5-1 Capacity Planning

Operations Management

William J. Stevenson

8th edition

5-2 Capacity Planning

CHAPTER

Capacity Planning
For Products and Services

McGraw-Hill/Irwin

Operations Management, Eighth Edition, by William J. Stevenson

Copyright 2005 by The McGraw-Hill Companies, Inc. All rights

5-3 Capacity 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?

5-4 Capacity Planning

Importance of Capacity Decisions

1.
2.
3.
4.
5.
6.
7.
8.

Impacts ability to meet future demands

Affects operating costs
Major determinant of initial costs
Involves long-term commitment
Affects competitiveness
Affects ease of management
Globalization adds complexity
Impacts long range planning

5-5 Capacity Planning

Design capacity

maximum output rate or service capacity an

operation, process, or facility is designed for

Effective capacity

Capacity

Design capacity minus allowances such as

personal time, maintenance, and scrap

Actual output

rate of output actually achieved--cannot

exceed effective capacity.

5-6 Capacity Planning

Efficiency and Utilization

Efficiency =

Utilization =

Actual output
Effective capacity
Actual output
Design capacity

Both measures expressed as percentages

5-7 Capacity Planning

Efficiency/Utilization Example

Design capacity = 50 trucks/day

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

Efficiency =
90%

Utilization =
72%

Actual output

Effective capacity
Actual output
Design capacity

36 units/day

40 units/ day
=

36 units/day
50 units/day

5-8 Capacity Planning

Determinants of Effective Capacity

Facilities
Product and service factors
Process factors
Human factors
Operational factors
Supply chain factors
External factors

5-9 Capacity Planning

Strategy Formulation

Capacity strategy for long-term demand

Demand patterns
Growth rate and variability
Facilities

Cost of building and operating

Technological changes

Rate and direction of technology changes

Behavior of competitors
Availability of capital and other inputs

5-10 Capacity Planning

Key Decisions of Capacity Planning

1.
2.
3.
4.

Amount of capacity needed

Timing of changes
Need to maintain balance
Extent of flexibility of facilities

Capacity cushion extra demand intended to offset uncertainty

5-11 Capacity Planning

Steps for Capacity Planning

1.
2.
3.
4.
5.
6.
7.
8.

Estimate future capacity requirements

Evaluate existing capacity
Identify alternatives
Conduct financial analysis
Assess key qualitative issues
Select one alternative
Implement alternative chosen
Monitor results

5-12 Capacity Planning

1.
2.
3.
4.
5.
6.

Make or Buy

Available capacity
Expertise
Quality considerations
Nature of demand
Cost
Risk

5-13 Capacity Planning

Developing Capacity Alternatives

1.
2.
3.

4.
5.
6.

Design flexibility into systems

Take stage of life cycle into account
Take a big picture approach to capacity
changes
Prepare to deal with capacity chunks
Attempt to smooth out capacity requirements
Identify the optimal operating level

5-14 Capacity Planning

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

5-15 Capacity Planning

Evaluating Alternatives

Figure 5.3
Average cost per unit

Production units have an optimal rate of output for minimal cost.

Minimum average cost per unit

Minimum
cost

Rate of output

5-16 Capacity Planning

Evaluating Alternatives

Figure 5.4

Average cost per unit

Minimum cost & optimal operating rate are

functions of size of production unit.

Small
plant

Medium
plant

Large
plant

Output rate

5-17 Capacity Planning

Planning Service Capacity

Need to be near customers

Inability to store services

Capacity and location are closely tied

Capacity must be matched with timing of
demand

Degree of volatility of demand

Peak demand periods

5-18 Capacity Planning

Cost-Volume Relationships

Amount ($)

Figure 5.5a

C
V
=

C
F
+

)
C
(V
t
os
c
e

st
o
c
l
l
a
t
b
o
a
T
ri
a
v
l
a
t
To
Fixed cost (FC)

Q (volume in units)

5-19 Capacity Planning

Cost-Volume Relationships

Amount ($)

Figure 5.5b

r
l
ta
o
T

e
u
n
e
ev

Q (volume in units)

5-20 Capacity Planning

Cost-Volume Relationships

Amount ($)

Figure 5.5c

e
u
n
t
i
e
f
o
v
r
e
P
r
l
a
t
st
o
o
c
T
l
a
Tot

BEP units
Q (volume in units)

5-21 Capacity Planning

Break-Even Problem with Step Fixed Costs

Figure 5.6a

+
FC

FC

TC
=
C
V
+

TC
=
C

+
FC
TC

=
C
V

3 machines

2 machines

1 machine
Quantity
Step fixed costs and variable costs.

5-22 Capacity Planning

Break-Even Problem with Step Fixed Costs

Figure 5.6b
$

BEP

TC

BEP2
TC
3

TC
2
TR 1

Quantity
Multiple break-even points

5-23 Capacity Planning

Assumptions of Cost-Volume Analysis

1.
2.
3.
4.
5.
6.

One product is involved

Everything produced can be sold
Variable cost per unit is the same regardless
of volume
Fixed costs do not change with volume
Revenue per unit constant with volume
Revenue per unit exceeds variable cost per
unit

5-24 Capacity Planning

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.

5-25 Capacity Planning

Calculating Processing Requirements

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