Capacity Planning

Dr . Venkateswara Rao. K
 Time Horizons for Capacity Planning
• Long Range
– Greater than one year (involves equipment,
building, facilities) requires management approval
• Intermediate Range
– Monthly or quarterly plan for the next 6-8 months
• Short Range
– Less than one month,
– tied into daily or weekly schedules,
– eliminate variances between planned and actual
output
 Objective of capacity Planning
• To provide an approach for determining
overall capacity level of capital intensive
resources-facilities, equipment, overall labor
force size-that best support company’s long
term competitive strategy.
 Capacity planning concepts

• Capacity implies attainable rate of output

• Best operating level
• Capacity Utilisaion rate = Capacity Used/ Best
operating Level
=480/500
=0.96%
Economies and diseconomies of scale
• Two advantages
– Large capacities results into cost reduction
– Learning curve capacities
• Advantage of a competitive strategy
 Learning Curve
• As plants produce more, they gain experience
in the best production methods, which reduce
their costs of production in a predictable
manner.
Fig5.1 Learning Curve of on production costs of Hamburgers.
 Capacity Focus
• The concept of focused factory holds that a
production facility works best when it focuses
on a fairly limited set of production objectives.
• Capacity focus concept can be operationalized
through the mechanism of plants within
plants, PWP
• An area in a large facility that is dedicated to a
specific production objective (eg. Production
group).
 Capacity Flexibility
• Flexible plants- zero change over time plants
• Flexible Process
• Flexible workers
 Capacity Planning

• Maintaining system balances

• Frequency of capacity additions
• External sources of capacity
Frequent vs infrequent expansion
 Determining Capacity Requirements
• Use forecasting technique to predict sales for
individual products within each product line.
• Calculate equipment and labor requirements
to meet product line forecasts.
• Project labor and equipment availabilities over
the planning horizon
 Example
Determining capacity requirements
• The Stewart company produces two flavors of
salad dressings: Paul’s and Newman’s. Each is
available in bottles and single-serving plastic
bags. Management would like to determine
equipment and labor requirement for the next
five years
Step1: use forecasting technique to predict sales for
individual products within each product line.
Step2: calculate equipment and labor requirements to meet
product line forecasts.
3 machines, 1500000 bottles, 2,50,000 sachets
Step3: project labor and equipment availabilities over the
planning horizon. We repeat the preceding calculations for the
remaining year.
 Using decision trees to evaluate Capacity
Alternatives
• A decision tree is a schematic model of the
sequence of steps in a problem and the
conditions and consequences of each step.
• Decision trees are composed of decision nodes
with branches to and from them.
– Square represents decision points
– Circles represent chance events.
– Branches shows the choices.
– Branches from chance events shows the probabilities
of their occurrences.
– We work from end of the tree backwards to the start
of the tree
Service Capacity Planning

Dr . Venkateswara Rao. K
• Though Service capacity planning is same as
Manufacturing capacity planning, there are
certain differences:
– Service capacity planning is more dependent on
Time & Location
– Also subject to more volatile demand fluctuations
– Utilisation directly impact service quality.
Capacity Utilisation and Service Quality
• Time
– Peak time
– Slack time
• Location
– Location must be near to the customer
• Volatility of Demand
– Service cannot be stored, Inventory cannot smooth
the demand
– Variability in processing time required for each
customer
 Capacity Utilisation and Service
Quality
• Planning service capacity levels must consider
the day-to-day relationship between service
utilisaion and service quality.