5-1 Capacity Planning

Operations Management

William J. Stevenson

8th edition
 5-2 Capacity Planning

CHAPTER
5

Capacity Planning
For Products and Services

Operations Management, Eighth Edition, by William J. Stevenson

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights
5-3 Capacity Planning

Capacity Planning
• Capacity is the upper limit or ceiling on the load that an
operating unit can handle. Load might be in terms of the
number of physical units produced(e.g., bicycles assembled
per hour) or the number of services performed(e.g.,
computers upgraded per hour)
• The basic questions in capacity handling are:

• What kind of capacity is needed?

• How much is needed?
• When is it needed?
5-4 Capacity Planning

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
5-5 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
• Effective capacity is usually less than design capacity owing to realities of
changing product mix, the need for periodic maintenance of equipment,
lunch breaks, tea breaks, problem in scheduling and balancing ops.
• Actual output
• rate of output actually achieved--cannot
exceed effective capacity and is often less because of machine breakdowns,
absenteeism, shortages of materials, and quality problems, as well as factors
that are outside the control of the ops manager.
5-6 Capacity Planning

Efficiency and Utilization

Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity

Both measures expressed as percentages

5-7 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
5-8 Capacity Planning

Determinants of Effective Capacity

• Facilities..infrastructure, layout, work area
• Product and service factors..items similar in nature
• Process factors…e.g.if quality of output does not meet standards, the rate of
output would be slowed down by the need for inspection and rework activities
• Human factors..employee motivation, absenteeism, turnover
• Policy factors..overtime, or extra shifts
• Operational factors..inventory decisions, delivery, purchasing
• Supply chain factors..warehousing, transportation, distribution
• External factors..pollution standards, trade union
5-9 Capacity Planning

Strategy Formulation
• 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
 5-10 Capacity Planning

Key Decisions of Capacity Planning

1. Amount of capacity needed

2. Timing of changes
3. Need to maintain balance throughout the
system.
4. Extent of flexibility of facilities and the
workforce.

ushion – extra demand intended to offset uncertain

ates to availability of capital, lead time needed to m
5-11 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
5-12 Capacity Planning

Make or Buy

1. Available capacity..equipment, skills, time.

2. Expertise
3. Quality considerations
4. Nature of demand
5. Cost
6. Risk..loss of control over operations, diclosure
of information.
5-13 Capacity Planning

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
5-14 Capacity Planning

Contd..
• 1. Keeping in mind the future expansion, design
flexible systems. Eg-Restaurant, golf course.
• 2.introduction phase-difficult to determine size of the
market, growth phase-rapid growth, maturity phase-
slow down growth but may still increase profitability
by lowering the prices.
• 3.Eg- Expansion of Hotel-increase in parking,
entertainment, food n housekeeping.
• 4.difficult to achieve match between desired capacity
and feasible capacity. Eg-55units/hr.,40, 55, 25 extra.
5-15 Capacity Planning

Contd..
• 5.Seasonal variations, -uneven demands.
• 6.economies of scale
5-16 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
5-17 Capacity Planning

Evaluating Alternatives
Figure 5.3
Production units have an optimal rate of output for minimal cost.
Average cost per unit

Minimum average cost per unit

Minimum
cost

0 Rate of output
5-18 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
5-19 Capacity Planning

Planning Service Capacity

• 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
5-20 Capacity Planning

Cost-Volume Relationships
Figure 5.5a

F C
+
Amount ($)

VC C)
s
=
t t (V
s
c o co
t al le
b
To r i a
l va
o ta
T
Fixed cost (FC)

0
Q (volume in units)
5-21 Capacity Planning

Cost-Volume Relationships
Figure 5.5b

ue
en
Amount ($)
e v
l r
ta
To

0
Q (volume in units)
5-22 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)
5-23 Capacity Planning

Break-Even Problem with Step Fixed Costs

Figure 5.6b

$
BEP
3
TC
BEP2
TC
3
TC
2
TR 1
Quantity
Multiple break-even points
5-24 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 variable cost per
unit
7. Cost volume analysis can be a valuable tool
for comparing capacity alternatives if
certain assumptions are satisfied.
5-25 Capacity Planning

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.
5-26 Capacity Planning

Calculating Processing Requirements

S t a n d a r d
A n n u p a r l o c e s s i Pn gr o tc i me s e s i n
P r o d uD c e t m a pn ed r u n i t (n h e r e. ) d e d (

# 1 4 0 0 5 . 0 2 , 0 0

# 2 3 0 0 8 . 0 2 , 4 0

# 3 7 0 0 2 . 0 1 , 4 0
5 , 8 0