5-

CAPACITY PLANNING
FOR PRODUCTS AND SERVICES
5-

FACILITY PLANNING
Facility planning answers:
What kind of capacity is needed?
How much capacity is needed to match demand?
When more capacity is needed?
Where facilities should be located (location)
How facilities should be arranged (layout)
5-

CAPACITY (DEFINITION OF)

The number of units a facility can hold, receive, store

or produce in a period of time

It is the upper limit or ceiling on the load that an

operating unit can handle. It includes
 equipment,
 space,
 employee skills
5-

STRATEGIC CAPACITY PLANNING

Goal
To achieve a match between the long-term supply
capabilities of an organization and the predicted
level of long-run demand
Overcapacity  operating costs that are too
high
Undercapacity  strained resources and
possible loss of customers
5-

CAPACITY PLANNING QUESTIONS

Key Questions:
What kind of capacity is needed?
How much capacity is needed to match demand?
When is it needed?
Related Questions:
How much will it cost?
What are the potential benefits and risks?
Are there sustainability issues?
Should capacity be changed all at once, or through
several smaller changes
Can the supply chain handle the necessary changes?
5-

ISSUES TO BE CONSIDERED IN
STRATEGY FORMULATION
Capacity strategy
Demand patterns
Growth rate and variability
Facilities
 (Cost of the building and operating)
Technological changes
 (Rate and direction of technology changes)
Behavior of competitors
Availability of capital and other inputs.
5-

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 AllocateMachinery
*Limited options Modify Capacity Use Capacity
exist
5-

IMPORTANCE OF CAPACITY
DECISIONS
·impact the ability of the organization to meet future demands
·affect operating costs
·affect lead time responsiveness
·are a major determinant of initial costs
·involve long-term commitment of resources
·affect competitiveness
·affect ease of management
·are more important and complex due to globalization
·need to be planned for in advance due to their consumption
of financial and other resources
5-

CAPACITY MEASURES
 Design capacity
Maximum output rate or service capacity an operation,
process, or facility is designed for
 Effective capacity
Capacity a firm can expect to attain given its product
mix, methods of scheduling, maintenance and standards
of quality. Design capacity minus allowances such as
personal time, maintenance and scrap
5-

CAPACITY RELATED CONCEPTS

Actual output
Rate of output actually achieved—cannot exceed
effective capacity
Utilization
Actual output as a percent of design capacity
Efficiency
Actual output as a percent of effective capacity
5-

EFFICIENCY

Measure of how well a facility or machine is performing

when used

Actual output
Efficiency =
Effective Capacity

(expressed as a percentage)
5-

UTILIZATION
Measure of actual capacity usage of a facility, work
center, or machine

Actual Output
Utilization =
Design Capacity

(expressed as a percentage)
5-

EXAMPLE- EFFICIENCY/UTILIZATION

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-

DETERMINANTS OF EFFECTIVE
CAPACITY
Facilities
Product and Service Factors
Process Factors
Human Factors
Policy Factors
Operational Factors
Supply Chain Factors
External Factors
5-

Facilities

The size and provision for expansion are key

in the design of facilities. Other facility factors
include locational factors (transportation
costs, distance to market, labor supply, energy
sources). The layout of the work area can
determine how smoothly work can be
performed.
5-

Product and Service Factors

The more uniform the output, the more

opportunities there are for standardization of
methods and materials. This leads to greater
capacity
5-

Process Factors

Quantity capability is an important

determinant of capacity, but so is output
quality. If the quality does not meet standards,
then output rate decreases because of need of
inspection and rework activities. Process
improvements that increase quality and
productivity can result in increased capacity.
Another process factor to consider is the time
it takes to change over equipment settings for
5-

Human Factors

The tasks that are needed in certain jobs, the

array of activities involved and the training,
skill, and experience required to perform a job
all affect the potential and actual output.
Employee motivation, absenteeism, and labor
turnover all affect the output rate as well.
5-

Policy Factors

Management policy can affect capacity by

allowing or not allowing capacity options such
as overtime or second or third shifts
5-

Operational Factors

Scheduling problems may occur when an

organization has differences in equipment
capabilities among different pieces of
equipment or differences in job requirements.
Other areas of impact on effective capacity
include inventory stocking decisions, late
deliveries, purchasing requirements,
acceptability of purchased materials and parts,
and quality inspection and control procedures.
 5-

Supply Chain Factors

Questions include:
What impact will the changes have on suppliers, warehousing, transportation, and
distributors?
If capacity will be increased, will these elements of the supply chain be able to handle the
increase?
If capacity is to be decreased, what impact will the loss of business have on these elements
of the supply chain?
5-

External Factors

Minimum quality and performance standards

can restrict management’s options for
increasing and using capacity
5-

STRATEGY FORMULATION

Strategies are typically based on assumptions and

predictions about:
Long-term demand patterns
Technological change
Competitor behavior
5-

SPECIAL REQUIREMENTS FOR

MAKING GOOD CAPACITY
DECISIONS
Forecasting the demand accurately
Understanding the technology and capacity
increments
Finding the optimal operating level (volume)
Building for change
5-

KEY DECISIONS IN CAPACITY

PLANNING
Amount of capacity needed
Timing of changes (frequency of capacity additions)
Extent of flexibility of facilities
External sources of capacity
Need to maintain balance
5-

AMOUNT OF CAPACITY NEEDED

5-

STEPS OF CAPACITY PLANNING

Estimate future capacity requirements
Evaluate existing capacity and facilities and
identify gaps
Identify alternatives for meeting requirements
Conduct financial analysis
Assess key qualitative issues
Select the best alternative for the long term
Implement the alternative chosen
Monitor results
5-

FORECASTING CAPACITY
REQUIREMENTS

Long-term considerations relate to overall level of

capacity requirements

Short-term considerations relate to probable

variations in capacity requirements
5-

CALCULATING PROCESSING
REQUIREMENTS
Forecast sales within each individual product
line

Calculate equipment and labor requirements to

meet the forecasts
5-

CALCULATING PROCESSING
REQUIREMENTS
Calculating processing requirements requires
reasonably accurate demand forecasts, standard
processing times, and available work time
k

pD i i
NR  i 1
T
where
N R  number of required machines
pi  standard processing time for product i
Di  demand for product i during the planning horizon
T  processing time available during the planning horizon
5-

CALCULATING PROCESSING
REQUIREMENTS: EXAMPLE 1 (1 of 2)
SS t taa nn dd aa r rdd
AA nn nn uu aa l l pp r roo ccee ssssi ni n gg t ti mi m ee PP r roo ccee ssssi ni n gg t ti mi m ee
PP r roo dd uu cct t DD ee mm aa nn dd pp ee r r uu nn i ti t ( (hh r r. .) ) nn ee ee dd ee dd ( (hh r r. .) )

## 11 44 00 00 55 . .00 22 , ,00 00 00

## 22 33 00 00 88 . .00 22 , ,44 00 00

## 33 77 00 00 22 . .00 11 , ,44 00 00
55 , ,88 00 00
5-

CALCULATING PROCESSING
REQUIREMENTS: EXAMPLE 1 (2 of 2)

If the department works one eight hour shift, 250 days a

year, calculate the number of machines that would be
needed to handle the required volume.

Solution:
5800/(250)(8) = 2.9 (3 machines are needed)
5-

CAPACITY CUSHION

Capacity Cushion
Extra capacity used to offset demand uncertainty
Capacity cushion = 100% - Utilization
Capacity cushion strategy
Organizations that have greater demand
uncertainty typically have greater capacity cushion
Organizations that have standard products and
services generally have greater capacity cushion
5-

SERVICE CAPACITY PLANNING

Service capacity planning can present a number
of challenges related to:
The inability to store services
The need to be near customer
The degree of demand volatility
5-

SERVICE CAPACITY PLANNING

Time: Inability to store services for later consumption.
Capacity must be available to provide a service when it is
needed (capacity must be matched with the timing of
demand)
Location: Need to be near customers for convenience.
Capacity and location are closely tied. Service goods must
be at the customer demand point and capacity must be
located near the customer
Volatility of Demand: (Much greater than in
manufacturing)
Volume and timing of demand
Time required to service individual customers
5-

TIMING AND SIZE OF CHANGES

(FREQUENCY OF CAPACITY
ADDITIONS)
5-

CAPACITY EXPANSION

Factors to be considered:
Volume and certainty of anticipated demand
 Strategic objectives for growth
 Costs of expansion and operation
 Incremental or one-step expansion
 Frequency of capacity additions
5-

MAKE OR BUY?
·Available capacity
·Expertise
·Quality considerations
·Nature of demand
·Cost
·Risk
5-

OPTIMAL OPERATING LEVEL

5-

OPTIMAL OPERATING LEVEL

Average cost per room

Best operating
level

Economies Diseconomies
of scale of scale

250 500 1000

# Rooms
5-

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
Reasons for economies of scale:
 Fixed costs are spread over a larger number of units
 Construction costs increase at a decreasing rate as facility size increases
 Processing costs decrease due to standardization
5-

DISECONOMIES OF SCALE

 Diseconomies of scale
 If the output rate is more than the optimal level,
increasing the output rate results in increasing average unit
costs
Reasons for diseconomies of scale
Distribution costs increase due to traffic congestion
and shipping from a centralized facility rather than
multiple smaller facilities
Complexity increases costs
Inflexibility can be an issue
5-

ECONOMIES OF SCALE
Minimum cost & optimal operating rate are
Average cost per unit functions of size of production unit.

Small
plant Medium
plant Large
plant

0 Volume or output rate

 5-
ECONOMIES AND DISECONOMIES OF
SCALE
Economies
Economiesof
ofScale
Scaleand
andthe
theExperience
ExperienceCurve
Curveworking
working

100-unit
Average plant
unit cost 200-unit
of output plant 400-unit
300-unit
plant
plant

Diseconomies
Diseconomiesof
ofScale
Scalestart
startworking
working

Volume
5-
THE
As
Asplants
plantsproduce
producemore
moreproducts,
products,they
they
EXPERIENCE gain
gainexperience
experiencein
inthe
thebest
bestproduction
production
CURVE methods
methodsand
andreduce
reducetheir
theircosts
costsper
perunit
unit

Yesterday

Cost or Today
price Tomorrow
per unit

Total accumulated production of units

5-

EXTERNAL SOURCES OF CAPACITY

5-

IN-HOUSE OR OUTSOURCE?

Once capacity requirements are determined, the

organization must decide whether to produce a good
or service itself or outsource
Factors to consider:
Available capacity
Expertise
Quality considerations
The nature of demand
Cost
Risks
5-

NEED TO MAINTAIN BALANCE

5-

CAPACITY PLANNING: BALANCE

Unbalanced
Unbalancedstages
stagesof
ofproduction
production
Units
per Stage 1 Stage 2 Stage 3
month
6,000 7,000 5,000
Maintaining System Balance: Output of one stage is the
exact input requirements for the next stage
Balanced
Balancedstages
stagesof
ofproduction
production
Units
per Stage 1 Stage 2 Stage 3
month
6,000 6,000 6,000
5-

BOTTLENECK OPERATION
Bottleneck operation: An operation
10/hr
Machine
Machine #1
#1 in a sequence of operations whose
capacity is lower than that of the
other operations
10/hr
Machine
Machine #2
#2 Bottleneck
Bottleneck 30/hr
Operation
Operation
Machine
Machine #3
#3 10/hr

Machine
Machine #4
#4 10/hr
5-

BOTTLENECK OPERATION

Bottleneck

Operation 1 Operation 2 Operation 3

10/hr.
20/hr. 10/hr. 15/hr.

Maximum output rate

limited by bottleneck
5-

CONSTRAINT MANAGEMENT
Constraint
Something that limits the performance of a process or
system in achieving its goals
 Categories
 Market
 Resource
 Material
 Financial
 Knowledge or competency
 Policy
5-

RESOLVING CONSTRAINT ISSUES

Identify the most pressing constraint
Change the operation to achieve maximum benefit, given
the constraint
Make sure other portions of the process are supportive of
the constraint
Explore and evaluate ways to overcome the constraint
Repeat the process until the constraint levels are at
acceptable levels
5-

STRATEGIES FOR MATCHING

CAPACITY TO DEMAND
5-

DEMAND MANAGEMENT
STRATEGIES
Strategies used to offset capacity limitations
and that are intended to achieve a closer match
between supply and demand
 Pricing
 Promotions
 Backorders
 Offering complementary products
 Discounts
 Other tactics to shift demand from peak periods
into slow periods
5-

CAPACITY MANAGEMENT
STRATEGIES
1Adjusting equipment and processes – which might
include purchasing additional machinery or selling
or leasing out existing equipment
2Making staffing changes (increasing or decreasing
the number of employees)
3Redesigning the product to facilitate more
throughput (for faster processing)
5-

THINGS THAT CAN BE DONE TO

ENHANCE CAPACITY MANAGEMENT

1Design flexibility into systems

2Take stage of life cycle into account
3Take a “big picture” approach to capacity changes
4Attempt to smooth out capacity requirements
5Identify the optimal operating level
6Choose a strategy if expansion is involved
5-

CAPACITY FLEXIBILITY
5-

CAPACITY FLEXIBILITY

Flexible plants

Flexible processes

Flexible workers
5-

EVALUATING ALTERNATIVES
Alternatives should be evaluated from varying
perspectives

ECONOMIC
Cost-volume analysis
 Break-even point
Financial analysis
 Cash flow
 Present value
5-

COST-VOLUME RELATIONSHIPS
(1 OF 3)

FC
+
Amount ($)

VC C)
t = t (V
s
lc o
le cos
o ta b
T
a ria
l v
ta
To
Fixed cost (FC)

0
Q (volume in units)
5-

COST-VOLUME RELATIONSHIPS
(2 OF 3)

u e
e n
v
Amount ($)

re
l
ota
T

0
Q (volume in units)
5-

COST-VOLUME RELATIONSHIPS
(3 OF 3)

u e
en it
v o f
Amount ($)

r e Pr
al
o t ost
T a l c
Tot

0 BEP units
Q (volume in units)
5-

BREAK-EVEN POINT (BEP)

BEP
 The volume of output at which total cost and total revenue are equal
 Profit (P) = TR – TC = R x Q – (FC +v x Q)
= Q(R – v) – FC

FC
QBEP 
Rv
5-

ASSUMPTIONS OF COST-VOLUME
ANALYSIS

1One product is involved

2Everything produced can be sold
3Variable cost per unit is the same regardless of
volume
4Fixed costs do not change with volume
5Revenue per unit is the same regardless of
volume
6Revenue per unit exceeds variable cost per unit
5-

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.