5-1 Capacity Planning

CHAPTER

Capacity Planning For Products and Services

5-2 Capacity Planning

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?

5-3 Capacity Planning

Importance of Capacity Decisions

1. 2. 3. 4. 5.

Impacts ability to meet future demands Affects operating costs Major determinant of initial costs Involves long-term commitment Affects competitiveness

5-4 Capacity Planning

Capacity Types

Design capacity

maximum output rate or service capacity an operation, process, or facility is designed for Design capacity minus allowances such as personal time, maintenance, and scrap

Effective capacity

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 = 90% 40 units/ day = 36 units/day 50 units/day = 72%

Efficiency =
Effective capacity

Utilization =

Actual output Design capacity

5-7 Capacity Planning

Effective Capacity is Determined by:

Facilities
Product and service factors Process factors Human factors Operational factors External factors

5-8 Capacity Planning

Steps for Capacity Planning

1.
2. 3. 4. 5.

6.
7. 8.

Estimate future capacity requirements Evaluate existing capacity Identify alternatives Conduct financial analysis Assess key qualitative issues Select one alternative Implement alternative chosen Monitor results

5-9 Capacity Planning

Make or Buy

1. 2. 3. 4.

5.
6.

Available capacity Expertise Quality considerations Nature of demand Cost Risk

5-10 Capacity Planning

Evaluating Alternatives

Production units have an optimal rate of output for minimal cost. Average cost per unit

Minimum average cost per unit

Minimum cost

Rate of output

5-11 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 If the output rate is more than the optimal level, increasing the output rate results in increasing average unit costs

Diseconomies of scale

5-12 Capacity Planning

Evaluating Alternatives

Minimum cost & optimal operating rate are functions of size of production unit. Average cost per unit

Small
plant

Medium plant

Large plant

Output rate

5-13 Capacity Planning

Calculating Processing Requirements

Annual Demand Standard processing time per unit (hr.) Processing time needed (hr.)

Product

#1 #2 #3

400 300 700

5.0 8.0 2.0

2,000 2,400 1,400 5,800