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
Itis 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 Add Facilities
Planning Add long lead time equipment *
Intermediate Sub-Contract Add Personnel
Range Planning Add Equipment Build or Use Inventory
Add Shifts
Schedule Jobs
Short Range * Schedule Personnel
Planning Allocate Machinery
*Limited options exist Modify Capacity Use Capacity
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
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
Actual output
Efficiency =
Effective Capacity
(expressed as a percentage)
Utilization
Measure of planned or actual capacity usage
of a facility, work center, or machine
Actual Output
Utilization =
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 40 units/ day
Utilization = Actual output = 36 units/day
=
72% Design capacity 50 units/day
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. Estimate future capacity requirements
2. Evaluate existing capacity
3. Identify alternatives
4. Conduct financial analysis
5. Assess key qualitative issues
6. Select the best alternative
7. Implement the alternative chosen
8. Monitor results
Calculating Processing Requirements:
Example 1 (1 of 2)
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## 11 44 00 00 55 . .00 22 , ,00 00 00
## 22 33 00 00 88 . .00 22 , ,44 00 00
## 33 77 00 00 22 . .00 11 , ,44 00 00
55 , ,88 00 00
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. Available capacity
2. Expertise
3. Quality considerations
4. Nature of demand
5. Cost
6. 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
Best Operating Levels
Average cost per room
Best operating
level
Economies Diseconomies
of scale of scale
250 500 1000
# Rooms
Economies of Scale
Minimum cost & optimal operating rate are
Average cost per unit functions of size of production unit.
Small
plant Medium
plant Large
plant
0 Volume
Economies & Diseconomies of Scale
Economies
Economiesof
ofScale
Scaleand
andthe
theExperience
ExperienceCurve
Curveworking
working
100-unit
Average plant
unit cost 200-unit
of output plant 400-unit
300-unit
plant
plant
Diseconomies
Diseconomiesof
ofScale
Scalestart
startworking
working
Volume
The Experience As
Asplants
plantsproduce
producemore
moreproducts,
products,they
they
gain
gainexperience
experiencein
inthe
thebest
bestproduction
production
Curve methods
methodsandandreduce
reducetheir
theircosts
costsper
perunit
unit
Yesterday
Cost or Today
price Tomorrow
per unit
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 New Capacity
Demand
Demand
Time in Years Time in Years
Capacity leads demand with an incremental expansion Capacity leads demand with a one-step expansion
Expected Demand Expected Demand
New Capacity
New Capacity
Demand
Demand
Time in Years Time in Years
Attempts to have an average capacity, with an
Capacity lags demand with an incremental expansion
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
Unbalancedstages
stagesof
ofproduction
production
Units
per Stage 1 Stage 2 Stage 3
month
6,000 7,000 5,000
Maintaining System Balance: Output of one stage is the
exact input requirements for the next stage
Balanced
Balancedstages
stagesof
ofproduction
production
Units
per Stage 1 Stage 2 Stage 3
month
6,000 6,000 6,000
Bottleneck Operation
Bottleneck operation: An operation
10/hr
Machine
Machine #1
#1
in a sequence of operations whose
capacity is lower than that of the
other operations
10/hr
Machine
Machine #2
#2 Bottleneck
Bottleneck 30/hr
Operation
Operation
Machine
Machine #3
#3 10/hr
Machine
Machine #4
#4 10/hr
Bottleneck Operation
Bottleneck
Operation 1 Operation 2 Operation 3
10/hr.
20/hr. 10/hr. 15/hr.
Maximum output rate
limited by bottleneck
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
Cost-Volume Relationships (1 of 3)
F C
+
Amount ($)
VC C)
s
=
t t (V
s
c o co
t al le
b
To ri a
l va
o ta
T
Fixed cost (FC)
0
Q (volume in units)
Cost-Volume Relationships (2 of 3)
ue
en
Amount ($)
e v
l r
ta
To
0
Q (volume in units)
Cost-Volume Relationships in Making
Capacity Decisions (3 of 3)
u e
e n f it
Amount ($)
v o
re Pr
al
o t ost
T a l c
t
To
0 BEP units
Q (volume in units)
Break-Even Problem with Step
Fixed Costs (1 of 2)
C =
+ V
FC
TC
= TC
V C
+
FC 3 machines
T C
C =
V
F C + 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
TR 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 staffing
Vary promotion Change equipment
& processes
Change lead times
(e.g., backorders)
Change methods
Offer complementary
Redesign the product
for faster processing
products
Complementary Products
Sales (Units)
5,000
Total
4,000
Snow-
3,000 mobiles
2,000
1,000 Jet Skis
0
J M M J S N J M M J S N J
Time (Months)