5-1 Capacity Planning

CHAPTER
5

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.

• The basic questions in capacity handling

are:
– What kind of capacity is needed?
– How much is needed?
– When is it needed?
5-3 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
5-4 Capacity Planning

CAPACITY
• Design capacity
– maximum output rate or service capacity an
operation, process, or facility is designed for

• Effective capacity
– Design capacity minus allowances such as
personal time, maintenance, and scrap

• Actual output
– rate of output actually achieved and it cannot
exceed effective capacity.
5-5 Capacity Planning

EFFICIENCY AND UTILIZATION

Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity

Both measures expressed as percentages

5-6 Capacity Planning

EXAMPLE:
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day

Actual output = 36 units/day

Efficiency = = 90%
Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day

= 72%
Design capacity 50 units/day
5-7 Capacity Planning

DETERMINANTS OF
EFFECTIVE CAPACITY

• Facilities
• Product and service factors
• Process factors
• Human factors
• Operational factors
• Supply chain factors
• External factors
5-8 Capacity Planning

STRATEGY FORMULATION
• Capacity strategy for long-term demand
• Demand patterns
• Growth rate and variability
• Facilities
– Cost of building and operating
• Technological changes
– Rate and direction of technology changes
• Behavior of competitors
• Availability of capital and other inputs
5-9 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

Capacity cushion – extra demand intended to offset uncertainty

5-10 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
5-11 Capacity Planning

MAKE OR BUY?

1.Available capacity
2.Expertise
3.Quality considerations
4.Nature of demand
5.Cost
6.Risk
5-12 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
5-13 Capacity Planning

ECONOMIES OF SCALE
• Economies of scale
– If the output rate is less than the optimal level,
increasing output rate results in decreasing
average unit costs

• Diseconomies of scale
– If the output rate is more than the optimal
level, increasing the output rate results in
increasing average unit costs
5-14 Capacity Planning

EVALUATING ALTERNATIVES
Figure 5.3
Production units have an optimal rate of output for minimal cost.
Average cost per unit

Minimum average cost per unit

Minimum
cost

0 Rate of output
5-15 Capacity Planning

Figure 5.4

Minimum cost & optimal operating rate are

functions of size of production unit.
Average cost per unit

Small
plant Medium
plant Large
plant

0 Output rate
5-16 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
5-17 Capacity Planning

COST-VOLUME RELATIONSHIP
Figure 5.5a

FC
+
Amount ($)

V C C)
= t (V
o st os
l c e c
t a bl
To ari a
l v
t a
To
Fixed cost (FC)

0
Q (volume in units)
5-18 Capacity Planning

Figure 5.5b

u e
e n
Amount ($)
e v
a lr
t
To

0
Q (volume in units)
5-19 Capacity Planning

Figure 5.5c

u e
e n f i t
Amount ($)

ev P ro
l r
ta s t
To l c o
o ta
T

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

ASSUMPTIONS OF COST-VOLUME
RELATIONSHIP
1.One product is involved
2.Everything produced can be sold
3.Variable cost per unit is the same
regardless of volume
4.Fixed costs do not change with volume
5.Revenue per unit constant with volume
6.Revenue per unit exceeds variable cost
per unit
5-21 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.
5-22 Capacity Planning

CALCULATING PROCESSING REQUIREMENTS

Standard
Annual processing time Processing time
Product Demand per unit (hr.) needed (hr.)

#1 400 5.0 2,000

#2 300 8.0 2,400

#3 700 2.0 1,400

5,800
5-23 Capacity Planning

THANK YOU!
PRESENTED BY:

GROUP 5
Arcadio, Via
Bael, Celeste
Barcena, Queen Faustine
Jaramilla, Shiela Mae
Sipat, Rainnier