5-1 Capacity Planning

Capacity Planning
For Products and Services
5-2 Capacity Planning

Capacity Planning

 Capacity is the upper limit or ceiling on the

load that an operating unit can handle.
5-3 Capacity Planning

Reasons for capacity planning

 Changes in demand
 Changes in technology

 Changes in the environment

 Perceived threats or opportunities

5-4 Capacity Planning

The basic questions in capacity planning are:

 What kind of capacity is needed?
 How much is needed?
 When is it needed?
5-5 Capacity Planning

Related questions
 How much will it cost, and what is the expected
return?
 What are the potential benefits and risks?

 Are there sustainability issues that need to be

addressed?
 Should capacity be changed all at once, or through
several small changes?
 Can the supply chain handle the necessary
changes?
5-6 Capacity Planning

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
5-7 Capacity Planning

Capacity

 Design capacity
 maximum output rate or service capacity an
operation, process, or facility is designed for
under ideal condition
 Effective capacity
 Design capacity minus allowances such as
personal time, maintenance, and scrap
 Actual output
 rate of output actually achieved--cannot
exceed effective capacity.
5-8 Capacity Planning

Efficiency and Utilization

Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity

Both measures expressed as percentages

5-9 Capacity Planning

Determinants of Effective Capacity

 Facilities
 Product and service factors
 Process factors
 Human factors
 Operational factors
 Supply chain factors
 External factors
5-10 Capacity Planning

 Facilities  Human factors

 Design  Job content
 Location  Job design
 Layout  Training & experience
 Environment  Motivation
 Product/service  Compensation
 Design  Learning rates
 Product or service mix  Absenteeism & labor
 Process turnover
 Quantity capabilities  policy
 Quality capabilities
5-11 Capacity Planning

 Operational  External factors

 Scheduling
 Materials management
 Quality assurance
 Maintenance policies
 Equipment breakdowns
 Supply chain
 Product standard
 Safety regulations
 Unions
 Pollution control standards
5-12 Capacity Planning

Strategy Formulation

 Growth rate and variability of demand

 Facilities
 Cost of building and operating
 Technological changes
 Rate and direction of technology changes
 Behavior of competitors
 Availability of capital and other inputs
5-13 Capacity Planning

Key Decisions of Capacity Planning

1. Amount of capacity needed

2. Timing of changes
3. Need to maintain balance
4. Extent of flexibility of facilities
5-14 Capacity Planning

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
5-15 Capacity Planning

Make or Buy

1. Available capacity
2. Expertise
3. Quality considerations
4. Nature of demand
5. Cost
6. Risk
5-16 Capacity Planning

Developing Capacity Alternatives

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
5-17 Capacity Planning

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
5-18 Capacity Planning

Evaluating Alternatives
 Cost-volume analysis
 Financial analysis
5-19 Capacity Planning

Cost-Volume Relationships

F C
+
Amount ($)

VC C)
s
=
t t (V
s
c o co
t al le
b
To ri a
l va
o ta
T
Fixed cost (FC)

0
Q (volume in units)
5-20 Capacity Planning

Cost-Volume Relationships

ue
en
Amount ($)
e v
l r
ta
To

0
Q (volume in units)
5-21 Capacity Planning

Cost-Volume Relationships

u e
e n fi t
Amount ($)

ev ro
r P
al t
t o s
To t a l c
To

0 BEP units
Q (volume in units)
5-22 Capacity Planning

Break-Even Problem with Step Fixed Costs

C =
+ V
FC
TC
= TC
V C
+
FC 3 machines
T C
C =
V
F C + 2 machines

1 machine
Quantity
Step fixed costs and variable costs.
5-23 Capacity Planning

Break-Even Problem with Step Fixed Costs

$
BEP
3
TC
BEP2
TC
3
TC
2
TR 1
Quantity
Multiple break-even points
5-24 Capacity Planning

Cost-Volume-Profit Analysis
 How can production management be improved
with your knowledge and understanding of Cost-
Volume-Profit Relationship?
 Read the following references:

 http://www.fao.org/docrep/w4343e/w4343e06.htm

 http://www.swlearning.com/ibc/albrecht9e/pdf/67
604_c02_42-113.pdf
5-25 Capacity Planning

Financial Analysis

 Cash Flow - the difference between cash

received from sales and other sources, and
cash outflow for labor, material, overhead,
and taxes.
 Present Value - the sum, in current value, of
all future cash flows of an investment
proposal.