Chapter 5
Strategic Capacity Planning for Product and Services
BOM1001
Learning objectives
After completing this chapter, you should be able to:
LO 5.1
Name the three questions in Capacity Planning
LO 5.2
Explain the importance of Capacity Planning.
LO 5.3
Describe ways of defining and measuring capacity.
LO 5.4
Name several determinants of effective capacity.
LO 5.5
Discuss factors to consider when deciding whether to operate in-house or outsource .
LO 5.6
Discuss the major considerations related to developing capacity alternatives .
LO 5.7
Describe the steps that are used to resolve constraint issues .
LO 5.8
Briefly describe approaches that are useful for evaluating capacity alternatives .
Introduction
Capacity
• The upper limit or ceiling on the load that an operating unit can handle
• Capacity needs include
- Equipment
- Space
- Employee skills
Goal of strategic capacity planning
- To achieve a match between the long-term supply capabilities of an
organization and the predicted level of long-term demand
- Overcapacity - operating costs that are too high
- Undercapacity - strained resources and possible loss of customers
LO 5.1 Name the three key questions in capacity planning
(pg 190)
Key questions:
 What kind of capacity is needed?
 How much 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?
LO 5.2 Explain the importance of capacity planning (pg 193)
Capacity decisions
1.
2.
3.
4.
5.
6.
7.
8.
Impact the ability of the organization to meet future demands
Affect operating costs
Are a major determinant of initial cost
Often involve long-term commitment of resources
Can affect competitiveness
Affect the ease of management
Have become more important and complex due to globalization
Need to be planned for in advance due to their consumption of financial
and other resources
LO 5.3 Describe ways of defining and measuring capacity (pg 194)
Design capacity: the maximum output rate or service capacity an
operation, process, or facility is designed for.
Effective capacity: design capacity minus allowance such as personal
time, and maintenance.
𝐸𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 =
𝐴𝑐𝑡𝑢𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡
x 100%
𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑐𝑎𝑝𝑎𝑐𝑖𝑡𝑦
𝑈𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 =
𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡
x 100%
𝐷𝑒𝑠𝑖𝑔𝑛 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦
LO 5.3 Describe ways of defining and measuring capacity
(pg 195) An example.
Calculate the efficiency and utilization of the vehicle repair department using the
following information:
Design Capacity = 50 Vehicles per day
Effective Capacity = 40 Vehicles per day
Actual Output = 36 Vehicles per day
𝑬𝒇𝒇𝒊𝒄𝒊𝒆𝒏𝒄𝒚=(36 𝑉𝑒ℎ𝑖𝑐𝑙𝑒𝑠)/(40 𝑉𝑒ℎ𝑖𝑐𝑙𝑒𝑠) x 100% = 90%
𝑼𝒕𝒊𝒍𝒊𝒛𝒂𝒕𝒊𝒐𝒏= (36 𝑉𝑒ℎ𝑖𝑐𝑙𝑒𝑠)/(50 𝑣𝑒ℎ𝑖𝑐𝑙𝑒𝑠) x 100% = 72%
LO 5.3 Describe ways of defining and measuring capacity (pg
195) Continued
How to improve capacity utilization:
Increase effective capacity by:
●
Correcting quality problems
●
maintaining equipment in good operating condition
●
fully training employees
●
fully utilising bottleneck equipment
LO 5.4 Name several determinants of effective capacity (196)
 Facilities
 Product and service factors
 Process factors
 Human factors
 Policy factors
 Operational factors
 Supply chain factors
 External factors
List the steps in Capacity Planning Process (pg 198)
1.
2.
3.
4.
5.
6.
7.
8.
Estimate future capacity requirements
Evaluate existing capacity, facilities and identify gaps
Identify alternatives for meeting requirements
Conduct financial analysis of each alternative
Assess key qualitative issues for each alternative
Select one alternative to pursue
Which alternative is the most economical to pursue and will yield quality products.
Implement the selected alternative
Monitor results
LO 5.5 Discuss factors to consider when deciding whether
to operate in-house or outsource (pg 201)
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
LO 5.6 Discuss the major considerations related to
developing capacity alternatives (pg 202)
There are a number of ways to enhance development of capacity
strategies:
 Design flexibility into systems
 Take stage of life cycle into account
 Take a “big-picture” approach to capacity changes
 Prepare to deal with capacity “chunks”
 Attempt to smooth out capacity requirements
 Identify the optimal operating level
 Choose a strategy if expansion is involved
LO 5.7 Describe the steps that are used to resolve constraint
issues (pg 207)
A constraint is something that limits the performance of a process or system
in achieving its goals.
There are seven categories of constraints:
Market
Resource
Material
Financial
Supplier
knowledge or competency
Policy
LO 5.7 Describe the steps that are used to resolve constraint
issues (pg 207) Continued.
Constraint issues can be resolved by using the following five steps:
1. Identify the most pressing constraint. if it can easily be overcome, do so, and
return to step one for the next constraint. otherwise proceed to Step 2.
2. Change the operation to achieve the maximum benefit, given the constraint. this
might be a short term solution.
3. Make sure other portions of the process are supportive of the constraint (example
bottleneck operation).
4. Explore and evaluate ways to overcome the constraint.
5. Repeat the process until the level of constraints is acceptable.
LO 5.8 Briefly describe approaches that are useful for
evaluating capacity alternatives (pg 207)
Most obvious are economic
considerations. Examples:
 Is it economically feasible?
 How much will it cost?
 How soon can we have it?
 What will operating and maintenance
costs be?
 What will its useful life be?
 Will it be compatible with present
personnel and present operations?
Less obvious, But nonetheless
important is possible negative public
opinions:
• Any option that could disrupt lives and
property is bound to generate hostile
reactions
• Construction of new facilities may
necessitate moving personnel to new
location
• Embracing a new technology may mean
retraining some people and terminating
some jobs
• Relocation can cause unfavourable
reactions
• Community pressure in a new location
LO 5.8 Briefly describe approaches that are useful for evaluating
capacity alternatives (pg 208)
1. Cost-volume analysis
 Focuses on relationships between cost, revenue, and volume of output.
 Purpose is to estimate the income of an organisation under different operating conditions.
2. Financial analysis
 Rank investment proposals, taking into account the time value of money.
3. Decision theory
 Helpful tool for financial comparison of alternatives under conditions of risk or uncertainty
 Involves identifying a set of possible future conditions that could influence results, listing
alternative courses of action, and developing a financial outcome for each alternative future
condition combination.
LO 5.8 Briefly describe approaches that are useful for evaluating
capacity alternatives (pg 208) Continued.
4. Waiting line analysis
• Analysis of lines is often useful for designing or modifying service systems.
• The lines are symptoms of bottleneck operations.
• This analysis is useful in helping managers choose a capacity level that will be cost
effective through balancing the cost of having customers wait with the cost of
providing additional capacity.
5. Simulation
• Simulation can be a useful tool in evaluating what-if scenarios
Next
Chapter 6: Process selection and facility layout
(ONLINE TEAMS lecture) – 29th of March
Reminder: Moodle Quiz SU4 (Chapter 5) Friday,
31st of March (7am-11pm)