LAGUNA STATE POLYTECHNIC UNIVERSITY

SANTA CRUZ MAIN CAMPUS

OPERATIONS MANAGEMENT
AND TOTAL QUALITY
MANAGEMENT

Prepared by: Aldon M. Francia, MBA

 LAGUNA STATE POLYTECHNIC UNIVERSITY
SANTA CRUZ MAIN CAMPUS

Module 4:
Strategic Capacity Planning for
Products
and Services
Presented by:

Aldon M. Francia, MBA

 LAGUNA STATE POLYTECHNIC UNIVERSITY
SANTA CRUZ MAIN CAMPUS

Learning Outcomes
At the end of this module, students should be able
to:
1. name the three key questions in capacity
planning;
2. explain the importance of capacity planning;
3. describe ways how to define and measure
capacity;
4. name several determinants of effective capacity;
5. discuss factors whether to perform in-house or
outsource; and
Introduction
Hospitals that, not too long ago,
experienced what might be called "facility
oversupply" are now, in certain locations,
going through what might be called a
"capacity crisis." Hospitals' ability to
succeed in the future will depend on
how they plan for capacity. The same
holds true for all types of organizations and
for all levels within them. The term
"capacity" describes the maximum load
that a functioning unit is capable of
LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS
handling.
COLLEGE OF BUSINESS, ADMINISTRATION, AND ACCOUNTANCY
Introduction
The quantity of work to be done may be
expressed in terms of the quantity of
physical goods produced (such as the
number of bicycles that can be put together
per hour) or the quantity of services that
can be provided (e.g., computers upgraded
per hour). An employee, department,
machine, or store could all be considered
operating units. Equipment, space, and
employee skills are all requirements for
capacity.
LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS
COLLEGE OF BUSINESS, ADMINISTRATION, AND ACCOUNTANCY
Introduction

The following are the crucial inquiries in

capacity planning:

1. How much capacity is required?

2. What quantity is required to meet
demand?
3. How soon is it required?

LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS

COLLEGE OF BUSINESS, ADMINISTRATION, AND ACCOUNTANCY
Lesson 1. Capacity Decisions are Strategic
(Stevenson, 2018)
Capacity considerations are among the most
fundamental of all the design decisions that
managers must make for a variety of reasons. In
actuality, choices about capacity can be very
important for a business.
1. Decisions about capacity have a significant
impact on the organization's ability to
deliver goods and services in the future;
capacity essentially caps the production rate that
can be produced. A corporation can frequently
benefit greatly from having the capacity to meet
demand.
LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS
COLLEGE OF BUSINESS, ADMINISTRATION, AND ACCOUNTANCY
Lesson 1. Capacity Decisions are Strategic
(Stevenson, 2018)
2. Operating costs are impacted by
capacity decisions. Demand and
capacity requirements should ideally
coincide which should reduce operating
expenses. In reality, this is not always
possible since actual demand either varies
or differs from anticipated demand. In
such circumstances, a choice might be
taken to try to strike a balance between
the costs of excess and under capacity.
LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS
COLLEGE OF BUSINESS, ADMINISTRATION, AND ACCOUNTANCY
Lesson 1. Capacity Decisions are Strategic
(Stevenson, 2018)
3. A key factor in determining initial
cost is capacity. Generally speaking, a
producing unit's cost increases with
capacity. Larger units typically cost
proportionately less than smaller units,
although this does not imply a one-for-one
relationship.
4. Decisions on capacity frequently
require long-term commitments of
resources, and once they are made, they
LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS
mayCOLLEGE
beOF BUSINESS,
difficult or impossible
ADMINISTRATION, AND ACCOUNTANCY to change
Lesson 1. Capacity Decisions are Strategic
(Stevenson, 2018)
5. Competitiveness may be impacted
by capacity decisions. A firm's surplus
capacity or ability to develop capacity quickly
may operate as a barrier to entry for other
businesses. Moreover, delivery speed can be
impacted by capacity and provide a
competitive edge.
6. Capacity has an impact on
management cases; when capacity is
matched correctly, management is more
LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS
effective.
COLLEGE OF BUSINESS, ADMINISTRATION, AND ACCOUNTANCY
Lesson 1. Capacity Decisions are Strategic
(Stevenson, 2018)
7. Decisions on capacity are become more
critical and complex due to globalization.
Distant markets and extensive supply networks
increase the ambiguity surrounding capacity
requirements.
8. Planning for capacity decisions in
advance is crucial since they frequently
require significant financial and other
resources. For instance, it can take years for a new
power plant to be built and put into service.
However, this raises the possibility that when
capacity becomes
LAGUNA STATE available,
POLYTECHNIC theCRUZ
UNIVERSITY - SANTA designated
MAIN CAMPUS quantity
will COLLEGE OF BUSINESS, ADMINISTRATION, AND ACCOUNTANCY
not correspond to real demand.
Lesson 2. Defining and Measuring Capacity
(Stevenson, 2018)

The term "capacity" frequently refers to an

upper limit on the output rate. Even
while it can appear straightforward, there
can occasionally be subtle challenges
when attempting to measure capacity.
These issues are brought about by varying
understandings of the word "capacity" and
issues identifying appropriate solutions for a
given circumstance.
LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS
COLLEGE OF BUSINESS, ADMINISTRATION, AND ACCOUNTANCY
Lesson 2. Defining and Measuring Capacity
(Stevenson, 2018)
It's crucial to pick a capacity measure that
doesn't need to be updated while making your
decision. Dollar amounts, for instance, are frequently
a subpar indicator of capacity (e.g., a $30 million
annual capacity), as updating such indicator is
required by price changes.
When only one good or service is
involved, the productive unit's capacity can be
stated in terms of that particular thing.
However, employing a straightforward capacity
metric based on output units might be deceptive
when many products or services are involved, as is
LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS
frequently the case.
COLLEGE OF BUSINESS, A producer
ADMINISTRATION, of appliances might
AND ACCOUNTANCY
Lesson 2. Defining and Measuring Capacity
(Stevenson, 2018)
and refrigerators. It would not make sense to simply
mention capacity in units without reference to either
refrigerators or freezers if the output rates for these
two items are different.

There won't be a single capacity measure

that works in every circumstances. Instead,
the capacity measure must be adjusted for the
circumstances.

LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS

COLLEGE OF BUSINESS, ADMINISTRATION, AND ACCOUNTANCY
Lesson 2. Defining and Measuring Capacity
(Stevenson, 2018)

2 Helpful Definitions of Capacity

1. Design capacity is the highest output

rate or service capacity that a facility,
process, or operation is intended to support.
2. Design capacity less allowances like
personal time and maintenance equals
effective capacity. (Effective Capacity =
Design Capacity – Allowances)
LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS
COLLEGE OF BUSINESS, ADMINISTRATION, AND ACCOUNTANCY
Lesson 2. Defining and Measuring Capacity
(Stevenson, 2018)
Utilization and efficiency are two measures of
system effectiveness that can be defined using
these various capacity measures. The ratio of actual
output to effective capacity is known as efficiency.
The ratio of actual output to design capacity is
known as capacity utilization.

Efficiency = (Actual output / Effective capacity) x

100%
Utilization = (Actual output / Design capacity) x
100%
LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS
COLLEGE OF BUSINESS, ADMINISTRATION, AND ACCOUNTANCY
Lesson 2. Defining and Measuring Capacity
(Stevenson, 2018)
It is common for managers to place their
sole attention on efficiency, although this
concentration is frequently incorrect. As soon
as effective capacity falls short of design capacity,
this occurs. High efficiency might appear to indicate
effective resource use in those situations even
though it does not.
The real secret to boosting capacity
utilization is to raise effective capacity by fixing
quality issues, keeping machinery in good
working order, thoroughly training staff, and
LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS
making maximum
COLLEGE OF BUSINESS, ADMINISTRATION, use of
AND ACCOUNTANCY bottleneck
equipment. Effective capacity acts as a lid on
Lesson 3. Determinants of Effective Capacity
(Stevenson, 2018)

Product and Service Factors. Capacity

can be greatly impacted by the design
of a product or service. For instance, the
system can typically manufacture identical
products considerably more easily than
goods that differ from one another after
them. The result is that a restaurant with a
small menu can typically prepare and serve
meals more quickly than one with a large
selection.
LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS
COLLEGE OF BUSINESS, ADMINISTRATION, AND ACCOUNTANCY
Lesson 3. Determinants of Effective Capacity
(Stevenson, 2018)
Human Factor. The potential and actual output are
affected by the tasks that make up a work, the
diversity of activities involved, training, skill,
and experience needed to accomplish a job.
Additionally, absenteeism and labor turnover as well
as staff motivation have a fundamental connection
to capacity.

Policy Factor. By granting or disallowing capacity

alternatives like overtime or second or third shifts,
management policy can affect capacity.
LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS
COLLEGE OF BUSINESS, ADMINISTRATION, AND ACCOUNTANCY
Lesson 3. Determinants of Effective Capacity
(Stevenson, 2018)

Operational Factors. When an

organization's various pieces of equipment
have different capabilities or have
different job requirements, scheduling
issues may arise. Effective capacity can also
be impacted by decisions about inventory
stocking, delayed delivery, purchasing needs,
the acceptability of purchased materials and
parts, and quality inspection and control
systems.
LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS
COLLEGE OF BUSINESS, ADMINISTRATION, AND ACCOUNTANCY
Lesson 3. Determinants of Effective Capacity
(Stevenson, 2018)
Supply Chain Factors. If there will be
significant capacity changes, supply
chain factors must be considered. The
following are important inquiries: How will
the modifications affect distributors,
warehousing, and suppliers? Will these
supply chain components be able to handle
the increase if capacity is increased? On the
other hand, if capacity is to be reduced, what
effects would
LAGUNA STATE theUNIVERSITY
POLYTECHNIC loss - SANTA
of CRUZ
business
MAIN CAMPUS have on
these supply chain components?
COLLEGE OF BUSINESS, ADMINISTRATION, AND ACCOUNTANCY
Lesson 3. Determinants of Effective Capacity
(Stevenson, 2018)

External Factors. Product standards,

particularly the minimal requirements
for quality and performance, may limit
management's alternatives for
expanding and utilizing capacity. As a
result, requirements for pollution-free items
and machinery frequently lower effective
capacity, as does the paperwork that
government regulatory bodies demand by
forcing
LAGUNA staff to engage
STATE POLYTECHNIC UNIVERSITY in unproductive
- SANTA CRUZ MAIN CAMPUS tasks.
COLLEGE OF BUSINESS, ADMINISTRATION, AND ACCOUNTANCY
Lesson 4. Strategy Formulation (Stevenson, 2018)

There are three (3) primary strategies

namely leading, following, and tracking.
A leading strategy adds capacity in
preparation of future demand increases.
Following strategy builds capacity in
response when demand exceeds current
capacity. A tracking strategy is like a
following capacity, but it adds up capacity
gradually to keep pace with the increasing
demand.
LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS
COLLEGE OF BUSINESS, ADMINISTRATION, AND ACCOUNTANCY
Lesson 4. Strategy Formulation (Stevenson, 2018)

A company often based its capacity

strategy on presumptions and forecasts
regarding long-term demand trends,
technical advancements, and
competitive behavior. These typically
include (1) the growth rate and fluctuation of
demand, (2) the costs of constructing and
operating facilities of various sizes, (3) the
pace and direction of technological progress,
(4) LAGUNA
the expected
STATE POLYTECHNIC conduct ofCRUZ
UNIVERSITY - SANTA competitors,
MAIN CAMPUS and
COLLEGE OF BUSINESS, ADMINISTRATION, AND ACCOUNTANCY
(5) the availability of cash and other inputs.
Lesson 4. Strategy Formulation (Stevenson, 2018)

The Steps in Capacity Planning Process

1. Determine the capacity needs of the future.
2. Evaluate current infrastructure, capability, and
gaps.
3. Find alternate methods to satisfy the requirements.
4. Analyze each option's financial impact.
5. Analyze the main qualitative issues with each
option.
6. Choose the course of action that will result in the
most long-term benefit.
7. Put the chosen option into action.
8. Track outcomes.
LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS
COLLEGE OF BUSINESS, ADMINISTRATION, AND ACCOUNTANCY
Lesson 5. Forecasting Capacity Requirements
(Stevenson, 2018)
Long-term and short-term factors are both
considered when making capacity planning
decisions. Short-term issues pertain to possible
variations in capacity requirements caused by things
like seasonal, random, and irregular swings in
demand. Long-term considerations deal to overall
level of capacity, such as facility size. It would be
misleading to assign times to the intervals because
the time intervals covered by each of these
categories can differ greatly from sector to industry.
The distinction will nonetheless provide a foundation
LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS
for talking
COLLEGE OFabout
BUSINESS, capacity planning.
ADMINISTRATION, AND ACCOUNTANCY
Lesson 5. Forecasting Capacity Requirements
(Stevenson, 2018)
Forecasting demand over a time
horizon and converting such estimates into
capacity requirements are both necessary for
long-term capacity demands. A combination of
cycles and trends is one example of a more
complex pattern in addition to fundamental patterns.
Short-term capacity requirements are
more concerned with seasonal changes and other
deviations from the norm than with cycles or
trends. These differences are especially crucial since
they may put a system under a great deal of stress
LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS
at times while
COLLEGE OF also
BUSINESS, causing
ADMINISTRATION, idle capacity at other
AND ACCOUNTANCY
Lesson 5. Forecasting Capacity Requirements
(Stevenson, 2018)

Although seasonal changes are

typically thought of as annual swings, they
are also mirrored in monthly, weekly, and
even daily capacity requirements. An
organization can identify seasonal patterns
using traditional forecasting approaches.

LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS

COLLEGE OF BUSINESS, ADMINISTRATION, AND ACCOUNTANCY
Lesson 5. Forecasting Capacity Requirements
(Stevenson, 2018)

Calculating Processing Requirements

The capacity requirements of the
products that will be processed are an
important piece of information. To obtain this
information, one needs to have
reasonably accurate demand
projections for each product as well as
knowledge of the standard processing
time per unit, the number of workdays
LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS
perCOLLEGE
year, andADMINISTRATION,
OF BUSINESS, the number of shifts that
AND ACCOUNTANCY
Lesson 5. Forecasting Capacity Requirements
(Stevenson, 2018)
Obtaining a forecast of future
demand, translating it into the quantity and
timing of capacity requirements, and deciding
whether to expand, decrease, or leave the
capacity as is are appropriate approaches to
evaluating capacity requirements. The
expansion or shrinkage of an existing facility,
the establishment or closing of branch
facilities, and the relocation of current
operations are long-term capacity alternatives.
A choice must now be made regarding whether to
LAGUNA STATE POLYTECHNIC UNIVERSITY - SANTA CRUZ MAIN CAMPUS
produce
COLLEGEaOFgood
BUSINESS,or purchase
ADMINISTRATION, ANDone, or whether to offer
ACCOUNTANCY
or purchase a service.
Reference
Operations Management and Total Quality Management (2019).
McGraw-Hill Education. Philippines