Operations

Management
Capacity Planning
Supplement 7

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Principles of Operations Management, 5e, and Operations
Management, 7e
S7-1
 Facility Planning

Facility planning answers:

 How much long-range capacity is needed
 When more capacity is needed
 Where facilities should be located (location)
 How facilities should be arranged (layout)

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© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
Principles of Operations Management, 5e, and Operations
Management, 7e
S7-2
 Capacity Planning Process

Develop Quantitative
Forecast
Alternative Factors
Demand
Plans (e.g., Cost)

Compute Evaluate Qualitative

Rated Capacity Factors
Capacity Plans (e.g., Skills)

Compute Select Best

Implement
Needed Capacity
Best Plan
Capacity Plan

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Principles of Operations Management, 5e, and Operations
Management, 7e
S7-3
 Types of Planning Over a Time
Horizon

Long Range Add Facilities

Planning Add long lead time equipment *

Intermediate Sub-Contract Add Personnel

Range Planning Add Equipment Build or Use Inventory
Add Shifts

Schedule Jobs
Short Range * Schedule Personnel
Planning Allocate Machinery

*Limited options exist Modify Capacity Use Capacity

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Principles of Operations Management, 5e, and Operations
Management, 7e
S7-4
 Definition and Measures of Capacity
Capacity: The “throughput,” or number of units a facility
can hold, receive, store, or produce in a period
of time.

Effective Capacity a firm can expect to receive given its

capacity: product mix, methods of scheduling,
maintenance, and standards of quality.

Utilization: Actual output as a percent of design capacity.

Efficiency: Actual output as a percent of effective capacity.

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Principles of Operations Management, 5e, and Operations
Management, 7e
S7-5
 Special Requirements for Making
Good Capacity Decisions

 Forecast demand accurately

 Understanding the technology and capacity
increments
 Finding the optimal operating level (volume)
 Build for change

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Principles of Operations Management, 5e, and Operations
Management, 7e
S7-6
 Strategies for Matching Capacity to
Demand
1. Making staffing changes (increasing or
decreasing the number of employees)
2. Adjusting equipment and processes – which
might include purchasing additional machinery
or selling or leasing out existing equipment
3. Improving methods to increase throughput;
and/or
4. Redesigning the product to facilitate more
throughput
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Principles of Operations Management, 5e, and Operations
Management, 7e
S7-7
 Breakeven Analysis

 Technique for evaluating process & equipment

alternatives
 Objective: Find the point ($ or units) at which total cost
equals total revenue
 Assumptions
 Revenue & costs are related linearly to volume
 All information is known with certainty
 No time value of money

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Principles of Operations Management, 5e, and Operations
Management, 7e
S7-8
 Break-Even Analysis

 Fixed costs: costs that continue even if no units

are produced: depreciation, taxes, debt,
mortgage payments
 Variable costs: costs that vary with the volume of
units produced: labor, materials, portion of utilities

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Principles of Operations Management, 5e, and Operations
Management, 7e
S7-9
 Managing Existing Capacity

Demand Management Capacity Management

 Vary prices  Vary staffing
 Vary promotion  Change equipment
& processes
 Change lead times
 Change methods
(e.g., backorders)
 Redesign the product for
 Offer complementary faster processing
products

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© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
Principles of Operations Management, 5e, and Operations
Management, 7e
S7-10