Operations Management

Chapter 8

Capacity Planning

Outline
CAPACITY

Defining Capacity
Capacity and Strategy
Capacity Considerations
Managing Demand

CAPACITY PLANNING
BREAKEVEN ANALYSIS
Single-Product Case
Multi-product Case

Learning Objectives
When you complete this supplement,
you should be able to :

Identify or Define:

Capacity
Design Capacity
Effective Capacity
Utilization

Facility Planning
Facility planning answers:
How much long-range capacity is
needed
When more capacity is needed
Where facilities should be located
(location)
How facilities should be arranged
(layout)

Capacity Planning Process

Forecast
Demand
Compute
Rated
Capacity

Compute
Needed

Capacity

Develop
Alternative
Plans
Evaluate
Capacity
Plans
Select Best
Capacity
Plan

Quantitative
Factors
(e.g., Cost)
Qualitative
Factors
(e.g., Skills)
Implement
Best Plan

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

Definition and Measures of Capacity

Capacity:

The throughput, or number of units a facility

can hold, receive, store, or produce in a period
of time.

Effective
capacity:

Capacity a firm can expect to receive given its

product mix, methods of scheduling,
maintenance, and standards of quality.

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)

Utilization
Measure of planned or actual capacity
usage of a facility, work center, or
machine
Utilization

Actual Output
=
Design Capacity
Planned
hours
to
be
used
=
Total hours available

Efficiency
Measure of how well a facility or
machine is performing when used
Efficiency

Actual
output
=
Effective Capacity
Actual
output
in
units
=
Standard output in units
Average actual time
=
Standard time

Implications of Capacity
Changes
Changes in:
Sales
Cash flow
Quality
Supply chain
Human resources
Maintenance

Special Requirements for

Making Good Capacity
Decisions
Forecast demand accurately
Understanding the technology and
capacity increments
Finding the optimal operating level
(volume)
Build for change

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

Approaches to Capacity
Expansion 1
Expected Demand

Demand

New Capacity

Time in Years
Capacity leads demand with an incremental expansion

Approaches to Capacity
Expansion 2
Expected Demand

Demand

New Capacity

Time in Years
Capacity leads demand with a one-step expansion

Approaches to Capacity
Expansion 3
Expected Demand

Demand

New Capacity

Time in Years

Capacity lags demand with an incremental expansion

Approaches to Capacity
Expansion 4

Demand

New Capacity

Expected Demand

Time in Years
Attempts to have an average capacity, with an incremental
expansion

Breakeven Analysis
Technique for evaluating process & equipment
alternatives
Objective: Find the point ($ or units) at which total
cost equals total revenue
Assumptions
Revenue & costs are related linearly to volume
All information is known with certainty
No time value of money
Fixed costs: costs that continue even if no units are
produced: depreciation, taxes, debt, mortgage
payments
Variable costs: costs that vary with the volume of
units produced: labor, materials, portion of utilities

Breakeven Chart
Total revenue line

Profit

Cost in Dollars

Breakeven point
Total cost = Total revenue

Total cost line

Variable cost

Loss

Fixed cost

Volume (units/period)

Managing Existing Capacity

Demand Management

Capacity Management

(manufacturing)

(service)

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

Capacity Planning
Exercise

Actual output = 148,000 units

Effective Capacity = 175,000 units
Operations = 7days x 3 shifts x 8 hours
Output rate = 1,200 units perhour

Calculate :
i) Design Capacity = (7days x 3 shifts x 8 hours) x 1,200 = 201,600 units

ii) Utilization = 148,000 units / 201,600 units x 100 = 73.41%

iii) Efficiency = 148,0000 units / 175,000 units x 100 = 84.6%
iv) if the total output is 150,000 units, what is the efficiency? =