Capacity Planning

Capacity refers to an upper limit or ceiling on the

load that an operating unit can handle
The basic questions are:
What kind of capacity is needed?
How much is needed?
When it is needed?
Impact on the ability of the organization to meet future
demands for products & services
Major determinant of initial cost greater the capacity,
larger the investment
Can affect competitiveness excess capacity or flexible
capacity
Affects the ease of management

Capacity Planning
Design Capacity: maximum attainable output
Effective Capacity: maximum possible output with
scheduling difficulties, machine maintenance & so on

Actual output
Efficiency
Effective capacity
Actual output
Utilization
Design capacity
Utilization is always less than efficiency

Capacity Planning
Determinants of Effective Capacity
Facilities
Design including size & provision of expansion
Location transportation cost, distance to market, labor supply
Layout smoothness of flow, as will as lighting & ventilation

Product / services
Design easier the design, easier to produce
Product Mix varieties of product reduce capacity

Process
Quantity obvious determinant of capacity
Quality low quality will require inspection & rework

Capacity Planning
Determinants of Effective Capacity
Human Factor
Job content
Training/Experience
Motivation
Compensation

Operational
Scheduling differences in equipment capabilities
Materials management shortage of materials/ complaints
Quality assurance in process & incoming materials

External
Product standard can restricts increasing capacity
Safety regulations
Unions

Capacity Planning
Capacity Requirement
Long term relates to overall level of capacity e.g., facility size
Determined by forecasting demand over a time horizon, and then
converting those forecasts into capacity requirement

Trend

- How long
- Slope of trend

Short term relates to probable variations e.g., seasonal, random

Deviations are important as they can place severe strain to satisfy
demand at sometimes & yet result in idle capacity at other times

Capacity Planning
Developing Capacity Alternatives
Design flexibility into systems
Provisions for future expansions in the original design
Differentiate between new and matured products/services
Matured product/services tends to be more predictable
Attempt to smooth out capacity requirement
Need to identify products which can offset each other
Prepare to deal with capacity chunks
Capacity increases are often acquired in fairly large chunks
Identify the optimal operation level
In terms of unit cost of output

Capacity Planning
Evaluating Alternatives

Financial Analysis
Pay back period
Net present value
Internal rate of return

Cost volume Analysis

TC FC VC
Total cost
Variable cost VC Q * U

Total revenue TR Q * R
Total Profit P TR TC
Q * ( R U ) FC

P FC
Q
R U

For breakeven Q

FC
R U