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Capacity Planning

This document discusses capacity planning concepts. It defines design capacity, effective capacity, and actual capacity. Design capacity is the maximum output or service a facility is designed for under ideal conditions. Effective capacity subtracts allowances from design capacity for factors like breaks. Actual capacity cannot exceed effective capacity. The document outlines steps for capacity planning, including estimating future needs, evaluating existing capacity, identifying alternatives, and monitoring results. It also discusses efficiency, utilization, cost-volume analysis, and challenges planning service capacity like the inability to store services.

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92 views

Capacity Planning

This document discusses capacity planning concepts. It defines design capacity, effective capacity, and actual capacity. Design capacity is the maximum output or service a facility is designed for under ideal conditions. Effective capacity subtracts allowances from design capacity for factors like breaks. Actual capacity cannot exceed effective capacity. The document outlines steps for capacity planning, including estimating future needs, evaluating existing capacity, identifying alternatives, and monitoring results. It also discusses efficiency, utilization, cost-volume analysis, and challenges planning service capacity like the inability to store services.

Uploaded by

furiousTaher
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Introduction Design Capacity Effective Capacity Actual Capacity Efficiency and Utilization Steps for Capacity Planning Cost-Volume

Analysis

2-0

CAPACITY PLANNING
o

Capacity is the upper limit or ceiling on the load that an operating unit can handle.
What kind of capacity is needed?
Depends on the product or the service management intends to produce or provide.

How much capacity is needed?


When the capacity is needed?
Forecasting process helps us to find out how much is needed and when it is needed.

CAPACITY

Design Capacity: The maximum output rate or service capacity an operation, process or facility is designed for.
Design capacity is the maximum rate of output achieved under ideal conditions.

Effective Capacity: Design capacity minus allowances such as personal time, maintenance and scrap.
Effective capacity is usually less than design capacity owing to realities of changing product mix, periodic maintenance of equipment, lunch breaks, coffee breaks etc.

Actual Capacity: Rate of output actually achieved, cannot exceed


effective capacity. Machine breakdowns, shortages of materials, quality problem etc.

CAPACITY DECISIONS ARE STRATEGIC


Impacts ability to meet future demands

Affects operating costs


Major determinant of initial costs Involves long-term commitment Affects competitiveness Affects ease of management

Globalization adds complexity


Impacts long range planning

EFFICIENCY AND UTILIZATION


Efficiency = Actual output

Effective capacity
Actual output

Utilization =

Design capacity

EXAMPLE 01
Design capacity = 50 trucks/day

Effective capacity = 40 trucks/day


Actual output = 36 units/day

Actual output

36 units/day

Efficiency =
Utilization =

Effective capacity Actual output Design capacity

40 units/ day 36 units/day 50 units/day

= 90%

= 72%

EXAMPLE 02

A loan processing operation that processes an average of 7 loans per day. The operation has a design capacity of 10 loans and per day and effective capacity of 8 loans per day.

STEPS FOR CAPACITY PLANNING


1.
2. 3. 4. 5. 6. 7. 8.

Estimate future capacity requirements Evaluate existing capacity Identify alternatives Conduct financial analysis Assess key qualitative issues Select one alternative Implement alternative chosen Monitor results

CAPACITY REQUIREMENTS
A department works 8 hours a day, 250 days a year, and has these figures for usage of a machine:
Product Annual Demand Processing Time Per Unit (hrs) Total Processing Time (hrs)

400

5.0

2000

2
3

300
700 Total

8.0
2.0

2400
1400 5800

Requirement = 5800 hrs / (8 x 250) hrs per machine = 2.90 machines

COST VOLUME ANALYSIS

Amount ($)

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

COST VOLUME ANALYSIS

Amount ($) 0

BEP units Q (volume in units)

COST VOLUME ANALYSIS (CONTD.)


1.
2. 3. 4.

Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC) Profit (P) = Q (R v) FC Quantity to generate specific profit, Q = (P + FC) / (R v) QBEP = FC / (R v)
Where, v = Variable cost per unit R = Price per unit (Also called revenue)

EXAMPLE 03

The owner of old fashion berry pies, Mr. Simon, is planning a new lines of pies, which will require leasing new equipments for a monthly payment of $6,000. Variable costs would be $2.00 per pie, and pies retail for $7.00 each.

How many pies must be sold in order to break even? What would be profit or loss if 1,000 pies sold in a month? How many pies must be sold to realize a profit of $4,000? If 2,000 can be sold. And profit target is $5,000, what price should be charged per pie?

EXAMPLE 04
A manager has the option of purchasing one, two, or three machines. Fixed costs and potential volumes are as follows:

No. of machine Total Annual FC Output 1 $9,600 0 to 300 2 $15,000 301 to 600 3 $20,000 601 to 900 Variable cost is $10 per unit, and revenue is $40/unit
a. Determine the break even point for each stage. b. If projected annual demand is between 580 to 660 unit, how many machine should the manager purchase?

EXAMPLE 04 (CONTD.)

3 machines 2 machines 1 machine Quantity Step fixed costs and variable costs.

CHALLENGES OF PLANNING SERVICE CAPACITY


The need to be near customers

The inability to store service


The degree of volatility of demand

Thank

you

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