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Chapter 5

Capacity Planning

Capacity Planning
Capacity is the upper limit or ceiling on the load that an operating unit can handle. The basic questions in capacity handling are:

What kind of capacity is needed? How much is needed? When is it needed?

Importance of Capacity Decisions

Impacts ability to meet future demands Affects operating costs Major determinant of initial costs Involves long-term commitment Affects competitiveness Affects ease of management

Design capacity

maximum obtainable output Maximum capacity given product mix, scheduling difficulties, and other doses of reality. rate of output actually achieved--cannot exceed effective capacity.

Effective capacity

Actual output

Efficiency and Utilization

Actual output Efficiency = Effective capacity Actual output Utilization =

Design capacity

Efficiency/Utilization Example
Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 units/day
Actual output Efficiency = Effective capacity Utilization = Actual output Design capacity 40 units/ day 36 units/day 50 units/day = 72% = 36 units/day = 90%

Determinants of Effective Capacity

Facilities Products or services Processes Human considerations Operations External forces

Steps in the Capacity Planning Process

Estimate future capacity requirements Evaluate existing capacity and facilities and identify gaps Identify alternatives for meeting requirements

Steps in the Capacity Planning Process (cont)

Conduct financial analysis of each alternative Assess key qualitative issues for each alternative Select one alternative to pursue Implement the selected alternative Monitor results.

Determining capacity requirements

Long term consideration - relate to overall level of capacity such as facility size Short term consideration - relate to probable variations in capacity requirements created by such things as seasonal, random and irregular fluctuation in demand

Some Possible Growth Patterns

Figure -1











Make or Buy
After determined the capacity requirements an organization decide whether to produce a good or provide a service itself, or to outsource (buy) from another organization.

Reason to buy product or services from outsource

Available capacity Expertise Quality consideration The nature of demand Cost Risk

Cost- volume analysis

Focuses on relation between cost, revenue and volume of output. Purpose estimate the income of the organization under different operating condition. It is a tool for comparing capacity alternatives.

Cost volume analysis


Cost-Volume Relationships
Figure- 4

Amount ($)

Fixed cost (FC) 0 Q (volume in units)

Cost-Volume Relationships
Figure -5

Amount ($) 0

Q (volume in units)

Cost-Volume Relationships
Figure -6

Amount ($) 0

BEP units Q (volume in units)

Break even point

The volume at which total cost and total revenue is equal is referred to as the Break Even Point .(BEP)

Assumptions of Cost-Volume Analysis

One product is involved Everything produced can be sold Variable cost per unit is the same regardless of volume Fixed costs do not change with volume Revenue per unit constant with volume Revenue per unit exceeds variable cost per unit

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