Chapter 5:

Strategic Capacity
Planning for
Products and
Services

Prepared by: MACB

 What is Capacity Planning?

– Process of determining the production

capacity needed by an organization to meet
changing demands for its products.
– It is needed to prevent “facility oversupply”
or “capacity crisis”
 Introduction:

• Capacity is refers to the upper limit or ceiling on

load (no. of physical units produced or service
performed) that an operating unit (plant,
department, machine, store or worker) can handle.
• It also include equipment, space and employee skill.
 Some basic questions in capacity
planning are the following:

1. What kind of capacity is needed?

2. How much is needed?
3. When it is needed?
 Capacity decisions are Strategic

1. Capacity decisions have a real impact on the ability of

the organization to meet future demands for products
and services; it also limits the rate of output possible.
2. Capacity decisions affect operating cost.
3. Capacity is usually a major determinant of initial cost.
 Capacity decisions are Strategic

4. Capacity decisions often involve long-term commitment of

resources and the fact that, once implemented, those decisions
may be difficult or impossible to modify without incurring major
cost.
5. Capacity decisions can affect competitiveness.
6. Capacity affects the ease of management; having appropriate
capacity makes management easier than when capacity is
mismatched.
 Capacity decisions are Strategic

7. Globalization has increased the importance and

the complexity of capacity decisions.
8. Because capacity decisions often involve
substantial financial and other resources, it is
necessary to plan for them far in advance.
 Defining and Measuring Capacity

• Capacity often refers to an upper limit on the rate of

output.
2 definitions of capacity:
a. Design Capacity – maximum output rate or service
capacity an operation, process or facility is designed for.
b. Effective Capacity – design capacity minus allowance
such as personal time, maintenance and similar
circumstances.
 Defining and Measuring Capacity

–  
2 measures of system effectiveness:
a. Efficiency – ratio of actual output to effective capacity.
b. Capacity utilization – ratio of actual output design
capacity.
Efficiency =
Utilization =