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TOPIC:

Capacity Planning

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 What is Capacity?

“Capacity is the rate at which output can be produced

by an operating unit --- a machine, process, facility,
or company”.

Capacity is expressed as:

The No. of units of output produced per unit time.

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 Importance of Capacity Decisions


Capacity information is imp. for planning & scheduling.


Its strategically important that you select the amount of
production capacity to have.


Capacity decision establish the parameters within which
the organization must operate in short to intermediate
term.


Capacity decision will fix the production technology &
cost structure. e.g. Large-capacity facilities often use
large, specialized, high-speed equipment & specialized
labor; consequently high fixed costs but low marginal
costs will be observed.
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
Capacity decisions require large financial
investments and long planning lead times and
are not easily reversible in short term.


This also affect the company’s ability to serve
customers quickly and conveniently.

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 Key Capacity Issues :


How much capacity to have.


When to add or eliminate it.


What type of capacity to add.


As capacity and location decisions are clearly
interrelated so you have to coordinate them as well.

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 Terms of Capacity Planning

Following are the terms of Capacity Planning


Long-term capacity planning


Short-term capacity planning

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 Steps in the Capacity Planning Process


Estimate the capacity of the present facilities.

Forecast the long-range future capacity needs.

Identify and analyze sources of capacity to meet these
needs.

Select from among the alternative sources of
capacity.

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 Measurements of Capacity

As we have previously defined capacity as the rate at which output
can be produced by an operating unit --- a machine, process, facility,
or company. Whereas, we said that it can be expressed as the no. of
units of output produced per unit time.


While measuring capacity we encounter problems at:

(i) Defining output :

Complication occurs when the process or facility produces two or

more products that have different output rates.

(ii) Conditions under which the system is assumed to

operate.
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 Measurements of Capacity

1 Output Rate Capacity


For a facility having a single product or a few
homogeneous products, the unit of measure is
straightforward (barrels of beer per month)

For a facility having a diverse mix of products, an
aggregate unit of capacity must be established
using a common unit of output (sales dollars per
week)

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 Measurements of Capacity Cont…

2 Input Rate Capacity


Commonly used for service operations where
output measures are particularly difficult

Hospitals use available beds per month

Airlines use available seat-miles per month

Movie theatres use available seats per month

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 Measurements of Capacity

3 Capacity Utilization Percentage


Relates actual output to output capacity
Example: Actual automobiles produced in a


quarter divided by the quarterly automobile

production capacity

Relates actual input used to input capacity
Example: Actual accountant hours used in a


month divided by the monthly account-hours

available

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Analyzing Capacity-Planning Decisions


Break-Even Analysis

Present-Value Analysis

Computer Simulation

Waiting Line Analysis

Linear Programming

Decision Tree Analysis

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 Example: King Publishing


Break-Even Analysis
King Publishing intends to publish a book in
residential landscaping. Fixed costs are $125,000 per
year, variable costs per unit are $32, and selling price
per unit is $42.
A) How many units must be sold per year to
break even? B) How much annual revenue is
required to break even? C) If annual sales are 20,000
units, what are the annual profits? D) What variable
cost per unit would result in $100,000 annual profits
if annual sales are 20,000 units?

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 Example: King Publishing


Break-Even Analysis
A) How many units must be sold per year to break even?

Q = FC/(p-v) = $125,000/(42 – 32) = 12,500 books

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 Example: King Publishing


Break-Even Analysis
B) How much annual revenue is required to break even?

TR = pQ = 42(12,500) = $525,000

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 Example: King Publishing


Break-Even Analysis
C) If annual sales are 20,000 units, what are the annual
profits?
P = pQ – (FC + vQ)
= 42(20,000) – [125,000 + 32(20,000)]
= 840,000 – 125,000 – 640,000
= $75,000

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 Example: King Publishing


Break-Even Analysis
D) What variable cost per unit would result in $100,000
annual profits if annual sales are 20,000 units?
P = pQ – (FC + vQ)
100,000 = 42(20,000) – [125,000 + v(20,000)]
100,000 = 840,000 – 125,000 – 20,000v
20,000v = 615,000
v = $30.75

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 Factors that determine capacity


Ultimately, the output production facility or system is
not determined simply by the physical size of the
facility, the sizes or types of machines, or the no. of
employees working. Production capacity, especially
effective capacity, is affected by the design of the
products and processes, the training of employees, the
management of quality, and many other factors.


The most important factors affecting production
capacity are:-

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 Factors that determine capacity (Contd…)


1. Process Design :
In multistage production processes the max. rate of output
that can be achieved is governed by the slowest (lowest
capacity) stage.


2. Product Design :
With exactly the same personnel & equipment, the capacity
for making a product that is well designed for production
will be greater than for a poorly designed one.

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 Factors that determine capacity (Contd…)


3. Product Quality :
In some cases, work methods, testing, and inspections intended
to improve quality can reduce production capacity; In other
cases, these methods and the resulting reduction in product
defects can actually increase effective capacity.


4. Product Variety :
Processes that need to produce a wide variety of products must
be structured in a fundamentally different way than those that
produce a single type of product. This structure and product
variety will reduce production capacity in exchange for greater
flexibility.

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 Factors that determine capacity (Contd…)


5. Production Scheduling :
Scheduling that keeps product flows well balanced &
synchronized and unproductive time minimized will utilize
machines & personnel better and result in greater effective
capacity.


6. Materials Management :
Shortages of materials can cause work stoppages, while excess
inventories can cause congestion and wasted time searching
for materials. Procedures that keep all processes stocked with
just enough materials enhance productivity and capacity.
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 Factors that determine capacity (Contd…)

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7. Maintenance :
Equipment breakdowns and defects due to machine
wear are two major sources of lost production.


8. Job Design & Personnel Management :
Inadequate training, poor job design, overwork, and
absenteeism all lead to lost production.

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