STRATEGIC CAPACITY

PLANNING FOR
PRODUCTS AND
SERVICES
Prepared by: Jonathan Desenganio
 OBJECTIVES

1 2 3 4 5

Summarize the Discuss ways Describe the Discuss the Briefly

importance of of defining determinants of major describe
capacity and effective considerations approaches
planning. measuring capacity. related to that are useful
capacity. developing for evaluating
capacity capacity
alternatives. alternatives.
CAPACITY is the key component in
designing a system
 But what is capacity?
CAPACITY - the upper limit or ceiling on the
load that an operating unit can handle

Number of physical units produced

e.g. number of cupcakes per hour
Number of services performed
e.g. number of caller serves per hour
The goal of strategic capacity planning

predicted
long-term
level of long-
supply
term demand
capabilities
The key questions in capacity planning are the following:

1. What kind of capacity is needed?

e.g. choosing oven baking 2 small oven
Depends of product or service cookies 1 large oven

2. How much is needed to match demand?

3. When is it needed?
Forecast Demand
100
80
60
40
20
0
Monday Tuesday Wednesday Thursday Friday

Series 1
Importance of Capacity Planning
Impacts ability to meet future demands
Affects operation cost
Major determinants of initial cost
Involves long-term commitment
Affects competitiveness (can be barrier to
deter potential new entry)
Affects ease of management
MEASURING 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
For example: Photocopy Maching

Print speed : 25 ppm (papers per minute)

Design Capacity
Print speed : 1500 pph (papers per hour)

Due to paper jamming, out of paper, out of

ink, machine error

Its capacity per hour is reduced and

because of this the output now e.g.
Print speed : 1200 pph (papers per hour)

Effective Capacity
Our objective is
Design Capacity
To minimize the gap
between Gap
Design Capacity and Effective
Effective Capacity Capacity
Different measures of capacity

Efficiency

Utilization
Example
Compute the efficiency and the utilization of the vehicle repair
department:
Design capacity = 50 trucks per day
Effective capacity = 40 trucks per day
Actual output = 36 trucks per day

Efficiency ¿ 90 %

Utilization ¿ 72 %
 Determinants of Effective Capacity

1. Facilities 2. Product and

Service Factor
Size and provision for
expansion Uniformity has
Facilities
higher output rate
Transportation cost, labor
supply, distance to market, restaurant that offers a limited
Location energy source etc. menu can usually prepare and serve
meals at a faster rate than a
How smoothly work
restaurant with an extensive menu
can be performed
Layout
 Determinants of Effective Capacity

3. Process Factor 4. Human Factor

Output that does not meet Job Content
the standards will have a Job Design
Quality slower rate of output
Process Training & Experience

Motivation
Compensation
Learning Rates
Rework Inspection Absenteeism & Labor
Turnover
 Determinants of Effective Capacity

5. Policy Factor 6. Operational Factor

Scheduling
Material Management
Quality Assurance
Overtime
Maintenance Policies
Equipment Breakdown

Second or Third Shifts

 Determinants of Effective Capacity

7. Supply Chain 8. External Factor

Production Standard
Safety Regulation
Unions
Pollution Control Standards
 Calculating Processing Requirement
How many machine do we need to Annual Demand x
produce the annual demand for the 3 Standard processing
time
products in a year?
STANDARD PROCESSING TIME
PRODUCT ANNUAL DEMAND PROCESSING TIME NEED (Hr)
PER UNIT (Hr)

1 400 5.0 2,000

2 300 8.0 2,400
3 700 2.0 1,400
Assumptions: Working hours = 8hrs per day
Working days = 250 days per year
 STANDARD
PRODUCT ANNUAL DEMAND PROCESSING TIME PROCESSING TIME
PER UNIT (Hr) NEED (Hr)

1 400 5.0 2,000

2 300 8.0 2,400 1. Get the total
processing time
3 700 2.0 1,400 needed

5,800
Compute the total
For each machine Divide the total
hours per year
processing time by
number of hrs per
year
8 h𝑟𝑠 250 𝑑𝑎𝑦𝑠
𝑥 ¿ 2,000 h𝑜𝑢𝑟𝑠/ 𝑦𝑒𝑎𝑟 5,800 h𝑟𝑠
𝑑𝑎𝑦 𝑦𝑒𝑎𝑟
2,000 h𝑜𝑢𝑟𝑠/ 𝑚𝑎𝑐h𝑖𝑛𝑒
Good for product mix 2 .90 𝑀𝑎𝑐h𝑖𝑛𝑒≈ 3 𝑀𝑎𝑐h𝑖𝑛𝑒𝑠
ADDITIONAL CHALLENGES OF
PLANNING SERVICE CAPACITY
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
Service Capacity also must be matched with the
timing of demand
(3) the degree of volatility of demand
liability to change rapidly and unpredictably,
especially for the worse
DO IT IN-HOUSE OR OUTSOURCE IT?
Available Capacity
Expertise
Quality Consideration
Nature of Demand
High and Steady Demand – Do It In-House
Wide Fluctuation in demand and small orders - Outsource
Cost
Risk
Developing Capacity Strategies
Design flexibility into systems.
Take stage of life cycle into account.
Take a “big-picture” (i.e., systems) approach to
capacity changes.
Bottleneck operation An operation in a
sequence of operations whose capacity
is lower than that of the other
operations.

REMEMBER: “Your capacity

is as good as the bottleneck”
Developing Capacity Strategies
Prepare to deal with capacity “chunks.”
Attempt to smooth out capacity requirements.
Identify the optimal operating level
Economies of scale If the output rate is less
than the optimal level, increasing the output
rate results in decreasing average unit costs.
Choose a strategy if expansion is involved.
Constraints Management
A constraint is something that limits the performance of a
process or system in achieving its goals
Market: Insufficient demand.
Resource: Too little of one or more resources (e.g., workers,
equipment, and space),
Material: Too little of one or more materials.
Financial: Insufficient funds.
Supplier: Unreliable, long lead time, substandard quality.
Knowledge or competency: Needed knowledge or skills missing or
incomplete.
Policy: Laws or regulations interfere
Determine the Output rate and the Bottle neck of
the operation

20 units/hr 10 units/hr 30 units/hr

Output Rate
Operation 1 Operation 2 Operation 3 ?? units/hr

Bottle Neck

Output Rate
Capacity
10 units/hr
Cost–Volume Analysis Formulas to remember

-1
𝑇𝐶=𝐹𝐶 +𝑉𝐶
-2
𝑉𝐶=𝑄 𝑥 𝑣
THEREFORE:
-3
𝑇𝐶=𝐹𝐶+𝑄 𝑥 𝑣
-4
𝑇𝑅= 𝑅 𝑥 𝑄
-5
𝑃 =𝑇𝑅 − 𝑇𝐶 = 𝑅 𝑥 𝑄 − 𝐹𝐶 +𝑄 𝑥 𝑣
𝑃=𝑄 ( 𝑅 − 𝑣 ) − 𝐹𝐶
Cost–Volume Analysis
𝐹𝐶 The number of units to
𝐵𝐸𝑃 = be sold to avoid loss but
𝑅−𝑣 without profit

Special Case: BEP with target profit

𝑃 + 𝐹𝐶
𝐵𝐸𝑃 =
𝑅−𝑣
Sample Problem 1
The owner of Old-Fashioned Berry Pies, S. Simon, is contemplating
adding a new line of pies, which will require leasing new equipment
for a monthly payment of $6,000. Variable costs would be $2 per pie,
and pies would retail for $7 each.
a. How many pies must be sold in order to break even?
b. What would the profit (loss) be if 1,000 pies are made and sold in a
month?
c. How many pies must be sold to realize a profit of $4,000?
d. If 2,000 can be sold, and a profit target is $5,000, what price should
be charged per pie?
Solution
FC = $6,000 VC = $2 per pie R = $7 per pie

a 𝐹𝐶 $6,000
𝐵𝐸𝑃 =
𝑅 − 𝑣 ¿ $7/𝑝𝑖𝑒− $ 2/𝑝𝑖𝑒 ¿1200𝑝𝑖𝑒𝑠𝑝𝑒𝑟 𝑚𝑜𝑛𝑡h

b 𝐹𝑜𝑟 𝑄=1000
𝑃=𝑄 ( 𝑅 − 𝑣 ) − 𝐹𝐶
𝑃 =1000 ( 7 − 2 ) − 6000
𝑃 =− 1000 ( 𝐿𝑜𝑠𝑠 )
Solution
c 𝐹𝑜𝑟 𝑃 =$ 4000
𝐵𝐸𝑃 =
𝑃 + 𝐹𝐶 $ 4000+$6,000
𝑅 − 𝑣 ¿ $7/𝑝𝑖𝑒− $ 2/𝑝𝑖𝑒 ¿2000𝑝𝑖𝑒𝑠𝑝𝑒𝑟 𝑚𝑜𝑛𝑡h

d 𝐹𝑜𝑟 𝑃 =5000 𝑄=2000 ; R=?

𝑃=𝑄 ( 𝑅 − 𝑣 ) − 𝐹𝐶
5,000 =2000 ( 𝑅 − 2 )2000 𝑅=15000
− 6000
5000=2000 𝑅 − 4000 − 6000 𝑅= 15000
2000
5000 =2000 𝑅 − 10,000
2000 𝑅 =10000 +5000 𝑅=$ 7.5
Sample Problem 2
A manager has the option of purchasing one, two, or three machines.
Fixed costs and potential volumes are as follows
Number of Machines Total Annual Fixed Cost Corresponding Range to
Output
1 $ 9600 0 to 300
2 15,000 301 to 600
3 20,000 601 to 900

Variable cost is $10 per unit, and revenue is $40 per unit.
a. Determine the break-even point for each range.
b. If projected annual demand is between 580 and 660 units, how many
machines should the manager purchase?
Solution

a 𝐹𝐶 $9,600
𝐵𝐸𝑃 1= ¿ 320 𝑢𝑛𝑖𝑡𝑠[𝑜𝑢𝑡 𝑖𝑛𝑟𝑎𝑛𝑔𝑒]
𝑅 − 𝑣 ¿ $ 40/𝑢𝑛𝑖𝑡 −$10/𝑢𝑛𝑖𝑡

𝐵𝐸𝑃 2 =
𝐹𝐶 $15,000 ¿ 500 𝑢𝑛𝑖𝑡
𝑅 − 𝑣 ¿ $ 40/𝑢𝑛𝑖𝑡 −$10/𝑢𝑛𝑖𝑡

𝐵𝐸𝑃 3 =
𝐹𝐶 $20,000 ¿ 666.67 𝑢𝑛𝑖𝑡
𝑅 − 𝑣 ¿ $ 40/𝑢𝑛𝑖𝑡 −$10/𝑢𝑛𝑖𝑡
b. If projected annual demand is between 580 and 660 units, how many machines
should the manager purchase?

Within 580 to 660 unit

Number of Machines BEP annual demand range?
1 320 No
2 500 Yes
3 666.67 No

Therefore, the manager should purchase 2 machines

KEY TAKE AWAYS
Capacity decisions can be critical to the success of a business organization
because capacity is the supply side of the supply-demand equation, and too
little or too much capacity is costly.
The key issues in capacity planning relate to determining what kind of
capacity is needed, how much is needed, and when it is needed.
Volatile demand and long lead times to achieve capacity changes can be
challenging.
One or more constraints can adversely affect the overall capacity of a
system. Capacity increases can only be achieved by loosening those
constraints, not by increasing other resources so it is essential to identify
constraining resources and focus efforts on overcoming them.
 Questions?
COMMENTS? Comments?
SUGGESTIONS? Feedback?
FEEDBACK?
Thankyou!