5-1 Capacity Planning

what is Capacity?

1. Design capacity
2. Effective capacity
3. Actual output
5-2 Capacity Planning

what is Capacity?

1. Design capacity
 Maximum output rate or service capacity an
operation, process or facility is designed for.
2. Effective capacity
 Design capacity minus allowances such as
personal time, maintenance and scrap.
3. Actual output
 Rate of output actually achieved.
 Cannot exceed effective capacity.
5-3 Capacity Planning

Efficiency and Utilization

Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity
5-4 Capacity Planning

Efficiency/Utilization Example

Design capacity = 50 trucks/day

Effective capacity = 40 trucks/day
Actual output = 36 units/day

Actual output = 36 units/day

Efficiency = =
90%
Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day

=
72% Design capacity 50 units/day
5-5 Capacity Planning

Capacity Cushion or Buffer

 Capacity Cushion or Buffer is the difference
between Designed and Utilized Capacity.
5-6 Capacity Planning

7 Each Determinants of Effective Capacity

1. Facilities
2. Product and service factors
3. Process factors
4. Human factors
5. Operational factors
6. Supply chain factors
7. External factors
5-7 Capacity Planning

Strategy Formulation

1. Capacity strategy for long-term demand

2. Demand patterns
3. Growth rate and variability
4. Facilities
 Cost of building and operating
5. Technological changes
 Rate and direction of technology changes
6. Behavior of competitors
7. Availability of capital and other inputs
5-8 Capacity Planning

Key Decisions of Capacity Planning

1. Amount of capacity needed

2. Timing of changes
3. Need to maintain balance
4. Extent of flexibility of facilities
5-9 Capacity Planning

Steps for Capacity Planning

1. Estimate future capacity requirements

2. Evaluate existing capacity
3. Identify alternatives
4. Conduct financial analysis
5. Assess key qualitative issues
6. Select one alternative
7. Implement alternative chosen
8. Monitor results
5-10 Capacity Planning

Developing Capacity Alternatives

1. Design flexibility into systems.

2. Take stage of life cycle into account.
3. Take a “big picture” approach to capacity
changes.
4. Prepare to deal with capacity “chunks”.
5. Attempt to smooth out capacity requirements.
6. Identify the optimal operating level.
5-11 Capacity Planning

Economies of Scale

 Economies of scale
 If the output rate is less than the optimal level,
increasing output rate results in decreasing
average unit costs.
 Diseconomies of scale
 If the output rate is more than the optimal level,
increasing the output rate results in increasing
average unit costs.
5-12 Capacity Planning

Evaluating Alternatives
Figure 5.3
Production units have an optimal rate of output for minimal cost.

Average cost per unit

Minimum average cost per unit

Minimum
cost

0 Rate of output