Capacity Planning

key questions in capacity planning

1. What kind of capacity is needed?
2. How much is needed to match demand?
3. When is it needed?

 The question of what kind of capacity is needed

depends on the products and services that management
intends to produce or provide.
 Hence, in a very real sense, capacity planning is
governed by those choices.
 Forecasts are key inputs used to answer the questions
of how much capacity is needed and when is it needed.
DEFINING AND MEASURING CAPACITY
 Capacity often refers to an upper limit on the rate
of output, there are subtle difficulties in actually
measuring capacity in certain cases. These
difficulties arise because of different interpretations
of the term capacity and problems with identifying
suitable measures for a specific situation.
 it can be refined into two useful definitions of
capacity:
◦ Design capacity: The maximum output rate or service
capacity an operation, process, or facility is designed for.
◦ Effective capacity: Design capacity minus allowances such
as personal time, and maintenance.
Measuring Capacity
 These different measures of capacity are useful in defining
two measures of system effectiveness: efficiency and
utilization.
 Efficiency is the ratio of actual output to effective capacity.
 Utilization is the ratio of actual output to design capacity.

 Both measures are expressed as percentages.

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.

Capacity planning can be difficult at times due to the

complex influence of market forces and technology
Calculating Processing Requirements
Aggregate Planning and
Master Scheduling
Planning Horizon
 Long Term Planning
Major Issues
 Long-term capacity
 Location
 Layout
 Product design
 Work system design
 Intermediate Term Planning
 Intermediate Term Planning
General levels of:
 Employment
 Output
 Finished-goods
 inventories
 Subcontracting
 Back orders
 Short Term Planning
Detailed plans:
 Production lot size
 Order quantities
 Machine loading
 Job assignments
 Job sequencing
 Work schedules
 In the spectrum of production planning, aggregate
planning is intermediate-range capacity planning that
typically covers a time horizon of 2 to 12 months,
although in some companies it may extend to as much
as 18 months.

 Some organizations use the term “sales and operations

planning” instead of aggregate planning for
intermediate-range planning. Similarly, sales and
operations planning is defined as making intermediate-
range decisions to balance supply and demand,
integrating financial and operations planning.
Planning Sequence
 The Concept of Aggregation

 Aggregate planning is essentially a “big-picture”

approach to planning.
 Planners usually try to avoid focusing on individual
products or services—unless the organization has
only one major product or service.
 Instead, they focus on a group of similar products
or services, or sometimes an entire product or
service line.
 For example, planners in a company producing
television sets would not concern themselves with
40-inch sets versus 46-inch or 55-inch sets.
 An Overview of Aggregate Planning
 Aggregate planning begins with a forecast of aggregate
demand for the intermediate range.
 This is followed by a general plan to meet demand
requirements by setting output, employment, and finished-
goods inventory levels or service capacities. Managers
might consider a number of plans, each of which must be
examined in light of feasibility and cost.
 If a plan is reasonably good but has minor difficulties, it
may be reworked.
 Conversely, a poor plan should be discarded and alternative
plans considered until an acceptable one is uncovered.
 The production plan is essentially the output of aggregate
planning.
Aggregate Planning Inputs and
Outputs
Varying
Demand
Pattern
TECHNIQUES FOR AGGREGATE
PLANNING
1. Determine demand for each period.
2. Determine capacities (regular time, overtime,
subcontracting) for each period.
3. Identify company or departmental policies that are
pertinent (e.g., maintain a safety stock of 5 percent of
demand, maintain a reasonably stable workforce).
4. Determine unit costs for regular time, overtime,
subcontracting, holding inventories, back orders, layoffs,
and other relevant costs.
5. Develop alternative plans and compute the cost for each.
6. If satisfactory plans emerge, select the one that best
satisfies objectives. Otherwise, return to step 5
Worksheet/
Table
Number of workers calculation
Amount of Inventory Calculation
Cost of a Particular plan
Appropriate Cost Calculation
Example
Example
Solution Part 1
Solution Part 2 (Cost)