By Sechelle G Smith and Masika

Kabuyaya
 Course Objectives
• Define Capacity and control
• Explain What is meant by ‘Capacity Planning’
• Importance of Capacity Decisions
• Determinant of Effective Capacity
• Steps for Capacity Planning
• Forecasting Requirements
• Measuring Capacity
• Measures of system Effectiveness
• The challenges of planning service capacity
• Make or Buy
• Developing Capacity alternatives
• Evaluating alternatives
Introduction

Henry Gotham is a supervisor

at one of Kirk & Patrick Car
manufacturing plants.

Like any other supervisor in

the low level management, he
is responsible for assigning of
jobs and tasks to various
workers at the plant to meet
the daily, weekly as well as
monthly production levels
and schedules.
 Introduction

He also guides and instructs the workers for day to day activities and is
responsible for the quality as well as quantity of production.

Henry ensures that the resources are put to the optimum use and the
quality of the products is maintained.

He is also responsible for reporting on the daily status to the higher

management of the production schedules, produced quantity of goods etc.
Introduction

Recently, when the budget

was announced by the
government, they decreased
the price of gasoline and
diesel by a significant amount.

Due to this, there was a

sudden surge in the demand
for cars because almost
everyone wanted to buy a car
as fuel prices were more
affordable now.
 Introduction

The management passed on instructions to its manufacturing plant that

they wanted at least an increase of 15% in the daily production level at the
plant.

The management hopes that this increased production levels would help
meet the current market demand and the company can make huge profits
from this situation if they succeed in meeting this surge in demand.
Introduction

Henry’s boss, Gerard Butler

calls him for a meeting to
discuss the situation.

He informs Henry that the

production levels have to be
increased.

However, Henry informs

Gerard that there are not
enough inventories of raw
materials to meet the
increase in production
quantity.
Introduction

Gerard passes on the

information to the higher
management who realize that
this is a grave situation and
that they just do not have
enough raw materials to
increase their daily
productivity limits.

Gerard suggests that could

contact the suppliers and try
to procure the raw materials.
 Introduction

However, when the suppliers are contacted, they inform Gerard that they
would not be able to supply the required raw materials before another three
months due to the huge demand from all sides.

Gerard discusses the situation with the higher management.

Introduction

Gerard as well as the

management knows that they
have failed to take advantage
of the increased market
demand and have failed to
make huge profits out of the
situation.

You have seen how Kirk &

Patrick Car Manufacturers
failed to meet the current
market demand as they were
not able to increase the
capacity of their
manufacturing plants.
Introduction

Hence, you can understand

that it is extremely crucial
that the capacity of the plant
should be planned properly
keeping in mind such
situations where the plant
may be required to over-
produce as well as under-
produce than its normal
productivity levels.
Introduction

Therefore, ‘Capacity Planning’

can be the competitive
advantage that can help an
organization to succeed and
help fulfil the objectives and
strategies of the organization.

Let us now learn about

‘Capacity Planning’
in detail.
 Definition - Capacity
‘Management Capacity’
is referred as the
amount of input
resources available to
produce relative output
over period of time.

‘Capacity’ is the ability of
a given system to
produce output within
the specific time period.
‘Capacity’ is referred to
as maximum production
capacity, which can be
attained within a normal
working schedule.
 What is meant by ‘Capacity Planning’?

‘Capacity Planning’ is essential to determine the optimum

utilization of resources and plays an important role in
decision-making process such as for; extension of existing
operations, modification to existing product lines, starting
new products, etc.
 What is meant by ‘Capacity Planning’?

The goal of strategic capacity planning is to achieve a match

between the long-term supply capabilities of an organization
and the predicted level of long-term demand. A gap between
current and desired capacity will result in capacity that is out
of balance. Overcapacity causes operating costs that are too
high, while under capacity causes strained resources and
possible loss of customers.
 What is meant by ‘Capacity Planning’?

The key questions in capacity planning are the following: 1.

What kind of capacity is needed? 2. How much is needed to
match demand? 3. When is it needed? The question of what
kind of capacity is needed depends on the products and
services that management intends to produce or provide.
Hence, in a very real sense, capacity planning is governed by
those choices.
Importance of Capacity Control

1. Capacity limits the rate of output. Therefore,

capacity planning determines the ability of an enterprise to
meet future demand for its products and services.
2. Capacity influences the operating costs. Capacity
is determined because of estimated demand. Actual
demand is often different from estimated demand. As a result,
there arises excess capacity or under capacity. Excess or
idle capacity increases the cost per unit of output. Whereas
under capacity results in the loss of sales.
 Importance of Capacity Control cont’d...

3. Capacity decisions leave a direct impact on the amount

of fixed investment made initially.

4. Capacity decisions result in long-term commitment of

funds. Such long-term decisions cannot be reversed except at
major costs.
Determinants of Effective Capacity

FacilitiesProduct and Service Factors

Human Factors
Process Factors
Operational Factors
Policy Factors
Supply Chain Factors
External Factors
Determinants of Effective Capacity cont’d

Facilities: The size and provision for growth are key in the
design of facilities. Other facility influences include location
factors (distance to market, transportation costs, labor supply,
energy sources).
Product and Service Factors: More uniform the output, more
opportunities are available for standardization of methods and
materials. This leads to larger capacity.
 Determinants of Effective Capacity cont’d

Human Factors: The responsibilities that are needed in certain

jobs, the collection of activities involved and the training, skill,
and experience required to perform a job all affect the potential
and actual output. Employee motivation, absenteeism, and labor
turnover all affect the output rate as well.
 Determinants of Effective Capacity cont’d

Process Factors: Quantity capability is a significant

determinant of capacity, but so is output quality. If the
quality does not encounter standards, then output rate
decreases because of need of examination and rework
activities.
 Determinants of Effective Capacity cont’d

Operational Factors: Scheduling problems may occur when an

organization or business has differences in equipment
capabilities between different pieces of equipment or
differences in job requirements.
 Determinants of Effective Capacity cont’d

Policy Factors: Management policy will affect capacity by

allowing or not allowing capacity choices such as overtime or
second or third shifts
Supply Chain Factors: Questions include: What impact will the
fluctuations have on suppliers, transportation, warehousing, and
distributors? If capacity will be bigger, will these elements of the
supply chain be able to handle the increase?
External Factors: Least quality and performance standards can
restrict management's choices for increasing and using capacity.
 Steps for Capacity Planning

1. Estimate future capacity requirements. 2. Evaluate

existing capacity and facilities and identify gaps. 3. Identify
alternatives for meeting requirements. 4. Conduct financial
analyses of each alternative.
 Steps for Capacity Planning

5. Assess key qualitative issues for each alternative. 6. Select the

alternative to pursue that will be best in the long term. 7.
Implement the selected alternative. 8. Monitor results. Capacity
planning can be difficult at times due to the complex influence of
market forces and technology.
 Forecasting Capacity Requirements

Forecasts are key inputs used to answer the questions of how

much capacity is needed and when is it needed. Related
questions include:
1. How much will it cost, how will it be funded, and what is the
expected return? 2. What are the potential benefits and risks? 3.
Are there sustainability issues that need to be addressed? 4.
Should capacity be changed all at once, or through several (or
more) small changes? 5. Can the supply chain handle the
necessary changes?
 Forecasting Capacity Requirements

Because of uncertainties, some organizations prefer to

delay capacity investment until demand materializes.
However, such strategies often inhibit growth because
adding capacity takes time and customers won’t usually
wait. Conversely, organizations that add capacity in
anticipation of growth often discover that the new
capacity actually attracts growth.
 Forecasting Capacity Requirements

Capacity planning decisions involve both long-term and

short-term considerations. Longterm considerations
relate to overall level of capacity, such as facility size;
short-term considerations relate to probable variations
in capacity requirements created by such things as
seasonal, random, and irregular fluctuations in demand.
Calculating Processing Requirements
 Measuring Capacity

Design Capacity: Designed capacity of a facility is the

planned or engineered rate of output of goods or
services under normal or full scale operating
conditions. For example, the designed capacity of the
cement plant is 100 TPD (Tonnes per day). Capacity of
the sugar factory is 150 tonnes of sugarcane crushing
per day.
 Measuring Capacity continued

System Capacity: System capacity is the maximum

output of the specific product or product mix the
system of workers and machines is capable of
producing as an integrated whole. System capacity is
less than design capacity or at the most equal,
because of the limitation of product mix, quality
specification, breakdowns.
 Measuring Capacity continued

Licensed Capacity: Capacity licensed by the various

regulatory agencies or government authorities.
Installed Capacity: The capacity provided at the time
of installation of the plant is called installed capacity.
Rated Capacity: Capacity based on the highest
production rate established by actual trials is referred
to as rated capacity.
The challenges of Planning Service Capacity

While the foregoing discussion relates generally to capacity

planning for both goods and services, it is important to note
that capacity planning for services can present special
challenges due to the nature of services. Three very important
factors in planning service capacity are:

(1) there may be a need to be near customers

(2) the inability to store services, and
(3) the degree of volatility of demand.
The challenges of Planning Service Capacity

Convenience for customers is often an important

aspect of service. Generally, a service must be located
near customers. For example, hotel rooms must be
where customers want to stay; having a vacant room
in another city won’t help. Thus, capacity and
location are closely tied.
The challenges of Planning Service Capacity

Capacity also must be matched with the timing of demand.

Unlike goods, services cannot be produced in one period and
stored for use in a later period. Thus, an unsold seat on an
airplane, train, or bus cannot be stored for use on a later trip.
Similarly, inventories of goods allow customers to immediately
satisfy wants, whereas a customer who wants a service may
have to wait. This can result in a variety of negatives for an
organization that provides the service. Thus, speed of delivery,
or customer waiting time, becomes a major concern in service
capacity planning
The challenges of Planning Service Capacity

For example, deciding on the number of police officers and fire

trucks to have on duty at any given time affects the speed of
response and brings into issue the cost of maintaining that
capacity. Some of these issues are addressed in the chapter on
waiting lines. Demand volatility presents problems for capacity
planners. Demand volatility tends to be higher for services
than for goods, not only in timing of demand, but also in the
amount of time required to service individual customers
 DO IT IN-HOUSE OR OUTSOURCE IT? MAKE OR BUY

Once capacity requirements have been determined, the

organization must decide whether to produce a good or provide a
service itself, or to outsource from another organization. Many
organizations buy parts or contract out services, for a variety of
reasons. Among those factors are
1. Available capacity. If an organization has available the
equipment, necessary skills, and time, it often makes sense to
produce an item or perform a service in-house.

2. Expertise. If a firm lacks the expertise to do a job satisfactorily,

buying might be a reasonable alternative.
 DO IT IN-HOUSE OR OUTSOURCE IT? MAKE OR BUY

3. Quality considerations. Firms that specialize can usually offer

higher quality than an organization can attain itself. 4. The nature
of demand. When demand for an item is high and steady, the
organization is often better off doing the work itself. However,
wide fluctuations in demand or small orders are usually better
handled by specialists who are able to combine orders from
multiple sources, which results in higher volume and tends to
offset individual buyer fluctuations.
 DO IT IN-HOUSE OR OUTSOURCE IT? MAKE OR BUY

5. Cost. Any cost savings achieved from buying or making must be

weighed against the preceding factors. Cost savings might come
from the item itself or from transportation cost savings. If there
are fixed costs associated with making an item that cannot be
reallocated if the service or product is outsourced, that has to be
recognized in the analysis. Conversely, outsourcing may help a
firm avoid incurring fixed costs.
 DO IT IN-HOUSE OR OUTSOURCE IT? MAKE OR BUY

6. Risks. Buying goods or services may entail considerable

risks. Loss of direct control over operations, knowledge
sharing, and the possible need to disclose proprietary
information are three risks.
In some cases, a firm might choose to perform part of the
work itself and let others handle the rest in order to
maintain flexibility and to hedge against loss of a
subcontractor. If part or all of the work will be done in-
house, capacity alternatives will need to be developed.
 Developing Capacity Alternatives

There are a number of ways to enhance development of

capacity strategies:1. Design flexibility into systems. The long-
term nature of many capacity decisions and the risks inherent
in long-term forecasts suggest potential benefits from
designing flexible systems. For example, provision for future
expansion in the original design of a structure frequently can
be obtained at a small price compared to what it would cost to
remodel an existing structure that did not have such a
provision.Similarly, a new golf course may start as a 9-hole
operation, but if provision is made for future expansion by
obtaining options on adjacent land, it may progress to a larger
(18-hole) course.
 Developing Capacity Alternatives

2. Take stage of life cycle into account. Capacity

requirements are often closely linked to the stage of the
life cycle that a product or service is in. At the introduction
phase, it can be difficult to determine both the size of the
market and the organization’s eventual share of that
market. Therefore, organizations should be cautious in
making large and/or inflexible capacity investments.
increasing volume, and thus, increasing profits.
 Developing Capacity Alternatives

3. Take a “big-picture” (i.e., systems) approach to capacity

changes. When developing capacity alternatives, it is
important to consider how parts of the system interrelate.
For example, when making a decision to increase the
number of rooms in a motel, one should also take into
account probable increased demands for parking,
entertainment and food, and housekeeping.
 Developing Capacity Alternatives

4. Prepare to deal with capacity “chunks.” Capacity increases

are often acquired in fairly large chunks rather than smooth
increments, making it difficult to achieve a match between
desired capacity and feasible capacity. For instance, the desired
capacity of a certain operation may be 55 units per hour, but
suppose that machines used for this operation are able to
produce 40 units per hour each. One machine by itself would
cause capacity to be 15 units per hour short of what is needed,
but two machines would result in an excess capacity of 25 units
per hour.
 Developing Capacity Alternatives

5. Attempt to smooth out capacity requirements. Unevenness in

capacity requirements also can create certain problems. For
instance, during periods of inclement weather, public transportation
ridership tends to increase substantially relative to periods of
pleasant weather. Consequently, the system tends to alternate
between underutilization and over utilization. Increasing the number
of buses or subway cars will reduce the burden during periods of
heavy demand, but this will aggravate the problem of overcapacity
at other times and certainly add to the cost of operating the system.
 Developing Capacity Alternatives

6. Identify the optimal operating level. Production units typically

have an ideal or optimal level of operation in terms of unit cost of
output. At the ideal level, cost per unit is the lowest for that
production unit. If the output rate is less than the optimal level,
increasing the output rate will result in decreasing average unit
costs. This is known as economies of scale . However, if output is
increased beyond the optimal level, average unit costs will become
increasingly larger. This is known as diseconomies of scale .
 Evaluating Alternatives

An organization needs to examine alternatives for future

capacity from a number of different perspectives. Most
obvious are economic considerations: Will an alternative
be economically feasible? How much will it cost? How
soon can we have it? What will operating and maintenance
costs be? What will its useful life be? Will it be compatible
with present personnel and present operations?
 Evaluating Alternatives

Cost–volume analysis can be a valuable tool for comparing capacity

alternatives if certain assumptions are satisfied: 1. One product is
involved. 2. Everything produced can be sold. 3. The variable cost
per unit is the same regardless of the volume. 4. Fixed costs do not
change with volume changes, or they are step changes. 5. The
revenue per unit is the same regardless of volume. 6. Revenue per
unit exceeds variable cost per unit.
 Evaluating Alternatives

As with any quantitative tool, it is important to verify that the

assumptions on which the technique is based are reasonably
satisfied for a particular situation. For example, revenue per unit or
variable cost per unit is not always constant. In addition, fixed costs
may not be constant over the range of possible output. If demand is
subject to random variations, one must take that into account in the
analysis. Also, cost–volume analysis requires that fixed and variable
costs can be separated, and this is sometimes exceedingly difficult to
accomplish. Cost–volume analysis works best with one product or a
few products that have the same cost characteristics.
 Evaluating Alternatives

A notable benefit of cost–volume considerations is the

conceptual framework it provides for integrating cost,
revenue, and profit estimates into capacity decisions. If a
proposal looks attractive using cost–volume analysis, the
next step would be to develop cash flow models to see
how it fares with the addition of time and more flexible
cost function
Overview of Production Planning and Control
 Summary

Capacity refers to a system’s potential for producing goods or

delivering services over a specified time interval. Capacity decisions
are important because capacity is a ceiling on output and a major
determinant of operating costs.
Three key inputs to capacity planning are the kind of capacity that
will be needed, how much will be needed, and when it will be
needed. Accurate forecasts are critical to the planning process. The
capacity planning decision is one of the most important decisions
that managers make. The capacity decision is strategic and long-term
in nature, often involving a significant initial investment of capital.
Capacity planning is particularly difficult in cases where returns will
accrue over a lengthy period and risk is a major consideration.
 Summary

A variety of factors can interfere with effective capacity, so effective

capacity is usually somewhat less than design capacity. These factors
include facilities design and layout, human factors, product/service
design, equipment failures, scheduling problems, and quality
considerations. Capacity planning involves long-term and short-term
considerations. Long-term considerations relate to the overall level
of capacity; short-term considerations relate to variations in capacity
requirements due to seasonal, random, and irregular fluctuations in
demand. Ideally, capacity will match demand. Thus, there is a close
link between forecasting and capacity planning, particularly in the
long term. In the short term, emphasis shifts to describing and
coping with variations in demand.
“For which of you, desiring to build a tower, does
not first sit down and count the cost, whether he
has enough to complete it?” - Luke 14v 28