McGraw-Hill/Irwin
5
Capacity Planning
For Products and
Services
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

 Explain the importance of capacity planning.
 Discuss ways of defining and measuring capacity.
 Describe the determinants of effective capacity.
 Discuss the major considerations related to developing capacity alternatives.
 Briefly describe approaches that are useful for evaluating capacity alternatives
5-2

 Capacity is the upper limit or ceiling on the load that an operating unit can handle.
 Capacity also includes
 Equipment
 Space
 Employee skills
 The basic questions in capacity handling are:



What kind of capacity is needed?
How much is needed?
When is it needed?
5-3

Importance of Capacity Decisions
1. Impacts ability to meet future demands
2. Affects operating costs
3. Major determinant of initial costs
4. Involves long-term commitment
5. Affects competitiveness
6. Affects ease of management
7. Globalization adds complexity
8. Impacts long range planning
5-4

 Design capacity

…
 Effective capacity
 …
 Actual output

…
5-5

Efficiency =
Actual output
Effective capacity
Utilization =
Actual output
Design capacity
Both measures expressed as percentages
5-6

Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 trucks/day
Efficiency =
Utilization =
Actual output = units/day
Effective capacity units/ day
=
Actual output
Design capacity
= units/day
= units/day
5-7

Determinants of Effective
Capacity
 Facilities
 Product and service factors
 Process factors
 Human factors
 Policy factors
 Operational factors
 Supply chain factors
 External factors
5-8

 Capacity strategy for long-term demand
 Demand patterns
 Growth rate and variability
 Facilities
 Cost of building and operating
 Technological changes
 Rate and direction of technology changes
 Behavior of competitors
 Availability of capital and other inputs
5-9

Key Decisions of Capacity
Planning
1. Amount of capacity needed
• Capacity cushion (100% - Utilization)
2. Timing of changes
3. Need to maintain balance
4. Extent of flexibility of facilities
Capacity cushion – extra demand intended to offset uncertainty
5-10

Forecasting Capacity
Requirements
 Long-term vs. short-term capacity needs
 Long-term relates to overall level of capacity such as facility size, trends, and cycles
 Short-term relates to variations from seasonal, random, and irregular fluctuations in demand
5-11

Tot
Product
Calculating Processing
Requirements
Annual
Demand
Standard processing time per unit (hr.)
Processing time needed (hr.)
#1
#2
#3
Total
400
300
700
5.0
8.0
2.0
If annual capacity is 2000 hours, then how many machines do we need to handle the required volume of …. ?
5-12

 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
5-13

Outsource: obtain a good or service from an external provider
1. Available capacity
2. Expertise
3. Quality considerations
4. Nature of demand
5. Cost
6. Risk
5-14

Developing Capacity Alternatives
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
5-15

Figure 5.2
Machine #1
10/hr
Bottleneck operation: An operation in a sequence of operations whose capacity is lower than that of the other operations
Machine #2
10/hr
Bottleneck
Operation
30/hr
Machine #3
10/hr
Machine #4
10/hr
5-16

Which operation is the Bottleneck operation?
Operation 1
20/hr.
Operation 2
10/hr.
Operation 3
15/hr.
?
Maximum output rate limited by bottleneck
5-17

 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
5-18

Figure 5.4
Production units have an optimal rate of output for minimal cost.
Minimum average cost per unit
Minimum cost
0
Rate of output
5-19

Figure 5.5
Minimum cost & optimal operating rate are functions of size of production unit.
0
Small plant
Medium plant Large plant
Output rate
5-20

 Cost-volume analysis
 Break-even point
 Financial analysis
 Cash flow
 Present value
 Decision theory
 Waiting-line analysis
5-21

Figure 5.6a
0
Fixed cost (FC)
Q (volume in units)
5-22

Figure 5.6b
0
Q (volume in units)
5-23

Figure 5.6c
0 BEP units
Q (volume in units)
5-24

Break-Even Problem with Step
Figure 5.7a
Fixed Costs
3 machines
2 machines
1 machine
Quantity
Step fixed costs and variable costs.
5-25

Break-Even Problem with Step
Fixed Costs
Figure 5.7b
$
BEP
3
FC
3
FC
2
BEP
2
3
FC
1
2
1
Quantity
Multiple break-even points
TP = (P – VC) Q
5-26

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
5-27

 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.
5-28

 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
5-29