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 ( output quality )
Human factors
Operational factors ( late delivery for the
raw materials )
Supply chain factors
External factors

5-9 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

5-10 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

5-11 Capacity Planning

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

Make or Buy

Available capacity
Expertise
Quality considerations
Nature of demand
Cost
Risk

5-12 Capacity Planning

5-13 Capacity Planning

5-14 Capacity Planning

5-15 Capacity Planning

5-16 Capacity Planning

A manager must decide which type of equipment to buy ,

type A or type B. type A equipment costs $15000 each and
type B costs $ 11000. the equipment can be operated 8
hours a day ,250 days a year.
Either machine can be used to perform two types of
chemical analysis C1 and C2 annual service requirement
and processing times are shown in the following table
.which type of equipment should be purchased and how
many of that type will be need ? The goal is to minimize
total purchase cost.

5-17 Capacity Planning

Processing time per Processing time per

analysis ( HR)
analysis ( HR)
Analysis type

Annual volume

C1
C2

1200
900

1
3

2
2

Total processing time ( annual volume processing time per

analysis ) needed by type of equipment.

Analysis type

C1
C2

1200
2700

2400
1800

3900

4200

5-18 Capacity Planning

Total processing time available per price of equipment is

8 hours/day 250 days/year =2000
Hence , one piece can handle 2000 hours of analysis ,two
pieces of equipment can handle 4000 hours and so on.
Given the total processing requirement two of type A
would be needed for a total cost of 2 15000=30000 or
three of type B for a total cost of 3 11000=33000 thus
two pieces of type A would have sufficient capacity to
Handle the load at lower cost than three of type B

5-19 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

5-20 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

5-21 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

5-22 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

5-23 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.

5-24 Capacity Planning

A department works one eight hour shift ,250 days

a year, and has these figures for usage of a
machine that is being considered :

5-25 Capacity Planning

Calculating Processing Requirements

SS t taa nn dd aar rdd
ppr roocceessssi ningg t ti mi m ee
pp eer r uu nn itit ( (hhr r. .) )

PP r roodduucct t

AA nnnnuuaa l l
DD eemm aann dd

PP r roo ccee ssssinin gg t ti mi m ee

nn eeee ddee dd ( (hhr r. .) )

## 11

44 00 00

55 . .00

22 , ,00 00 00

## 22

33 00 00

88 . .00

22 , ,44 00 00

## 33

77 00 00

22 . .00

11 , ,44 00 00
55 , ,88 00 00

5-26 Capacity Planning

Annual capacity =8 250=2000

Number of machines required =5800 2000=2.9