Capacity the upper limit or ceiling

on the load that an operating unit

can handle.
The load might be in terms of the number
of physical units produced or the number
of services performed
 The goal of strategic capacity
planning
Match between the long-term supply
capabilities of an organization and the
predicted level of long-term demand.
The key questions in capacity planning
are the following:
1. What kind of capacity is needed?
2. How much is needed to match
demand?
3. When is it needed?
Importance of Capacity Decision

1.Impacts ability to meet future demands

2.Affects operating costs
3.Major determinant of initial costs
4.Involves long-term commitment
Importance of Capacity Decision

5. Affects competitiveness
6. Affects ease of management
7. Globalization adds
complexity
8. Impacts long range planning
 DEFINING AND MEASURING
CAPACITY
Design capacity
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
Efficiency is the ratio
of actual output to
effective capacity

Both measures expressed as

Capacity utilization is the
ratio of actual output to percentages
design capacity.
MEASURING CAPACITY
DETERMINANTS OF EFFECTIVE CAPACITY
 Facilities
 Product and service factors
 Process factors
 Human factors
 Operational factors
 Supply chain factors
 External factors
DETERMINANTS OF EFFECTIVE CAPACITY
 STRATEGY FORMULATION
 Leading capacity strategy builds capacity in
anticipation of future demand increases. If
capacity increases involve a long lead time,
this strategy may be the best option.

 A following strategy builds capacity when

demand exceeds current capacity.
 STRATEGY FORMULATION
 A tracking strategy is similar to a following
strategy, but it adds capacity in relatively
small increments to keep pace with increasing
demand.
 STRATEGY FORMULATION
 A tracking strategy is similar to a following
strategy, but it adds capacity in relatively
small increments to keep pace with increasing
demand.
STRATEGY FORMULATION
 Capacity strategy for long-term demand
 Demand patterns
 Growth rate and variability
 Facilities
Cost of building and operating
 Technological changes
Rate and direction of technology changes
 Behavior of competitors
 Availability of capital and other inputs
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.
Steps in the Capacity Planning Process
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.
Key Decisions in Capacity Planning
1. Amount of capacity needed
2. Timing of changes
3. Need to maintain balance
4. Extent of flexibility of facilities
Determining Needed Capacity
Determining Needed Capacity
Important Factors in Planning Service
Capacity

(1)there may be a need to be near

customers
(2) the inability to store services, and
(3) the degree of volatility of demand
Once capacity requirements is to
decide whether to produce a good or
provide a service itself, or to outsource
from another organization
DEVELOPING CAPACITY STRATEGIES

1.Design flexibility into systems.

2.Take stage of life cycle into account
3.Take a “big-picture” (i.e., systems)
approach to capacity changes
DEVELOPING CAPACITY STRATEGIES

4. Prepare to deal with capacity “chunks.”

5. Attempt to smooth out capacity
requirements.
6. Identify the optimal operating level
7. Choose a strategy if expansion is involved
DEVELOPING CAPACITY STRATEGIES

4. Prepare to deal with capacity “chunks.”

5. Attempt to smooth out capacity
requirements.
6. Identify the optimal operating level
7. Choose a strategy if expansion is involved
 EVALUATING ALTERNATIVES

Some of the more common are cost–volume

analysis, financial analysis, decision theory,
and waiting-line analysis.
 EVALUATING ALTERNATIVES

Cost–volume analysis
Financial analysis
-Cash flow
-Present value expresses in current value
the sum of all future cash flows of an
investment proposal.
 Financial Analysis

The three most commonly used methods of

financial analysis are payback, present value,
and internal rate of return.
Determining Payback Time A new machine will cost $2,000, but it
will result in savings of $500 per year. What is the payback time in
years?
The present value (PV) method summarizes the initial
cost of an investment, its estimated annual cash
flows, and any expected salvage value in a single
value called the equivalent current value, taking into
account the time value of money (i.e., interest rates).
The internal rate of return (IRR) summarizes the initial
cost, expected annual cash flows, and estimated
future salvage value of an investment proposal in an
equivalent interest rate. In other words, this method
identifies the rate of return that equates the
estimated future returns and the initial cost.
Decision Theory
a helpful tool for financial comparison of
alternatives under conditions of risk or uncertainty

Waiting-Line Analysis
helps managers choose a capacity level that will be
cost-effective through balancing the cost of having
customers wait with the cost of providing additional
capacity.
Simulation
a useful tool in evaluating what-if scenarios.