Strategic Capacity Planning

for Product and Services.

Capacity Planning

⚫ Capacity is the upper limit or ceiling on the load that

an operating unit can handle. Capacity also includes-
➢ Equipment
➢ Space
➢ Employee skills
⚫ The basic questions in capacity handling are:
➢ What kind of capacity is needed?
➢ How much is needed?
➢ When is it needed?
Importance of Capacity Decisions

1. Impacts ability to meet future demands

2. Affects operating costs
3. Major determinant of initial costs
4. Involves long-term commitment
5. Affects competitiveness
6. Affects ease of management
7. Globalization adds complexity
8. Impacts long range planning
 Determinants of Effective
Capacity

1. Facilities
2. Product and service factors
3. Process factors
4. Human factors
5. Policy factors
6. Operational factors
7. Supply chain factors
8. External factors
 Steps in the Capacity Planning
Process

1. Estimate future capacity requirements.

2. Evaluate existing capacity and facilities 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 the alternative to pursue that will be best in
the long term.
7. Implement the selected alternative.
8. Monitor results.
Make or Buy decision

1. Available capacity
2. Expertise
3. Quality consideration
4. The nature of demand
5. Cost
6. Risks
DEVELOPING CAPACITY STRATEGIES

⚫ Design flexibility into systems.

⚫ Take stage of life cycle into account.
⚫ Take a “big-picture” (i.e., systems)
approach to capacity changes.
⚫ Prepare to deal with capacity “chunks.”
⚫ Attempt to smooth out capacity
requirements.
⚫ Identify the optimal operating level.
 Economies of scale

Economies of scale If the output rate is less than the optimal

level, increasing the output rate results in decreasing average
unit costs.
• Reasons for economies of scale include the following:
1. Fixed costs are spread over more units, reducing the
fixed cost per unit.
2. Construction costs increase at a decreasing rate with
respect to the size of the facility to be built.
3. Processing costs decrease as output rates increase
because operations become more standardized, which
reduces unit costs.
Diseconomies of scale

Diseconomies of scale If the output rate is more than the optimal level,
increasing the output rate results in increasing average unit costs.
Reasons for diseconomies of scale include the following:
1. Distribution costs increase due to traffic congestion and
shipping from one large
2. centralized facility instead of several smaller, decentralized
facilities.
3. Complexity increases costs; control and communication
become more problematic.
4. Inflexibility can be an issue.
5. Additional levels of bureaucracy exist, slowing decision
making and approvals for changes.
 CONSTRAINT MANAGEMENT

Constraint Something that limits the performance of a process or system

in achieving its goals.
There are seven categories of constraints:
1. Market: Insufficient demand
2. Resource: Too little of one or more resources (workers,
equipment, and space)
3. Material: Too little of one or more materials
4. Financial: Insufficient funds
5. Supplier: Unreliable, long lead time, substandard quality
6. Knowledge or competency: Needed knowledge or skills missing
or incomplete
7. Policy: Laws or regulations interfere
Cost–Volume Analysis

Cost–volume analysis focuses on relationships between cost, revenue, and

volume of output. The purpose of cost–volume analysis is to estimate the
income of an organization under different operating conditions. It is
particularly useful as a tool for comparing capacity alternatives.
Cost-volume symbols
FC = Fixed cost VC = Total
variable cost
v = Variable cost per unit
TC = Total cost TR = Total revenue
R = Revenue per unit Q = Quantity or volume of output
QBEP = Break-even quantity P = Profit