Capacity Planning
For Products and Services
Facility Planning
Facility planning answers:
What kind of capacity is needed?
How much capacity is needed?
When more capacity is needed?
Where facilities should be located (location)
How facilities should be arranged (layout)
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
Capacity Planning
 Establishes overall level of productive
resources
 Affects lead time responsiveness,
cost & competitiveness
 Determines when and how much to
increase capacity
Types of Planning Over a Time
Horizon
Long Range
Planning
Intermediate
Range Planning
Add Facilities
Add long lead time equipment
Sub-Contract
Add Equipment
Add Shifts
*Limited options exist
Add Personnel
Build or Use Inventory
*
Short Range
Planning
Modify Capacity
*
Schedule Jobs
Schedule Personnel
Allocate Machinery
Use Capacity
Importance of Capacity Decisions
1.
2.
3.
4.
5.
6.
7.
8.
Impacts ability to meet future demands
Affects operating costs
Major determinant of initial costs
Involves long-term commitment
Affects competitiveness
Affects ease of management
Globalization adds complexity
Impacts long range planning
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
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
Actual or Expected Output
Actual (or Expected) Output =
(Effective Capacity)(Efficiency)
Efficiency
Measure of how well a facility or machine
is performing when used
Efficiency =
Actual output
Effective Capacity
(expressed as a percentage)
Utilization
Measure of planned or actual capacity usage
of a facility, work center, or machine
Utilization =
Actual Output
Design Capacity
(expressed as a percentage)
Efficiency/Utilization Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
Actual output
=
36 units/day
Efficiency =
= 90%
Effective capacity
Utilization =
Actual output
Design capacity
40 units/ day
=
36 units/day
50 units/day
= 72%
Determinants of Effective Capacity
 Facilities
Product and Service Factors
Process Factors
Human Factors
Policy Factors
Operational Factors
Supply Chain Factors
External Factors
Key Decisions in Capacity Planning
1. Amount of capacity needed
2. Timing of changes (frequency of capacity
additions)
3. Need to maintain balance
4. Extent of flexibility of facilities
5. External sources of capacity
Steps for Capacity Planning
1.
2.
3.
4.
5.
6.
7.
8.
Estimate future capacity requirements
Evaluate existing capacity
Identify alternatives
Conduct financial analysis
Assess key qualitative issues
Select the best alternative
Implement the alternative chosen
Monitor results
Calculating Processing Requirements:
Example 1 (1 of 2)
Standard
processing time
per unit (hr.)
Product
Annual
Demand
Processing time
needed (hr.)
#1
400
5.0
2,000
#2
300
8.0
2,400
#3
700
2.0
1,400
5,800
Calculating Capacity 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
Special Requirements for
Making Good Capacity Decisions
Forecasting the demand accurately
Understanding the technology and capacity
increments
Finding the optimal operating level (volume)
Build for change
Make or Buy
1.
2.
3.
4.
5.
6.
Available capacity
Expertise
Quality considerations
Nature of demand
Cost
Risk
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
Diseconomies of scale
 If the output rate is more than the optimal
level, increasing the output rate results in
increasing average unit costs
Average cost per room
Best Operating Levels
Best operating
level
Economies
of scale
250
Diseconomies
of scale
500
# Rooms
1000
Economies of Scale
Average cost per unit
Minimum cost & optimal operating rate are
functions of size of production unit.
0
Small
plant
Medium
plant
Large
plant
Volume
Economies & Diseconomies of Scale
Economies of Scale and the Experience Curve working
Average
unit cost
of output
100-unit
plant
200-unit
plant
300-unit
plant
400-unit
plant
Diseconomies of Scale start working
Volume
The Experience
Curve
As plants produce more products, they
gain experience in the best production
methods and reduce their costs per unit
Yesterday
Cost or
price
per unit
Today
Tomorrow
Total accumulated production of units
Strategies for Matching Capacity to
Demand
1. Making staffing changes (increasing or
decreasing the number of employees)
2. Adjusting equipment and processes – which
might include purchasing additional
machinery or selling or leasing out existing
equipment
3. Improving methods to increase throughput;
and/or
4. Redesigning the product to facilitate more
throughput
Capacity Expansion
Volume and certainty of anticipated demand
 Strategic objectives for growth
 Costs of expansion and operation
 Incremental or one-step expansion
 Frequency of capacity additions

Capacity Expansion Strategies
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
Time in Years
Capacity lags demand with an incremental expansion
Demand
Demand
Expected Demand
Time in Years
Attempts to have an average capacity, with
an incremental expansion
Issues in Capacity Management
1. Design flexibility into systems
2. Take stage of life cycle into account
3. Take a “big picture” approach to capacity
changes
4. Prepare to deal with capacity “chunks”
5. Attempt to smooth out capacity requirements
6. Identify the optimal operating level
Capacity Planning: Balance
Unbalanced stages of production
Units
per
month
Stage 1
Stage 2
6,000
7,000
Stage 3
5,000
Maintaining System Balance: Output of one stage is the
exact input requirements for the next stage
Balanced stages of production
Units
per
month
Stage 1
Stage 2
6,000
6,000
Stage 3
6,000
Bottleneck Operation
Machine #1
Machine #2
Bottleneck operation: An operation
in a sequence of operations whose
capacity is lower than that of the
other operations
10/hr
10/hr
Machine #3
Bottleneck
Operation
10/hr
Machine #4
10/hr
30/hr
Bottleneck Operation
Bottleneck
Operation 1
20/hr.
Operation 2
10/hr.
Operation 3
15/hr.
Maximum output rate
limited by bottleneck
10/hr.
Capacity Flexibility

Flexible plants

Flexible processes

Flexible workers
Evaluating Alternatives
Cost-volume analysis
Break-even point
Financial analysis
Cash flow
Present value
Decision theory
Waiting-line analysis
Amount ($)
Cost-Volume Relationships (1 of 3)
Fixed cost (FC)
0
Q (volume in units)
Amount ($)
Cost-Volume Relationships (2 of 3)
0
Q (volume in units)
Amount ($)
Cost-Volume Relationships in Making
Capacity Decisions (3 of 3)
0
BEP units
Q (volume in units)
Break-Even Problem with Step
Fixed Costs (1 of 2)
3 machines
2 machines
1 machine
Quantity
Step fixed costs and variable costs.
Break-Even Problem with Step Fixed
Costs (2 of 2)
$
BEP
3
TC
BEP2
TC
3
TC
2
1
Quantity
Multiple break-even points
Assumptions of Cost-Volume Analysis
1. One product is involved
2. Everything produced can be sold
3. Variable cost per unit is the same
regardless of volume
4. Fixed costs do not change with volume
5. Revenue per unit constant with volume
6. Revenue per unit exceeds variable cost per
unit
Decision Theory
Helpful tool for financial comparison of
alternatives under conditions of risk or uncertainty
Suited to capacity decisions
Waiting-Line Analysis




Useful for designing or modifying service
systems
Waiting-lines occur across a wide variety of
service systems
Waiting-lines are caused by bottlenecks in the
process
Helps managers plan capacity level that will be
cost-effective by balancing the cost of having
customers wait in line with the cost of additional
capacity
Strategy Driven Investment
 Select investments as part of a coordinated strategic
plan
 Choose investments yielding competitive
advantage
 Consider product life cycles
 Include a variety of operating factors in the
financial return analysis
 Test investments in light of several revenue
projections
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.
Net Present Value
F = future value
P = present value
F
P
N
I = interest rate
(i  1)
N = number of years
Planning Service Capacity

Inability to store services: Capacity must be
available to provide a service when it is needed
(capacity must be matched with the timing of
demand)

Need to be near customers: 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
Capacity Utilization &
Service Quality

Best operating point is near 70% of capacity

From 70% to 100% of service capacity, what do
you think happens to service quality?
Extras
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
Complementary Products
Sales (Units)
5,000
4,000
3,000
2,000
1,000
0
Total
Snowmobiles
Jet Skis
J M M J S N J M M J S N J
Time (Months)