Chapter 5
Strategic Capacity Planning
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Sputnik
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Capacity Planning
• Capacity is the upper limit or ceiling on the load
that an operating unit can handle.
• The basic questions in capacity handling are:
–
–
–
What kind of capacity is needed?
How much is needed?
When is it needed?
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In-House or Outsourcing
Outsource: obtain a good or service from an external provider
1.
2.
3.
4.
5.
6.
Available capacity
Expertise
Quality considerations
Nature of demand
Cost
Risk
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Types of Capacity Planning Over Time Horizon
Long Range
Planning
Add Facilities
Add equipment
*
Intermediate Range
Planning
Sub-Contract
Add Equipment
Add Shifts
Add Personnel
Build or Use Inventory
Short Range
Planning
*Limited options
*
Modify Capacity
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Schedule Jobs
Schedule Personnel
Allocate Machinery
Manage with existing Capacity
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Definitions and Measurements
Capacity:
The “throughput,” or number of units a facility can hold,
receive, store, or produce in a period of time.
Design Capacity: Maximum theoretical output
Effective Capacity: Capacity a firm can expect to receive given its product mix,
methods of scheduling, maintenance, scrap, personal time.
Actual Output:
What is actually being produced, in units.
Efficiency:
Actual Output / Effective Capacity
(Actual Output in units / Standard Output in units)
Utilization:
Actual Output / Design Capacity
(Hours used / Total hours available)
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Simple Example
A dentist assistant schedules a patient every 10 minutes.
This dentist treated 40 patients today.
The dentist works 8 hours a day.
The office is set up to handle a maximum of 60 patients a day.
What is the efficiency of this dentist office?
What is the utilizations of this dentist office?
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Special Requirements for
Making Good Capacity Decisions
• Forecasting demand accurately
– Cycles; overestimating growth; seasons; complementary products
• Building for change
• Understanding capacity increments
• Finding the optimal operating level (volume)
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Understanding Capacity Increments
Expected Demand
Expected Demand
New Capacity
Demand
Demand
New Capacity
Time in Years
Capacity leads demand with an incremental expansion
Time in Years
Capacity leads demand with a one-step expansion
Expected Demand
New Capacity
New Capacity
Demand
Demand
Expected Demand
Time in Years
Capacity lags demand with an incremental expansion
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Time in Years
Attempts to have an average capacity, with
an incremental expansion
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Cost per unit
Economies of Scale
0
Small
plant
Medium
plant
Large
plant
Output rate
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Tools for Capacity Decisions
1. Break-even Analysis
Single-product case
Break-even in units:
Total Fixed Cost
Price  Variable
Cost
Total Fixed Cost
Break-even in Dollar Sales:
1
Variable
Cost
Price
2. Decision Theory
Decision Making Tools
3. Financial Analysis
Net Present Value (NPV):
NPV 
F
( i  1)
N
4. Queueing / Waiting lines
(Simulation)
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Amount ($)
Cost-Volume Relationships
0
BEP
(Quantity in units)
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Crossover Chart
Process A: low volume, high variety
Process B: Repetitive
Process C: High volume, low variety
Cost
Fixed cost - Process C
Fixed cost - Process B
Fixed cost - Process A
Process A
Process B
Process C
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Quantity
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Break-Even Problem with Step Fixed Costs
$
Revenues
TC
1 machine
2 machines
3 machines
Quantity
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Assumptions of Cost-Volume Analysis
1.
2.
3.
4.
5.
6.
One product is involved
Everything produced can be sold
Variable cost per unit is the same regardless of volume
Fixed costs do not change with volume
Revenue per unit constant with volume
Revenue per unit exceeds variable cost per unit
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Managing Existing Capacity
Demand Management
Capacity Management
• Vary prices
• Vary promotion
• Change lead times
(e.g., backorders)
• Offer complementary
products
• Vary staffing
• Change equipment
& processes
• Change methods
• Redesign the product for
faster processing
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Planning Service Capacity
• Need to be near customers
– Capacity and location are closely tied
• Inability to store services
– Capacity must be matched with timing of demand
• Degree of volatility of demand
– Peak demand periods
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