Strategic Capacity

Planning for Products

and Services

5-1
You should be able to:
LO 5.1 Name the three key questions in capacity planning
LO 5.2 Explain the importance of capacity planning
LO 5.3 Describe ways of defining and measuring capacity
LO 5.4 Name several determinants of effective capacity

5-2
Capacity
 The upper limit or ceiling on the load that an
operating unit can handle.
e.g. physical units produced
(bicycles assembled per hour)
or number of services performed
(computers upgraded per hour)
or number of teachers needed to teach in a semester

5-3
Capacity

Operating unit could be: plant, department, machine,

store or worker.

5-4
refers to the activities of the firm in determining the capacity of a plant or a
facility in terms of its (capacity needs):
Equipment
Space
Employee skills
Processes
based on the resource constraints of the facility.

5-5
Goal (or major function of CP)
 To achieve a match between the long-term supply
capabilities of an organization and the predicted level
of long-term demand.

How do we differentiate long-range , medium-range &

short-range planning or time horizons in terms of
capacity planning?

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Time horizons
Long-range planning might need to build a new facility.

Medium-range planning might include acquisition of a

major piece of machinery & subcontracting.

Short-range planning includes disaggregation of the

long- or medium-range capacity plans. It includes
machine loading and detailed production scheduling. 5-7
Changes in demand
Changes in technology
Changes in the environment
Personal threats

Choose one from the above reasons

of CP, cite an example & explain
briefly.

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Overcapacity  operating costs that are too high
Undercapacity  strained resources and possible loss of
customers

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Key questions:
 What kind of capacity is needed?
 How much is needed to match demand?
 When is it needed?

(e.g. Capacity planning of UST - AMV

Accounting teachers who are accredited (What kind)
How many accredited accounting teachers to accommodate 30
sections of first year BSA students (How much)
First Sem, SY 2020 – 2021 (When)

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 Related questions:
 How much will it cost?
 What are the potential benefits and risks?
 Are there sustainability issues?
 Should capacity be changed all at once, or through several smaller
changes
 Can the supply chain handle the necessary changes?

5-11
 Importance of Capacity decisions
1. Impact the ability of the organization to meet future demands
2. Affect operating costs
3. Are a major determinant of initial cost
4. Often involve long-term commitment of resources
5. Can affect competitiveness
6. Affect the ease of management
7. Have become more important and complex due to globalization
8. Need to be planned for in advance due to their consumption of
financial and other resources

Please read page 143 for more elaboration, choose 1 even number &
1 odd number then explain briefly why CP is important in this aspect.

5-12
 Measure capacity in units that do not require
updating
 Use a measure of capacity based on the availability of inputs
(e.g. Hospital has a certain no. of beds, a factory has a number of
machine hours available, a bus has a certain no. of seats)

Refer to table 5.1 for other examples – page 144

5-13
Two useful definitions of capacity
 Design capacity
 The maximum output rate or service capacity an operation,
process, or facility is designed for
 Effective capacity
 Design capacity minus allowances such as personal time and
maintenance (e.g. changing product mix, lunch break or
coffee break scheduling, balancing operation)

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Actual output
 The rate of output actually achieved
 It cannot exceed effective capacity
Efficiency
actual output
Efficiency 
effective capacity
Utilization
actual output
Utilization 
design capacity
Both Measured as percentages
5-15
Design Capacity = 50 trucks per day
Effective Capacity = 40 trucks per day
Actual Output = 36 trucks per day

Compare Effective capacity & actual output then

compare design capacity & actual output

5-16
Design Capacity = 50 trucks per day
Effective Capacity = 40 trucks per day
Actual Output = 36 trucks per day

actual output 36
Efficiency    90%
effective capacity 40

actual output 36
Utilization    72%
design capacity 50

This means that the vehicle repair dept is designed to accommodate 50 trucks
per day. However, it appears to be effective (90%) at its actual output of 36
trucks if compared to its effective capacity which is 40 trucks per day.
5-17
Hence, if one wants to improve capacity utilization then one must
increase effective capacity. (through: correcting quality problems,
equipment maintenance, fully trained employees, fully utilizing bottleneck
equipment)
increasing utilization depends on being able to increase effective
capacity.

This also requires

knowledge of what is
constraining
effective capacity.
5-18
In the case of our example in the vehicle repair department, its design capacity is 50 trucks per day so how
come it is only 90% effective?

What restrains it to increase its effective capacity?

-- One factor restraining it would be lack of fully trained repairmen
-- Another would be, defective equipment used to repair the vehicles

Give two (2) more restraining factors in relation to the example above. Explain briefly.

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5-20
Facilities
Product and service factors
Process factors
Human factors
Policy factors
Operational factors
Supply chain factors
External factors

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