Facility Capacity Planning

Hemant Jog
Chetana’s Institute/s of Management & Research

PHONE 9503040028/9834150970
EMAIL: hemantjog45@gmail.com

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 Facility Capacity & its Measurement
o Capacity of a facility is defined as maximum load that can be
handled by it during a given period.
• Load can be expressed in terms of amount of inputs or outputs.
• e.g. capacity of sugar mill can be expressed in terms of tons of
sugar canes (input) crushed per day or tons of sugar (output)
produced per day.
o When many products or services are produced, measure of
capacity in terms of output may not be suitable.
• e.g. plastic goods factory producing tables, chairs, jugs & toys. It
may be impractical to express capacity as say 100 tables, 200
chairs, 350 jugs & 500 toys per day.
• Suitable measure here is in terms of input
• i.e. amount of plastic processed per day.
o So, measure of capacity is dependent on suitability of situation.

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 To find optimal capacity of
facility so that total of costs of
under-capacity (loss of profit) &
over-capacity is minimum

Need for
To satisfy future To keep initial
demand of Facility investment in facility as
products without Capacity low as possible to achieve
any shortages lesser break-even volume
Planning

Investments in facility capacity are

long-term & cannot be reversed
easily over period of time
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 Types of Capacity
a) Design Capacity represents maximum rate of output that can be
achieved under ideal conditions.

b) Effective Capacity is maximum rate of output which can be

practically achieved under constraints of time consumed in set-ups,
oiling & cleaning, defective items, etc.
o Effective capacity is always lesser than design capacity.

c) Actual Capacity is the maximum output rate which is actually

achieved under constraints of machine breakdowns, labor
inefficiencies & absenteeism, defective products, late deliveries of
materials by supplier, and so on.
o Actual capacity can be equal to or less than the effective capacity.

** **
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 Measures of Performance
Actual Output
Efficiency =
Effective Capacity

Actual Output
Capacity Utilization =
Design Capacity

Design capacity is constant.

So, utilization can be increased only by increasing output.

Actual output can not be increased beyond effective capacity.

Thus, for increasing utilization, effective capacity shall be increased.

** **

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 Proper process quality control so
that there are less defective items
requiring rework

Proper facility location, Good training, high

layout, and internal
working conditions
Increasing
By making products &
services as uniform as
possible in design so that
number of set-ups required
are less (batch sizes will be
large)
motivation, less
absenteeism & high
turnover on part of
Ways of workers
Effective
Capacity Good coordination with
suppliers for timely &
defect-free supplies &
proper scheduling of
products on machines

By properly following environmental & pollution norms, which results in lesser

inspections by government enforcement agencies &, thus, lesser disruption of
production activities

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 Trends in Demand Forecasts
Demand Forecasting by Marketing  Short term & Long Term.
Growth Decline
trend: trend:
Decline
Capacity Demand
forecast Growth Demand trend Find new
expansion trend forecast products for
required in capacity
future Time Time
utilization
Demand
forecast Demand
Cyclical forecast Stable
Instead of capacity trend trend
expansion
Overtime, Time
Time

More shifts, Products A & B

Subcontract,
Inventory Demand Product B Combined (A+B) Demand
forecast
pattern is stable. e.g.
Product A producing water coolers
Time & blowers

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Cost-Volume Relationships

Amount ((Rs)

Fixed cost (FC)

0
Q (volume in units)

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Cost-Volume Relationships

Amount ((Rs)

0
Q (volume in units)

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 Break-Even Analysis

Rs)
Amount (Rs

0 BEP units
Quantity / Volume (units)

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Cost Volume Relationship with Multiple Fixed Costs

3 machines

2 machines
Costs

1 machine
Thick lines are fixed costs
Quantity

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Break-Even Analysis with Step Fixed Costs

TR

No break
even points Break
in this range even
Costs

points.

Quantity

Step fixed costs and variable costs.

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 Cost-Volume(Break-even) Analysis
Break-even Quantity
Level of production that equates total costs to total revenues

Assumptions
1. One product is involved
2. Everything produced can be sold
3. Variable cost per unit is the same with volume
4. Fixed costs do not change with volume
5. Revenue per unit constant with volume
6. Revenue per unit exceeds variable cost per unit

** ** ** **

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 Capacity Situation
• Whenever Capacity < Demand
• Bull Whip Effect comes in.
• Longer the length, higher the bull whip effect
• Options are :
– Expand As per Projections
• Worst scenario : demand doesn’t materialise, capacity
is unutilised

© Oxford University Press 2007.

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All rights reserved.
 Capacity
• Don’t expand:
– Worst Scenario : demand materialises, opportunity loss.
Golden Rule is take 1/3rd or 40% of increase in demand for
projects of 1.5 to 2 years
More than one smaller capacity is always better than one
large capacity.
Go an adding capacity in smaller increments as demand
grows.
Always lag capacity to demand (let go some demand)
Exception is commodities which are sold on price. Cost per
unit plays a big role. Lowest cost sets the price

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 Automation
State-of-the-art fully exactly the same
automated plants increase
the market value of the
firm/ improve client base
in international markets
More reliable &
consistent performance
than that of humans
Usually more
expensive than the
human work force
Less flexible than the
humans; even small changes
in the process are expensive
Machines take
Behavioral problems in
time in humans like boredom,
repetitive tasks frustration, fatigue, etc. can
be avoided by using machines
Industrial relations
problems like strikes,
Advantages lockouts, etc. can be
avoided
Automation
Loss of creativity on the
Disadvantages part of workers due to
inflexibility in
automation
Could lead to unemployment/
retrenchment of the labor force
In fact the job gets enhanced.
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