Capacity Planning

For Products and Services

 Facility Planning
Facility planning answers:
What kind of capacity is needed?
How much capacity is needed?
When more capacity is needed?
Where facilities should be located (location)
How facilities should be arranged (layout)
 Capacity (Definition of)

The number of units a facility can hold, receive,

store or produce in a period of time

It is the upper limit or ceiling on the load that

an operating unit can handle. It includes
equipment, space, employee skills
 Capacity Planning
 Establishes overall level of productive
resources
 Affects lead time responsiveness,
cost & competitiveness
 Determines when and how much to
increase capacity
 Types of Planning Over a Time
Horizon

Long Range Add Facilities

Planning Add long lead time equipment *

Intermediate Sub-Contract Add Personnel

Range Planning Add Equipment Build or Use Inventory
Add Shifts

Schedule Jobs
Short Range * Schedule Personnel
Planning Allocate Machinery

*Limited options exist Modify Capacity Use Capacity

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
 Capacity Measures
Design capacity
Maximum output rate or service capacity an
operation, process, or facility is designed for
Effective capacity
Capacity a firm can expect to attain given its
product mix, methods of scheduling,
maintenance and standards of quality. Design
capacity minus allowances such as personal
time, maintenance and scrap
 Capacity Related Concepts
Actual output
Rate of output actually achieved—cannot
exceed effective capacity
Utilization
Actual output as a percent of design capacity
Efficiency
Actual output as a percent of effective
capacity
 Actual or Expected Output

Actual (or Expected) Output =

(Effective Capacity)(Efficiency)
 Efficiency

Measure of how well a facility or machine

is performing when used
Actual output
Efficiency =
Effective Capacity

(expressed as a percentage)
 Utilization
Measure of planned or actual capacity usage
of a facility, work center, or machine

Actual Output
Utilization =
Design Capacity

(expressed as a percentage)
 Efficiency/Utilization Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day

Actual output = 36 units/day

Efficiency = = 90%
Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day

= 72%
Design capacity 50 units/day
Determinants of Effective Capacity
 Facilities
Product and Service Factors
Process Factors
Human Factors
Policy Factors
Operational Factors
Supply Chain Factors
External Factors
Key Decisions in Capacity Planning
1. Amount of capacity needed
2. Timing of changes (frequency of capacity
additions)
3. Need to maintain balance
4. Extent of flexibility of facilities
5. External sources of capacity
 Steps for Capacity Planning
1. Estimate future capacity requirements
2. Evaluate existing capacity
3. Identify alternatives
4. Conduct financial analysis
5. Assess key qualitative issues
6. Select the best alternative
7. Implement the alternative chosen
8. Monitor results
Calculating Processing Requirements:
Example 1 (1 of 2)
Standard
Annual processing time Processing time
Product Demand per unit (hr.) needed (hr.)

#1 400 5.0 2,000

#2 300 8.0 2,400

#3 700 2.0 1,400

5,800
 Calculating Capacity Requirements
Example 1 (2 of 2)
If the department works one eight hour shift, 250
days a year, calculate the number of machines that
would be needed to handle the required volume.

Solution:
5800/(250)(8) = 2.9
3 machines are needed
 Special Requirements for
Making Good Capacity Decisions

Forecasting the demand accurately

Understanding the technology and capacity
increments
Finding the optimal operating level (volume)
Build for change
 Make or Buy
1. Available capacity
2. Expertise
3. Quality considerations
4. Nature of demand
5. Cost
6. Risk
 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
 Best Operating Levels
Average cost per room

Best operating
level

Economies Diseconomies
of scale of scale

250 500 1000

# Rooms
 Economies of Scale
Minimum cost & optimal operating rate are
Average cost per unit functions of size of production unit.

Small
plant Medium
plant Large
plant

0 Volume
 Economies & Diseconomies of Scale
Economies of Scale and the Experience Curve working

100-unit
Average plant
unit cost 200-unit
of output plant 400-unit
300-unit
plant
plant

Diseconomies of Scale start working

Volume
The Experience As plants produce more products, they
gain experience in the best production
Curve methods and reduce their costs per unit

Yesterday

Cost or Today
price Tomorrow
per unit

Total accumulated production of units

Strategies for Matching Capacity to
Demand
1. Making staffing changes (increasing or
decreasing the number of employees)
2. Adjusting equipment and processes – which
might include purchasing additional
machinery or selling or leasing out existing
equipment
3. Improving methods to increase throughput;
and/or
4. Redesigning the product to facilitate more
throughput
 Capacity Expansion
 Volume and certainty of anticipated demand
 Strategic objectives for growth

 Costs of expansion and operation

 Incremental or one-step expansion

 Frequency of capacity additions

 Capacity Expansion Strategies
Expected Demand Expected Demand

New Capacity New Capacity

Demand
Demand

Time in Years Time in Years

Capacity leads demand with an incremental expansion Capacity leads demand with a one-step expansion

Expected Demand Expected Demand

New Capacity
New Capacity
Demand

Demand

Time in Years Time in Years

Attempts to have an average capacity, with
Capacity lags demand with an incremental expansion
an incremental expansion
 Issues in Capacity Management
1. Design flexibility into systems
2. Take stage of life cycle into account
3. Take a “big picture” approach to capacity
changes
4. Prepare to deal with capacity “chunks”
5. Attempt to smooth out capacity requirements
6. Identify the optimal operating level
 Capacity Planning: Balance
Unbalanced stages of production
Units
Stage 1 Stage 2 Stage 3
per
month
6,000 7,000 5,000
Maintaining System Balance: Output of one stage is the
exact input requirements for the next stage
Balanced stages of production
Units
Stage 1 Stage 2 Stage 3
per
month
6,000 6,000 6,000
 Bottleneck Operation
Bottleneck operation: An operation
10/hr in a sequence of operations whose
Machine #1 capacity is lower than that of the
other operations

10/hr
Machine #2
Bottleneck 30/hr
Operation
Machine #3
10/hr

Machine #4 10/hr
 Bottleneck Operation

Bottleneck

Operation 1 Operation 2 Operation 3

10/hr.
20/hr. 10/hr. 15/hr.

Maximum output rate

limited by bottleneck
 Capacity Flexibility
 Flexible plants

 Flexible processes

 Flexible workers
 Evaluating Alternatives
Cost-volume analysis
Break-even point
Financial analysis
Cash flow
Present value
Decision theory
Waiting-line analysis
Cost-Volume Relationships (1 of 3)

Amount ($)

Fixed cost (FC)

0
Q (volume in units)
Cost-Volume Relationships (2 of 3)

Amount ($)

0
Q (volume in units)
Cost-Volume Relationships in Making
Capacity Decisions (3 of 3)
Amount ($)

0 BEP units
Q (volume in units)
Break-Even Problem with Step
Fixed Costs (1 of 2)

3 machines

2 machines

1 machine
Quantity
Step fixed costs and variable costs.
Break-Even Problem with Step Fixed
Costs (2 of 2)
$
BEP
3
TC
BEP2
TC
3
TC
2

1
Quantity
Multiple break-even points
Assumptions of Cost-Volume Analysis
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
 Decision Theory

Helpful tool for financial comparison of

alternatives under conditions of risk or uncertainty
Suited to capacity decisions
 Waiting-Line Analysis
 Useful for designing or modifying service
systems
 Waiting-lines occur across a wide variety of
service systems
 Waiting-lines are caused by bottlenecks in the
process
 Helps managers plan capacity level that will be
cost-effective by balancing the cost of having
customers wait in line with the cost of additional
capacity
 Strategy Driven Investment
 Select investments as part of a coordinated strategic
plan
 Choose investments yielding competitive
advantage
 Consider product life cycles
 Include a variety of operating factors in the
financial return analysis
 Test investments in light of several revenue
projections
 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.
 Net Present Value

F = future value
P = present value F
P
(i  1)
N
I = interest rate
N = number of years
 Planning Service Capacity
 Inability to store services: Capacity must be
available to provide a service when it is needed
(capacity must be matched with the timing of
demand)

 Need to be near customers: Capacity and location

are closely tied. Service goods must be at the
customer demand point and capacity must be
located near the customer

 Volatility of Demand: Much greater than in

manufacturing
 Capacity Utilization &
Service Quality

 Best operating point is near 70% of capacity

 From 70% to 100% of service capacity, what do

you think happens to service quality?
Extras
 Managing Existing Capacity
Demand Management Capacity Management
Vary prices  Vary staffing
Vary promotion  Change equipment
& processes
Change lead times
(e.g., backorders)  Change methods
 Redesign the product
Offer complementary
for faster processing
products
 Complementary Products
Sales (Units)
5,000
Total
4,000
Snow-
3,000 mobiles
2,000
1,000 Jet Skis
0
J M M J S N J M M J S N J
Time (Months)