1

Chapter 5
Capacity
Planning
2
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

!o" much is needed

When is it needed
3

#mpacts ability to meet future demands

$ffects operating costs

%a&or determinant of initial costs

#n'ol'es long(term commitment

$ffects competiti'eness

$ffects ease of management

#mportance of Capacity )ecisions
4
*arious Capacities

)esign capacity

%a+imum obtainable output

,ffecti'e capacity- e+pected 'ariations

%a+imum capacity sub&ect to planned and e+pected

'ariations such as maintenance- coffee breaks-
scheduling conflicts.

$ctual output- une+pected 'ariations and demand

.ate of output actually achie'ed((cannot e+ceed

effecti'e capacity. #t is sub&ect to random disruptions:
machine break do"n- absenteeism- material
shortages and most importantly the demand.
5
,fficiency and /tili0ation
Actual output
Efficiency =
Effective capacity
Actual output
Utilization =
Design capacity
This definition of efficiency is not used very much.
Utilization is more important.
6
)esign capacity 1 52 trucks3day a'ailable
,ffecti'e capacity 1 42 trucks3day- because 526 of truck capacity goes
through planned maintenance
$ctual output 1 78 trucks3day- 7 trucks delayed at maintenance- 9 had a flat
tire
,fficiency3/tili0ation ,+ample
for a Trucking Company
% 72
/ 50
/ 36


% 90
/ 40
/ 36

= = =
= = =
day units
day units
Capacity Design
Output Actual
n Utilizatio
day units
day units
Capacity Effective
Output Actual
Efficiency
7
)eterminants of ,ffecti'e Capacity3:utput

;acilities- layout

Products or ser'ices- product mixes/setups

Processes- quality

!uman considerations- motivation

:perations- scheduling and synchronization problems

<upply Chain factors- material shortages

,+ternal forces- regulations

Caution: While discussing these the book considers
effecti'e capacity almost synonymous to output.
8
<ome Possible =ro"th3)ecline Patterns
V
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V
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m
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V
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V
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0
0
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Time Time
Time
Time
Growth
Decline
yclical
!ta"le
;igure 5(9
9
)e'eloping Capacity $lternati'es

)esign fle+ibility into systems-

modular e+pansion

Take a >big picture? approach to capacity changes-

hotel rooms- car parks- restaurant seats

)ifferentiate ne" and mature products-

pay attention to the life cycle- demand 'ariability 's.

discontinuation

Prepare to deal "ith capacity >chunks?-

no machine comes in continuous capacities

$ttempt to smooth out capacity requirements-

complementary products- subcontracting

#dentify the optimal operating le'el-

facility si0e
10
:utsourcing: %ake or @uy

:utsourcing: :btaining a good or ser'ice from

an e+ternal pro'ider

)ecide on outsourcing by considering

$'ailable capacity

,+pertise

Auality considerations

The nature of demand: <tability

Cost

.isk: Boss of control o'er operations "ith outsourcingC

loss of kno"(ho". Boss of re'enue.
11
,'aluating $lternati'es: ;acility <i0e
#inimum
cost
A
v
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r
a
g
e

c
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t

p
e
r

u
n
i
t
0
$ate of output
%roduction units have an optimal rate of output for minimal cost&
12
,'aluating $lternati'es: ;acility <i0e
#inimum cost ' optimal operating rate are
functions of size of production unit&
A
v
e
r
a
g
e

c
o
s
t

p
e
r

u
n
i
t
0
!mall
plant
#edium
plant (arge
plant
)utput rate
13

Deed to be near customers

Capacity and location are closely tied

#nability to store ser'ices

Capacity must me matched "ith timing of demand

)egree of 'olatility of demand

Peak demand periods

Planning <er'ice Capacity
14
,+ample: Calculating Processing .equirements
P r o d u c t
$ n n u a l
) e m a n d
< t a n d a r d
p r o c e s s i n g t i m e
p e r u n i t E h r . F
P r o c e s s i n g t i m e
n e e d e d E h r . F
G 9
G 5
G 7
4 2 2
7 2 2
H 2 2
5 . 2
I . 2
5 . 2
5 - 2 2 2
5 - 4 2 2
9 - 4 2 2
5 - I 2 2
P r o d u c t
$ n n u a l
) e m a n d
< t a n d a r d
p r o c e s s i n g t i m e
p e r u n i t E h r . F
P r o c e s s i n g t i m e
n e e d e d E h r . F
G 9
G 5
G 7
4 2 2
7 2 2
H 2 2
5 . 2
I . 2
5 . 2
5 - 2 2 2
5 - 4 2 2
9 - 4 2 2
5 - I 2 2
15
Cost(*olume .elationships
A
m
o
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n
t

*
+
,
0
- *volume in units,
T
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a
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c
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t

=

V

.

/

T
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a
l

v
a
r
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a
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c
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*
V

,
/i0ed cost */,
16
Cost(*olume .elationships
A
m
o
u
n
t

*
+
,
- *volume in units,
0
T
o
t
a
l

r
e
v
e
n
u
e
17
Cost(*olume .elationships: @reak(e'en analysis
A
m
o
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n
t

*
+
,
- *volume in units,
0
1E% units
%
=
%
r
o
f
i
t
T
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a
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r
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T
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c
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FC v R Q P = = ) ( cost) Fixed ( ) Margin To on Contri!ti )( "!antit# (
18
@reak(,'en Problem "ith %ultiple ;i+ed Costs
-uantity
/

.

V

=

T

.

V

=

T

.

V

=

T

/i0ed costs and varia"le costs&

Thic2 lines are fi0ed costs&
3 machine
4 machines
5 machines
19
@reak(,'en Problem "ith <tep ;i+ed Costs
-uantity

T

!tep fi0ed costs and varia"le costs&

1rea2 even
points&
T$
No break
even points
in this range
20

@reak(e'en quantity: Be'el of production that

equates total costs to total re'enues
$ssumptions:

:ne product is in'ol'ed

,'erything produced can be sold

*ariable cost per unit is the same "ith 'olume

;i+ed costs do not change "ith 'olume

.e'enue per unit constant "ith 'olume

.e'enue per unit e+ceeds 'ariable cost per unit

Cost(*olumeE@reak(e'enF $nalysis
21
<ummary

Capacity types

,fficiency- utili0ation

@reak(e'en analysis
22
)ecision Theory
Decision Theory represents a general
approach to decision ma2ing which is
suita"le for a wide range of operations
management decisions6 including7
capacity
planning
product and
service design
product and
service design
e8uipment
selection
location
planning
23
)ecision Theory ,lements

$ set of possible future conditions Ecall

them scenariosF e+ists that "ill ha'e a
bearing on the results of the decision

/ncertain scenarios

$ list of alternatives for the manager to

choose from

$ kno"n payoff for each alternati'e

under each possible future condition
24
Payoff Table
#nput or implied by the problem set up
Alternatives (ow #oderate 9igh
<mall facility J92 J92 J92
%edium facility JH J95 J95
Barge facility J(4 J5 J98
%ossi"le future demand
%resent value in + millions&
This payoff ta"le is given as an input&
25
)ecision %aking under /ncertainty
When ma+imi0ing an ob&ecti'e:
%a+i%in ( Choose the alternati'e "hich has the ma+imum of
minimum possible payoffs for each alternati'e. Conser'ati'e
strategy because tries to make the best of the "orst possible
outcome Efor each decisionF. Which facility
%a+i%a+ ( Choose the alternati'e "ith the largest possible
payoff. .adical strategy. Which facility
$'erageEBaplaceF ( Choose the alternati'e "ith the best
a'erage payoff of any of the alternati'es. Which facility
26
)ecision %aking under /ncertainty
When minimi0ing an ob&ecti'e: <ay cost.
%ini%a+ ( Choose the alternati'e "hich has the minimum of
the ma+imum possible costs for each alternati'e. Conser'ati'e
strategy.
%ini%in ( Choose the alternati'e "ith the least possible cost.
.adical strategy.
$'erageEBaplaceF ( Choose the alternati'e "ith the minimum
a'erage cost of any of the alternati'es.
Average cost may not "e a good indicator& !ome alternatives may
have more ris2 than others& :n that case6 it is o2 to choose a slightly costly
alternative with low ris2&
27
,+ample: !yatt at the $irport >some time ago?
Construct the payoff matri+
$irport location
Bas Colinas
$irport Bocation
.ichardson
Purchase Price J9I J95
P* of hotel if airport is
built here
J79 J57
P* of hotel if airport is
built at the other location
J8 J4
28
Payoff %atri+ for %a+i%a+- %a+i%in
$irport location
Bas Colinas
$irport location
.ichardson
@uy Bas Colinas J97 (J95
@uy .ichardson (JI J99
@uy @oth J5 (J9
1uy ;one +0 +0
29
.egret: What # ha'e done against "hat #
could ha'e done. %ini%a+ .egret.
$irport location
Bas Colinas
$irport location
.ichardson
@uy Bas Colinas J21no regret J57
@uy .ichardson J59 J21no regret
1uy 1oth +< +34
@uy Done J97 J99
30
<ummary

Capacity types

,fficiency- utili0ation

@reak(e'en analysis

)ecision Theory Edecision making under uncertaintyF