Capacity Planning
• Contents
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Capacity and capacity decision
Measurement of capacity
Determining capacity requirements
Development and evaluation of capacity alternatives
Capacity and capacity decision
• Capacity
• The upper limit or ceiling on the load that an operating unit can handle.
Operating unit: Plant, department, machine, store or worker
Load: Inputs or outputs
• Capacity is an important information for planning purpose.
• Quantify production capacity for decision making
• Questions to be asked
• What kind of capacity is needed?
• How much is needed?
• When it is needed?
Capacity and capacity decision (Cont.)
• Importance of capacity decisions
• Most fundamental of all the design decisions
• Potential impact on the ability of the organization to meet future demands for
products and services: limiting factor
• Relation between capacity and operating cost: try to match capacity and
demand requirements to minimize operating cost
• Initial cost : capacity is a major components
• Long term commitment of resources: modification costs
Defining and Measuring Capacity
• Capacity
• Upper limit on the rate of output.
• Easy to define but difficult to measure
• Select a measure which does not require updating
• When multiple products or services- select wisely
• State capacity in terms of each product
• If product mix is changed frequently- measure in terms of availability of
inputs
• measure of capacity must be tailored to the situation
Defining and Measuring Capacity (Cont.)
Commonly used measures of Capacity
Business
Inputs
Outputs
Auto Manufacturing
Labor hours, Machine hours
Number of cars per shift
Steel Mill
Furnace size
Tons of steel per day
Oil Refinery
Refinery size
Gallons of fuel per day
Farming
Number of acres, Number of cows
Bushels of grains per acre per year,
Gallons of milk per day
Restaurant
Number of tables, Seating capacity
Number of meals served per day
Theater
Number of seats
Number of tickets sold per
performance
Retail Sales
Square feet of floor space
Revenue generated per day
Defining and Measuring Capacity (Cont.)
• Types of measure of Capacity
• Design capacity: the maximum output that can possibly be attained
• Effective capacity: the maximum possible output given in a product mix, scheduling
difficulties, machine maintenance, quality factors and so on.
• Actual output: the rate of output actually achieved.
• Cannot exceed effective capacity ( due to breakdowns, defective outputs, shortage of materials
etc.)
• Design capacity > effective capacity > actual output
• These measures of capacity help to measure system’s efficiency and utilization
Defining and Measuring Capacity (Cont.)
• Efficiency
• 𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 =
• Utilization
• 𝑈𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 =
• Example
𝐴𝑐𝑟𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑐𝑎𝑝𝑎𝑝𝑐𝑖𝑡𝑦
𝐴𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡
𝐷𝑒𝑠𝑖𝑛 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦
• Given the information below, compute the efficiency and utilization vehicle repair
department:
• Design capacity = 50 trucks per day
• Effective capacity: 40 trucks per day
• Actual output: 36 trucks per day
• Key to improving capacity utilization is to increase effective capacity.
Determinants of Effective Capacity
• Many decisions made concerning system design have impact on capacity
• Main factors are
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Facilities factors
Products or services
Processes
Human considerations
Operations
External factors
Determinants of Effective Capacity
(cont.)
Factors determining effective capacity
Facilities
Design
Location
Layout
Environment
Product/service Design
Product or service mix
Process
Quantity capabilities
Quality capabilities
Human factors
Job content
Job design
Timing and experience
Motivation
Operational
Scheduling
Materials management
Quality assurance
Equipment breakdown
External factors
Product standards
Safety requirements
Unions
Pollution control standards
Compensation
Learning rates
Absenteeism and labor turnover
Determinants of Effective Capacity
(cont.)
• Facilities
• Design of facilities: size, expansion flexibility
• Locational factors: transportation costs, distance to market, labor supply, energy
resources etc.
• Layout of work area
• Environmental factors: lightening, ventilation etc.
• Product/service
• Product/ service design has tremendous influence on capacity
• The more uniform the output, the more opportunities there are for standardization of
methods and materials, which leads to greater capacity.
• Process
• Output quality influences the output quantity capacity
Determinants of Effective Capacity
(cont.)
• Human considerations
• Tasks, varieties of activities, training, skill, experience required to perform a job,
employee’s motivation affect potential and actual output.
• Operation
• Scheduling problems; inventory stocking decision, late deliveries, acceptability of
purchased materials and parts, quality inspection and control procedures affect effective
capacity.
• External factors
• Product standards, pollution standards, union contract
• Inadequate planning is the major determinant of effective capacity
Determinants of Effective Capacity
(cont.)
• Long term considerations: overall level of capacity; facility size
• Short term considerations: probable variations incapacity; seasonal, random
and irregular fluctuations in demand
• Long term capacity: forecasting a demand over a time horizon and then
converting those forecasts into capacity requirements
• If trend is identified then
• How long the trend might persist?
Slope of the trend
• If cycles are identified then
• The approximate length of the cycles
average)
The amplitude of the cycles (deviation from
Determining Capacity Requirements (Cont.)
• Short-term
• Least concerned with cycles and trends
• Concerns with seasonal variations and variations from average
• Place severe strain on system’s ability to satisfy demand at some particular time and yet
result in idle capacity at other times
• Seasonal patterns can be identified using standard forecasting techniques
• Monthly, weekly, daily capacity requirements
Determining Capacity Requirements (Cont.)
Examples of seasonal demand patterns
Period
Items
Year
Toy sales, Air traffic, clothing, vacations, tourism, power usage, gasoline consumption, etc.
Month
Bank transactions, utilities bills etc.
Week
Retail sales, restaurant meals, automobile traffic, automotive rentals, hotel registrations, etc.
Day
Telephone calls, public transportation, class room utilization, retail sales etc.
Determining Capacity Requirements (Cont.)
• When time intervals are too short to have seasonal variations in demand, the
analysis can often describe variations in probability distributions i.e. normal,
uniform or Poisson distribution.
• Normal distribution (mean & standard deviation): amount of tea served
during the midday meal
• Poisson distribution (certain mean): number of customers who entered the
bank branch on Monday mornings
• Not every instance of variability will be described by a standard statistical
distribution (considerable variability in capacity requirement in service sector
can be optimized by scheduled request for service.
• Irregular variations are impossible to predict
• Customer contracts, demographic analysis and marking forecasts can help to
determining long-term and short-term capacity measurements.
Developing Capacity Alternatives
• Considerations relevant to capacity alternatives are:
• Design flexibility into system : expansion
• Take a “big picture” approach to capacity changes: how parts of the system
interrelate
• Prepare to deal with capacity “chunks”: capacity increment and over and
under utilization
• Attempt to smooth out capacity requirements:
unevenness in seasonal and unpredictable
demands; identify processes or services that
have complementary demand pattern.
• Identify the optimal operating level: overtime
work, subcontract some of the work, manage
finished goods inventories
Developing Capacity Alternatives (Cont.)
Production units have an optimal rate of
output for minimum cost
Minimum cost and optimal operating rate
are functions of size of a production unit
Evaluating Alternatives
• Alternatives for future capacity may have different prospective:
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Will an alternative be economically feasible?
How much it will cost?
How soon can we have it?
What will be operating and maintenance cost would be?
What will its useful life be? Will it be compatible with personnel and present operations?
Etc.
• Negative public opinion
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Disrupt life and property,
Retraining of personnel
Terminating personnel
Unwelcome behavior of community (noise, traffic, pollution)
• Techniques to evaluate capacity alternatives
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Cost-volume analysis,
Financial analysis
Decision theory
Waiting-line analysis
Evaluating Alternatives
(Cont.)
• Calculating processing requirements
• Capacity requirements of products that will be processed with a given
alternative should be known
• Mus have
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reasonably accurate demand forecast for each product
Standard processing time per unit for each product on each alternative machine
Number of work days per year
Number of shifts that will be used
Evaluating Alternatives (Cont.)
• A department works one 8-hour shift, 250 days a year and has these figures
for usage of a machine that is currently being considered
Product
Annual demand Standard processing time per unit (hr.)
Processing time needed (hr.)
1
400
5.0
2000
2
300
8.0
2400
3
700
2.0
1400
5800
• Working hours per year per machine = 8x250 = 2000 hours per machine
• No. of machines = 5800 hours/2000 hours per machine = 2.90
• 3 machines are required to fulfil the order
Evaluating Alternatives (Cont.)
• Cost – volume analysis
• Used to estimate the income of an organization under different operating
conditions.
• Relationships between cost, revenue, and volume of output
• Costs related to production
• Fixed cost: remains constant regardless of volume of output (rental cost, property taxes,
equipment cost, certain administrative costs etc.)
• Variable cost: varies directly with volume of output (material and labor cost) – usually
variable cost/unit remains constant regardless of volume of output
Evaluating Alternatives (Cont.)
• Cost-volume symbols
Symbol
Terminology
FC
Fixed cost
VC
Variable cost per unit
TC
Total cost
TR
Total revenue
R
Revenue per unit
Q
Quantity or volume of output
QBEP
Break-even quantity
P
Profit
SP
Specified profit
Evaluating Alternatives (Cont.)
Evaluating Alternatives (Cont.)
• Relationships used in cost-volume estimation
• Total cost (associated with a given volume of output)
• TC = FC + VC x Q
• Revenue per unit remains the same like variable cost per unit
• TR = R x Q
• Break-even point: the volume of output at which total costs and total revenue are equal
• Profit if
Q > QBEP
• Loss if Q < QBEP
• P = TR – TC =R x Q – (FC + VC x Q)
• Volume required to generate a specific profit
• Volume = (SP + FC) / (R – VC)
• QBEP = FC / (R – VC)
Evaluating Alternatives (Cont.)
• Example
• The owner of a pizza shop is contemplating adding a new additional setup for
pizza in the shop, which will require leasing new equipment for a monthly
payment of Rs 60000. Variable cost would be Rs 200 per pizza and pizzas
would retail for Rs 700 each.
• How many pizzas must be sold in order to break-even?
• What would be the profit/loss be if 1000 pizza are made and sold in a month?
• How many pizzas must be sold to realize a profit of Rs. 40000?
Evaluating Alternatives (Cont.)
• Capacity alternatives may involve step costs
• Costs that increase stepwise as operational volume increases.
• Multiple break even quantity may occur for each range or a range may miss a break even
quantity.
• Must consider projected annual demand/volume relative to the multiple break even
points and choose the most appropriate number of machines/units etc.
Evaluating Alternatives (Cont.)
• Example
• A manager has the option of purchasing one, two or three machines. Fixed costs and
potential volume are as follows:
No. of machines Total annual fixed costs
Corresponding range of outputs
1
$ 9600
0 - 300
2
15000
301 – 600
3
20000
601 - 900
• Variable cost is $10 per unit and revenue is $40 per unit.
• Determine the break even point for each range
• If the projected annual demand is between 580 to 660 units, how many machines should the
manager purchase?
• Example
• A manufacturing plant and equipment cost $150 million and are estimated to
have a lifetime of 25 years. Straight-line depreciation is to be used. Additional
fixed costs per year are $4 million. Variable costs are $1.25 and price is set at
$3.25. State annual profit when annual volume, in million units, is (a) 10, (b)
2.5, (c) 5 and (d) 8.
• What is the breakeven volume in millions of units for each level of demand?