Capacity Planning

By
Prof. A.K.Singh

A.K.Singh, IMI Delhi

 Capacity & Capacity Planning
• Production Capacity is the maximum output rate of a
production or service facility.
• There are others measures like Input Rate Capacity .
• Capacity planning is the process of establishing the
output rate that may be needed at a facility:
– Capacity is usually purchased in “chunks”
– Strategic issues: how much and when to spend
capital for additional facility & equipment
– Tactical issues: workforce & inventory levels, &
day-to-day use of equipment
A.K.Singh, IMI Delhi
 Measurement of Capacity
Type of Input measure of Output Measure of
Organization capacity Capacity

Car Mfg Labour Hours Car/ shift

Hospital Available Beds Patients per month

Pizza Shop Labour Hours Pizza per day

Retail Store Floor Space Revenue per unit of

space

A.K.Singh, IMI Delhi

 Planning Over a Time Horizon
Time Horizon
Options for Adjusting Capacity

Long-range Add facilities

planning

Intermediate-
range planning Subcontract Add personnel
(aggregate Add equipment/ Shifts Build or use inventory
planning) Extend the current Facility

Schedule jobs
Short-range Schedule personnel
planning Allocate machinery
(scheduling)

Modify capacity Use capacity

A.K.Singh, IMI Delhi

 Design and Effective Capacity
► Design capacity is the maximum theoretical output of a
system as claimed by OEM/ Design engineers
► The mileage of the car is 28Km/Ltr under standard

operating conditions.
► Effective capacity is the capacity a firm expects to
achieve given no operating constraints.
► On Highway the car gave a mileage of 24Km/Ltr,

However the running on highway is less

► Actual Output : is the capacity a form achieves given
the operating constraints.
► The car gives mileage of 20 Km/ Ltr on city roads.

A.K.Singh, IMI Delhi

 Utilization and Efficiency
Utilization is the percent of design capacity
actually achieved

Utilization = Actual output/Design capacity

Efficiency is the percent of effective capacity

actually achieved

Efficiency = Actual output/Effective capacity

*Utilization will always be less than equal to Efficiency

A.K.Singh, IMI Delhi
 EXAMPLE - 1

Design capacity = 50 trucks/day

Effective capacity = 40 trucks/day
Actual output = 36 units/day
• Find Efficiency & Utilization
Actual Output 36 unit/day
Efficiency    90%
Effective Capacity 40 unit/day

Actual Output 36 unit/day

Utilizatio n    72%
Design Capacity 50 unit/day

A.K.Singh, IMI Delhi

 Example 2
• Actual production last week = 148,000 rolls
• Effective capacity = 175,000 rolls
• Design capacity = 1,200 rolls per hour
• Operates 7 days/week,
• Shifts/day = 3,
• Hours/shift = 8
• Find Efficiency and Utilization

A.K.Singh, IMI Delhi

 Managing Demand
► Demand exceeds capacity
► Curtail demand by raising prices, scheduling longer
lead time
► Long term solution is to increase capacity
► Capacity exceeds demand
► Stimulate market
► Product changes
► Adjusting to seasonal demands
► Produce products with complementary demand
patterns

A.K.Singh, IMI Delhi

 Capacity Planning Strategies

• Proactive Strategy
• Reactive Strategy
• Neutral Strategy

A.K.Singh, IMI Delhi

Break Even Analysis
for Single Products

A.K.Singh, IMI Delhi

 Break Even Analysis Single Products
• Find out the Fixed cost, Variable cost and
expected Selling price.
• Plot the Cost and Revenue; find out the
volume for Break-even and revenue at BEP.
• Total Revenue is equal to total cost at Break
Even point.

A.K.Singh, IMI Delhi

 BEP

A.K.Singh, IMI Delhi

 Example (Single Product)
• A Dickie-Dee ice cream cart costs $12,000. Direct
labour for the driver amounts to $1.20 per unit, and
a given ice cream cost $0.80 per unit to prepare. The
selling price of each ice cream is $3.50. What is the
break even point?
• You run a manufacturing business that is involved in
manufacturing and selling a single product. The
annual fixed expenses to run the business are
$15,000 and variable expenses are $7.50 per unit.
The sale price of your product is $15 per unit. The
number of units to be sold to break even 
A.K.Singh, IMI Delhi
A.K.Singh, IMI Delhi
A.K.Singh, IMI Delhi