5-1 Capacity Planning

Capacity Planning
5-2 Capacity Planning

Capacity Planning

• Capacity planning is the process of 
determining the production capacity needed by 
an organization to meet changing demands for 
its products.
• The basic questions in capacity handling are:

• What kind of capacity is needed?
• How much is needed?
• When is it needed?
5-3 Capacity Planning

Importance of Capacity Decisions

1. Impacts ability to meet future demands
2. Affects operating costs
3. Involves long-term commitment
4. Affects competitiveness
5. Affects ease of management
5-4 Capacity Planning

Capacity
• Design capacity
• maximum output rate or service capacity an 
operation, process, or facility is designed for
• Effective capacity
• Design capacity minus allowances such as 
personal time, maintenance, and scrap
• Actual output
• rate of output actually achieved--cannot 
exceed effective capacity.
5-5 Capacity Planning

Efficiency and Utilization

Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity

Both measures expressed as percentages

5-6 Capacity Planning

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
5-7 Capacity Planning

Determinants of Effective Capacity

• Facilities  (equipments , tools)
• Product and service factors
• Human factors
• Operational factors
• Supply chain factors
• External factors
5-8 Capacity Planning

Key Decisions of Capacity Planning

1. Amount of capacity needed
2. Timing of changes
3. Need to maintain balance
4. Extent of flexibility of facilities
5-9 Capacity Planning

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 one alternative
7. Implement alternative chosen
8. Monitor results
5-10 Capacity Planning

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
5-11 Capacity Planning

Evaluating Alternatives
Figure 5.4
Minimum cost & optimal operating rate are
functions of size of production unit.
Average cost per unit

Small
plant Medium
plant Large
plant

0 Output rate
5-12 Capacity Planning

Cost-Volume Relationships
Figure 5.5a

F C
+
Amount ($)

VC C)
=t t (V
co
s osc
tal l e
o a b
T ari
l v
o ta
T
Fixed cost (FC)

0
Q (volume in units)
5-13 Capacity Planning

Cost-Volume Relationships
Figure 5.5b

ue
en
Amount ($)
r ev
al
t
To

0
Q (volume in units)
5-14 Capacity Planning

Cost-Volume Relationships
Figure 5.5c

u e
e n f i t
Amount ($)

ev ro
r P
al t
t o s
To t a l c
To

0 BEP units
Q (volume in units)
5-15 Capacity Planning

Break-Even Problem with Step Fixed Costs

Figure 5.6a

C =
+V
FC
C TC
T
V C=
+
FC 3 machines
T C
C =
V
F C + 2 machines

1 machine
Quantity
Step fixed costs and variable costs.
5-16 Capacity Planning

Break-Even Problem with Step Fixed Costs

Figure 5.6b

$
BEP
3

BEP2
TC
TC
3
TC
2
TR 1
Quantity
Multiple break-even points
5-17 Capacity Planning

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 average cost per 
unit
5-18 Capacity Planning