Capacity Planning

For Products and Services

Capacity Planning
• Capacity is the upper limit or ceiling on the load that an operating unit can handle.
• The basic questions in capacity handling are:
• What kind of capacity is needed?
• How much is needed?
• When is it needed?
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.
Utilization and Efficiency
Actual output
Utilization =
Design capacity

Actual output
Efficiency =
Effective capacity

Both measures expressed as percentages

Efficiency and 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
Evaluating Alternatives
• There are different perspectives that can make an organization re-examine
alternatives for future capacity. Mostly these are from an economic standpoint.
• Examples:
• Technology
• Relocation
• Expansion

• There are a number of techniques that are useful in evaluating capacity alternatives.
• Examples:
• Cost-Volume-Profit Analysis
• Financial Analysis (Cash Flow, Payback, Present Value, and Internal Rate of Return)
Cost-Volume-Profit (CVP) Analysis
• CVP focuses on the relationships between cost, revenue, and volume of output.
• Purpose: is to estimate the income of an organization under different operating
conditions.

ASSUMPTIONS OF CVP
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
Cost-Volume-Profit (CVP) Analysis
United Lighting produces and sell garden lights in 3 areas. The firm
intends to consolidate the assembly of these garden lights in one single
location. The best location has a monthly fixed cost of Php420,000 and
variable cost of Php30/unit. Garden lights sell for Php70/unit.

Let’s do this!!!

A. Prepare a table that shows total profits, fixed costs, variable costs, and
revenues for monthly volumes of 10,000, 12,000, and 15,000 units.

Profit = Selling Price x Volume – Total Cost

Total Cost = ((VC + FC) x Volume)
VOLUME SALES VC FC Total Cost PROFIT
(Units) (Php 70) (Php 30) (Php 420,000) (Php) (Php)

10,000 700,000 300,000 420,000 720,000 (20,000)

12,000 840,000 360,000 420,000 780,000 60,000

15,000 1,050,000 450,000 420,000 870,000 180,000

22,000
VOLUME SALES VC FC Total Cost PROFIT
(units) (Php 70) (Php 30) (Php 420,000) (Php) (Php)

10,000 700,000 300,000 420,000 720,000 (20,000)

12,000 840,000 360,000 420,000 780,000 60,000

15,000 1,050,000 450,000 420,000 870,000 180,000

22,000

22,000 1,540,000 660,000 420,000 1,080,000 460,000

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
Break-Even Point
• The volume at which Total Cost and Total Sales (Selling Price x Volume) are equal is
referred to as the Break-Even Point (BEP)

• Let’s do this!!!

B. Using the same problem, compute for the Break-Even Point in Units
Break-Even Point (Solution)
TO CHECK:

Sales P735,000

Less:

420,000 VC 315,000
BEP in units =
P70-P30 FC 420,000

Total Cost 735,000

420,000
BEP in units =
P40
PROFIT 0

BEP in units = 10,500 units

What Now???
Additional References:

Capacity Planning
https://www.youtube.com/watch?v=5-hhfBXykec

Break-Even Point Analysis

https://www.youtube.com/watch?v=0t7u_aBdhlw
Process Selection and
Facility Layout
Process Selection Overview
Capacity
Planning
Forecasting

Facilities and
Product and Process Equipment
Service Design Selection
Layout
Technological
change
Work
Design
 Process Strategy
• Outsourcing, trend, reasons

• Make or Buy?
– Available capacity
– Expertise
– Quality Consideration
– The nature of demand
– Cost
Process Selection
• Variety
• How much
• Volume
• Expected Output
• Flexibility
• What degree
• The key trade-off
Process Types

• Projects
• Job Shops
• Batch Processing
• Repetitive/Assembly
• Continuous Processing
Product-Process Matrix for Processes
 Technology
• Technological Innovation
• Refers to the DISCOVERY and DEVELOPMENT of new or improved products,
services, or processes for producing or providing them

• Technology
• Refers to the APPLICATIONS of scientific knowledge to the development and
improvement of goods, services, and the processes that produce or provide them.

• Process Technology
• Includes methods, procedures, and equipments used to produce goods and provide
services
 Automation

• Numerically controlled (NC) machines

• Robot
• Computer-aided design and
manufacturing systems (CAD/CAM)
• Flexible manufacturing systems
• Computer-integrated manufacturing
(CIM)
 Layout
• Layout: the configuration of departments, work
centers, and equipment, with particular emphasis on
movement of work (customers or materials) through
the system

IMPORTANCE
• Requires substantial investments of money and effort
• Involves long-term commitments
• Has significant impact on cost and efficiency of short-
term operations
 Basic Layout Types

• Product Layouts
– Layout that uses standardized processing operations to achieve
smooth, rapid, high-volume flow
– Group equipment according to the sequential steps of operations of
a specific product

• Process Layouts
– Layout that can handle varied processing requirements
– Group equipment according to their functions
 Basic Layout Types

• Fixed Position Layouts

– Layout that uses standardized processing operations to achieve
smooth, rapid, high-volume flow
– Group equipment according to the sequential steps of operations of
a specific product

• Cell Layouts
– Layout that can handle varied processing requirements
– Group equipment according to their functions
Product Layout

Process Layout
Product Layout (Examples)
Process Layout
Fixed Position Layout
Cellular Layouts
 Additional Materials

Cellular Layouts
https://www.assemblymag.com/articles/93462-honda-rethinks-the-assembly-line

Process Layout and Product Layout

https://www.youtube.com/watch?v=WYqMh5cf8fY