Capacity Planning

Capacity is the number of units a facility can hold, receive, store, or produce in a period of time. Capacity planning is the process of determination of capacity requirement in the future. Capacity planning itself has different meaning to individuals at different levels within the operations management hierarchy.
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Strategic Capacity Planning

It is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size The capacity level selected has a critical impact on the firms response rate, its cost structure, its inventory policies, and its management and staff support requirement Inadequate Capacity results in customer lose Excessive Capacity-underutilized workforce and underutilized equipment
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Time Horizons
Long range (Greater than one year): Resources such as building, equipment, or facilities requires top management participation. Intermediate range (monthly, quarterly for next 6 to 18 months): Hiring, layoffs, minor equipment purchases, and subcontracting Short range (Less than one month): Daily and weekly scheduling to eliminate 3 Ch6 Capacity Planning the variance between planned and actual

Need of Capacity Planning

To find the optimal capacity of the facility so that the sum of costs of the over capacity and under capacity is minimized To keep the initial investment in the facility as low as possible to achieve lower break-even volume To satisfy the future demand of the products without any shortages Capacity investments are long term Ch6 Capacity Planning and cant be reversed easily

Types of Capacity
Design Capacity: It is the maximum rate of output that can be achieved under ideal conditions. Effective capacity: It is the maximum rate of output which can be achieved under the operating constraints Actual Capacity: It is the maximum rate which is actually achieved under the constraints of machine breakdowns, labor inefficiencies and absenteeism, defective products. late deliveries of the materials by the supplier and so on Ch6 Capacity Planningcapacity Actual Design Capacity>Effective

Effectiveness Indicators of the Plant Capacity

System Utilization or capacity utilization=(Actual output/Design Capacity)x100% System Efficiency =(Actual output/Effective capacity)x100%

Ch6 Capacity Planning

Example: The fabrication dept of an engine manufacturer can make 100 engines per day. The management believes that a maximum output rate of 60 engines per day. Currently, the department is producing an average of 50 engines per day. Solution: Design capacity=100 engines per day Effective capacity=60 engines per day Actual output=50 engines per day Now, the indicators are -System utilization=(50/100)x100%=50% -System efficiency=(50/60)x100%=83.33%
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Capacity Planning
Capacity used Capacity utilizatio n rate Best operating level
Where Capacity used

rate of output actually achieved /actual capacity

Best operating level

capacity for which the process was designed/design capacity

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Experience Curve
Cost or price per unit
Yesterday
Today Tomorrow

Total accumulated production of units9 Ch6 Capacity Planning

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Economies and Diseconomies of Scale Economies of Scale and the Experience Curve working

Average unit cost of output

100-unit plant
200-unit plant 300-unit plant 400-unit plant

Volume

Diseconomies of Scale start working

Ch6 Capacity Planning

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Capacity Planning Concepts

Capacity Focus: A firm should not expect to excel in every aspect of manufacturing performance: cost, quality, flexibility, new product introductions, reliability, short lead times, and low investment. Plants Within Plants (PWP) :The capacity focus concept can be operationalized through the mechanism of plants within plants
Extend focus concept down to operating level A focused plant may have several PWPs each of which has separate sub-organizations, Ch6 Capacity Planning even production equipment, process policies,

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Capacity Planning Concepts

Capacity Flexibility: It is the ability to rapidly increase or decrease production levels, or to shift production capacity quickly from one product or service to another
Flexible plants: Using movable equipment, knockdown walls, and easily accessible and reroutable utilities allows quickly adapt to change. Flexible processes: It is possible through flexible manufacturing systems and easily set up equipment. Flexible workers :These workers have multiple skills and the ability to switch easily from one kind of task to another. 12 Ch6 Capacity Planning

Process of Capacity Planning

1. Assessing existing capacity: Measure the existing capacity of each work centre 2. Forecasting capacity needs: Factors like marketing plan, PLC, product development process must be considered 3. Identifying alternatives to modify capacity: Short term capacity modification-should be based on Capital intensive production system, Labor intensive production system and Nature of product, whether they can be stored or not Long term capacity modification-should be based on Expansion, Contraction or 13 Ch6 Capacity Planning constant capacity

Process of Capacity Planning

4. Evaluating financial, economical and technical aspects of capacity alternatives
Linear programming and simulation Decision Tree Net present value Break-even analysis

5. Selection of an alternative
Depends upon the firms problem and future Ch6 Capacity Planning vision
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Approaches to Capacity Expansion

Expected Demand New Capacity New Capacity Demand

Expected Demand

Demand

Time in Years Capacity leads demand with an incremental expansion Expected Demand Demand New Capacity

Time in Years Capacity leads demand with a one-step expansion Expected Demand New Capacity Demand Time in Years Attempts to have an average capacity, with an incremental expansion 15

Time in Years Capacity lags demand with an incremental expansion

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