Capacity Planning

2-1

CAPACITY PLANNING
o

Capacity is the upper limit or ceiling on the load that

an operating unit can handle.
What kind of capacity is needed?
Depends on the product or the service management intends
to produce or provide.

How much capacity is needed?

When the capacity is needed?
Forecasting process helps us to find out how much is needed
and when it is needed.

CAPACITY

Design Capacity: The maximum output rate or service

capacity an operation, process or facility is designed for.
Design capacity is the maximum rate of output achieved under
ideal conditions.

Effective Capacity: Design capacity minus allowances

such as personal time, maintenance and scrap.
Effective capacity is usually less than design capacity owing to
realities of changing product mix, periodic maintenance of
equipment, lunch breaks, coffee breaks etc.

Actual Capacity: Rate of output actually achieved, cannot

exceed effective capacity.
Machine breakdowns, shortages of materials, quality problem

etc.

CAPACITY DECISIONS ARE

STRATEGIC
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

EFFICIENCY AND UTILIZATION

Efficiency =
capacity

Utilization =
capacity

Actual output
Effective
Actual output
Design
Effective capacity acts as a lid on
actual output. Increasing effective
capacity is the key to improve
capacity utilization correcting
quality problems, maintain good
operating condition, fully trained
employees etc.

EXAMPLE 01
Design capacity = 50
trucks/day
Effective capacity = 40
trucks/day
Actual output = 36
units/day
Actual output

Efficiency =
= 90%

Utilization =
units/day

36 units/day
=

Effective capacity
Actual output

40 units/ day
36

EXAMPLE 02

A loan processing operation that processes

an average of 7 loans per day. The operation
has a design capacity of 10 loans and per
day and effective capacity of 8 loans per day.

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

CAPACITY REQUIREMENTS
A department works 8 hours a day, 250 days a year, and
has these figures for usage of a machine:
Produc
t

Annual
Demand

Processing
Time Per Unit
(hrs)

Total
Processing
Time (hrs)

400

5.0

2000

300

8.0

2400

700

2.0

1400

Total

5800

Requirement = 5800 hrs / (8 x 250) hrs

per machine
= 2.90 machines

1.

One product is involved

2.

Everything produced can be sold

3.

Variable cost per unit is the same regardless of

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

Amount ($)

COST VOLUME ANALYSIS

VC

FC

=
t
s
o
c
e
l
l
b
a
t
a
i
r
To
a
v
l
a
t
To

)
C
V
(
t
s
co

Fixed cost (FC)

0

Q (volume in units)

Amount
($)

COST VOLUME ANALYSIS

e
u
n
e
t
v
f
e
o
r
r
P
l
a
t
s
t
o
To
lc
a
t
To

BEP units
Q (volume in units)

COST VOLUME ANALYSIS

(CONTD.)
1.

2.
3.

4.

Total Cost (TC) = Fixed Cost (FC) + Variable

Cost (VC)
Profit (P) = Q (R v) FC
Quantity to generate specific profit, Q = (P +
FC) / (R v)
QBEP = FC / (R v)
Where,
v = Variable cost per unit
R = Price per unit (Also called revenue)

EXAMPLE 03

The owner of old fashion berry pies, Mr. Simon, is

planning a new lines of pies, which will require
leasing new equipments for a monthly payment of
$6,000. Variable costs would be $2.00 per pie, and
pies retail for $7.00 each.

How many pies must be sold in order to break

even?
What would be profit or loss if 1,000 pies sold in a
month?
How many pies must be sold to realize a profit of
$4,000?
If 2,000 can be sold. And profit target is $5,000,
what price should be charged per pie?

CHALLENGES OF PLANNING
SERVICE
The need toCAPACITY
be near customers
The inability to store service
The degree of volatility of demand