day-to-day uncertainties such as
employee absences, equipment
breakdowns, and material-delivery
delays
Product Mix

MEASURES OF CAPACITY
Output units are homogeneous :
- Battery manufacturing unit
Output units are diverse :
- Restaurant
- Jobbing machine shop

MEASUREMENTS OF
CAPACITY
Input Rate Capacity
Commonly used for service operations
where output measures are particularly
difficult
Hospitals : No of beds
Airlines : seat-miles per month
Movie theatres :No of seats

CAPACITY PLANNING PROCESS

Estimate the capacity of the present
facilities.
Forecast the long-range future
capacity needs.
Identify and analyze sources of
capacity to meet these needs.
Select from among the alternative
sources of capacity.

ISSUES
Accuracy of demand forecast
Market trends : market size &
location
Technological innovation
New products
Process innovation to affect
production method
Extent of capacity enhancement :
strategy

STRATEGIC CAPACITY
PLANNING
Capacity level of capital intensive resources :
- Equipments
- Facilities
- Manpower
It impacts :
- Response rate
- Cost structure
- Inventory policy
- Management & staff support

CAPACITY STRATEGIES

CAPACITY STRATEGIES

CAPACITY STRATEGIES

CAPACITY STRATEGIES

OPTIONS

Overtime / Multiple shifts

Lost sales
Increase capacity in small steps
Increase capacity in large steps
Partially use alternate source
Establish new location for the
additional capacity
Relocate the entire operation

RETURNS TO SCALE
Increasing returns to scale
Law of diminishing returns
Decreasing returns to scale
Best operating level

Economies of Scale
Declining costs result from:
Fixed costs being spread over more and
more units
Longer production runs result in a
smaller proportion of labor being
allocated to setups
Proportionally less material scrap
and other economies

Diseconomies of Scale
Increasing costs result from increased
congestion of workers and material,
which contributes to:
Increasing inefficiency
Difficulty in scheduling
Damaged goods
Reduced morale
Increased use of overtime
and other diseconomies

Economies and Diseconomies of

Scale

Average Unit
Cost of Output

Economies
of Scale

Diseconomies
of Scale

Best Operating Level

Annual Volume (units)

ECONOMIES OF SCALE

ECONOMIES OF SCALE

ECONOMIES OF SCALE

CAPACITY-PLANNING DECISIONS
Break-Even Analysis
Present-Value /Future value Analysis
Computer Simulation
Internal Rate of return Analysis
Linear Programming
Decision Tree Analysis

FACTORS
Forecast of future demand
Mature products
New products : Optimistic & pessimistic

MATURE PRODUCTS

NEW PRODUCT

NEW PRODUCT

Break-Even Analysis
BEPx
= breakeven point in units
BEP$
= breakeven point in dollars
P = price per
unit (after all
discounts)

BEP$ = BEPx P
=
=
=

F P Profit
P-V
F
(P - V)/P
F
1 - V/P

=
=
=
=

x = number of units
produced
TR = total revenue =
Px
F = fixed costs
V = variable cost
per unit
TC = total costs = F
+ Vx

TR - TC
Px - (F + Vx)
Px - F - Vx
(P - V)x - F

Break-Even Analysis
BEPx
= breakeven point in units
BEP$
= breakeven point in dollars
P = price per
unit (after all
discounts)
Break-even point occurs
when

TR = TC
or
Px = F + Vx

x = number of units
produced
TR = total revenue =
Px
F = fixed costs
V = variable cost
per unit
TC = total costs = F
+ Vx

F
BEPx =
P-V

Break-Even Multiproduct
Case

Multiproduct Example
Fixed costs = $3,500 per month
Item
Sandwich
Soft drink
Baked potato
Tea
Salad bar

Price
$2.95
.80
1.55
.75
2.85

Cost
$1.25
.30
.47
.25
1.00

Annual Forecasted
Sales Units
7,000
7,000
5,000
5,000
3,000

Multiproduct Example
Fixed costs = $3,500 per month

Item (i)
7)
Sandwich
Soft drink
Baked
potato
Tea
Salad bar

Annual
Weighted
Selling Variable
Forecasted % of Contribution
Price (P)Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col
$2.95
.80
1.55

$1.25
.30
.47

.42
.38
.30

.58
.62
.70

$20,650
5,600
7,750

.446
.121
.167

.259
.075
.117

.75
2.85

.25
1.00

.33
.35

.67
.65

3,750 .081
8,550 .185
$46,300 1.000

.054
.120
.625

BREAK EVEN VALUE

DAILY SALES

DECISION TREE