Capacity Planning

Capacity refers to an upper limit or ceiling on the

load that an operating unit can handle

The basic questions are:

• What kind of capacity is needed?
• How much is needed?
• When it is needed?
 Impact on the ability of the organization to meet future
demands for products & services
 Major determinant of initial cost – greater the capacity,
larger the investment
 Can affect competitiveness – excess capacity or flexible
capacity
 Affects the ease of management
 Capacity Planning
Design Capacity: maximum attainable output
Effective Capacity: maximum possible output with
scheduling difficulties, machine maintenance & so on

Design Capacity
- Unavoidable delays

Effective Capacity

Actual output
Efficiency 
Effective capacity
 Capacity Planning

Design Capacity
- Unavoidable delays

Effective Capacity
- Avoidable delays

Actual Output
Actual output
Utilization 
Design capacity
Actual output
Efficiency 
Effective capacity

Utilization is always less than efficiency

 Capacity Planning
Determinants of Effective Capacity

Facilities
• Design – including size & provision of expansion
• Location – transportation cost, distance to market, labor supply
• Layout – smoothness of flow, as will as lighting & ventilation

Product / services
• Design – easier the design, easier to produce
• Product Mix – varieties of product reduce capacity

Process
• Quantity – obvious determinant of capacity
• Quality – low quality will require inspection & rework
 Capacity Planning
Determinants of Effective Capacity
Human Factor
• Job content
• Training/Experience
• Motivation
• Compensation

Operational
• Scheduling differences in equipment capabilities
• Materials management – shortage of materials/ complaints
• Quality assurance – in process & incoming materials

External
• Product standard – can restricts increasing capacity
• Safety regulations
• Unions
 Capacity Planning
Capacity Requirement
Long term – relates to overall level of capacity e.g., facility size
Determined by forecasting demand over a time horizon, and then
converting those forecasts into capacity requirement

- How long
Trend - Slope of trend

Short term – relates to probable variations e.g., seasonal, random

Deviations are important as they can place severe strain to satisfy
demand at sometimes & yet result in idle capacity at other times
 Capacity Planning
Developing Capacity Alternatives
Design flexibility into systems
Provisions for future expansions in the original design
Differentiate between new and matured products/services
Matured product/services tends to be more predictable
Attempt to smooth out capacity requirement
Need to identify products which can offset each other
Prepare to deal with capacity chunks
Capacity increases are often acquired in fairly large chunks

Identify the optimal operation level

In terms of unit cost of output
 Capacity Planning

Evaluating Alternatives

Financial Analysis

• Net present value

• Pay back period
• Internal rate of return
 Capacity Planning
Evaluating Alternatives
Cost-Volume-Profit Total Profit P  TR  TC
Analysis
Total cost TC  FC  VC
Variable cost VC  Q *V
TR Total revenue TR  Q * R
t P  Q * R  (Q *V  FC )
ofi TC
Pr  Q * ( R  V )  FC
VC
P  FC
Q
o ss FC R V
L
FC
Quantity For breakeven Q 
BEP R V
 Capacity Planning

Example problem

M/C # FC (Tk) Capacity (unit) BEP (unit)

1 9600 300 320
2 15000 600 500 ?
3 20000 900 667 √

D = 680
580 ~ 760
660 unit • No Loss Allowed
R = Tk 40/unit • Need to Satisfy Market Demand
V = Tk 10/unit
For no loss, FC = 17400/-
FC
QBEP 
R V For profit, FC = 17370/-