UNIT 5

Capacity Planning
For Products and Services

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 Learning Objectives
 Explain the importance of capacity planning.
 Discuss ways of defining and measuring
capacity.
 Describe the determinants of effective
capacity.
 Discuss the major considerations related to
developing capacity alternatives.
 Briefly describe approaches that are useful
for evaluating capacity alternatives
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 Capacity Planning
Capacity is the upper limit or
ceiling on the load that an
operating unit can handle.
Capacity also includes
 Equipment
 Space
 Employee skills

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There are 3 things an operation must
consider when looking at production
of goods and services:
Capacity: • How much can they
make? Demand: • How much does
the market require?
Forecasting: • How are they going to
match what is required with what they
can make without wasting resources?
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These factors all impact upon
each other; in order to fulfil the
requirements of a market,
an operation must be able to
evaluate what capacity it can
provide and the options it has
to increase or decrease this.

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It is not just a case of offering
the amount of goods or
services wanted; it is also an
issue of timing and when these
are required.
This can give an operation a
number of problems when
attempting to plan capacity.
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 Capacity Management
Capacity management affects all
areas of an operation.
Capacity measures the rate that the
operation can transform inputs into
outputs.
Capacity is about the quantity of a
product or service that can be made
within a given time period.
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This, for example, could be;
• The number of passengers per flight on an
aeroplane
• The number of patients that can be seen in a
surgery session at a doctors
• The number of mobile phones that can be
produced a week by a factory.

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It is defined as the number of
units (goods and/or services)
an operation can produce over
a given time period, under
normal working conditions,
where no additional resources
are deployed.

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 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

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 Types of 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, maintenance, and scrap
 Actual output
 rate of output actually achieved--cannot
exceed effective capacity.

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 Efficiency and Utilization
Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity

Both measures expressed as percentages

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 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

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 Determinants of Effective
Capacity
 Facilities
 Product and service factors
 Process factors
 Human factors
 Policy factors
 Operational factors
 Supply chain factors
 External factors

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 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
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 Key Decisions of Capacity
Planning
1. Amount of capacity needed
• Capacity cushion (100% - Utilization)
2. Timing of changes
3. Need to maintain balance
4. Extent of flexibility of facilities

Capacity cushion – extra demand intended to offset uncertainty

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 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 one alternative
7. Implement alternative chosen
8. Monitor results

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 Forecasting Capacity
Requirements
 Long-term vs. short-term capacity needs
 Long-term relates to overall level of capacity
such as facility size, trends, and cycles
 Short-term relates to variations from
seasonal, random, and irregular fluctuations
in demand

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 Calculating Processing
Requirements
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55 , ,88 00 00

If annual capacity is 2000 hours, then we need three machines to handle the
required volume: 5,800 hours/2,000 hours = 2.90 machines

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 CAPACITY CUSHION
Capacity Cushion
Extra capacity used to offset demand uncertainty
Capacity cushion = 100% - Utilization
Capacity cushion strategy
Organizations that have greater demand
uncertainty typically have greater capacity cushion
Organizations that have standard products and
services generally have greater capacity cushion

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SERVICE CAPACITY PLANNING

Service capacity planning can

present a number of challenges
related to:
The inability to store services
The need to be near customer
The degree of demand volatility

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 SERVICE CAPACITY
PLANNING
Time: Inability to store services for later consumption.
Capacity must be available to provide a service when
it is needed (capacity must be matched with the timing
of demand)
Location: Need to be near customers for
convenience. 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)
Volume and timing of demand
Time required to service individual customers
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 Planning Service Capacity
 Need to be near customers
 Capacity and location are closely tied
 Inability to store services
 Capacity must be matched with timing of
demand
 Degree of volatility of demand
 Peak demand periods

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 CAPACITY EXPANSION
Factors to be considered:
Volume and certainty of anticipated
demand
 Strategic objectives for growth
 Costs of expansion and operation
 Incremental or one-step expansion
 Frequency of capacity additions
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 In-House or Outsourcing
Outsource: obtain a good or service
from an external provider

1. Available capacity
2. Expertise
3. Quality considerations
4. Nature of demand
5. Cost
6. Risk

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 Developing Capacity Alternatives
To enhance capacity management, the following
approaches to capacity alternatives could be
developed
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

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 BOTTLENECK OPERATION
A bottleneck has a terrible effect
on the productivity and efficiency.
The stages following the
bottleneck must function below
their capacity because they do not
receive enough input to operate at
full capacity.
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The stages before the
bottleneck need to slow down
because the subsequent
stages cannot handle the
capacity. As a result, the
overall efficiency of the system
is significantly reduced.
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The capacity of the bottleneck
operation is less than the
combined capacities of the
operations that provide input,
so the units queue up waiting
to be processed.
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Usually total plant capacity equals the
bottleneck capacity.
Bottlenecks should be optimized by eliminating
1. time wasted through idle bottleneck time,
2. processing defective parts or
3. producing parts which do not contribute to
throughput.

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• Installing more efficient equipment
• Increasing labors and shifts
• Arranging pre-production meeting in time
• Allocation the task as per standard produced
value equally
• Maintain sequence of task accordingly
• Reducing excess task from overloaded
operator / find capacity where else
• Reducing ineffective time / task by production
study
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• Minimizing non-value adding activities like
transport, rework, waiting, testing and
inspecting.
• Redesigning the product for better
manufacturability
• Layout making before input in line
• Customizing activities so as to increase
flexibility
• Select right operator for right task
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• Keeping the supply available in time
• Should not forward the reject products
• Supply should be forwarded after checking
• Should not be forwarded inconsistency
process
• Reducing lead time
• Reducing costs
• By improving method.
• By improving workers performance.
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 Bottleneck Operation
Bottleneck operation: An operation
in a sequence of operations whose
10/hr capacity is lower than that of the
Machine
Machine #1
#1 other operations

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

Machine
Machine #4
#4 10/hr

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 Bottleneck Operation

Bottleneck

Operation 1 Operation 2 Operation 3

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

Maximum output rate

limited by bottleneck

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 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

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