Capacity

Capacity
• Upper limit or ceiling on the load that an operating unit can handle.

• Basic questions :

• What kind of capacity is needed?

• How much is needed?

• When is it needed?
• Rate of output that can be achieved from a process.

• How much should a plant or service facility be able to produce?

• That is specifying which level of capacity will meet market demands in a cost-
efficient way.
 Factors Affecting Capacity
A. External Factors B. Internal Factors
1. Government regulations 1. Prod.&service design
2. Union agreements 2. Personnel & jobs
3. Supplier capabilities 3. Plant layout & flow
4. Technology 4. Equipment Capabilities ,,
and maintenance
5. Materials management
6. Q.C. Systems
7. Management capabilities
 Important Capacity Concepts
1. Best operating level (BOL): it is the capacity for which the average unit cost is at a minimum.

Average unit cost

of output

BOL Volume

Economies of Diseconomies of scale

scale
2. Economies & diseconomies of scale: economies of scale produce a decrease in the unit cost; diseconomies of
scale increase the unit cost.
3. Capacity flexibility: ability to provide wide range of products in a short period of time. Flexible plants,
flexible processes, and flexible workers.
4. Capacity balance: output of stage 1 provides the exact input for stage 2. To deal with imbalance we add
capacity to bottleneck stages, work overtime, lease additional equipment, or subcontract.
Capacity Strategies
Capacity Decisions

1. Meet present & future Demand

2. Initial cost + Operating cost
3. Long-term Planning + Commitment
4. Competitiveness
5. Ease of management
6. Complexity
7. Uncertainty
Capacity

• Design capacity
• maximum output rate or service capacity an operation, process, or facility is
designed for

• Effective capacity
• Design capacity minus allowances such as personal time, maintenance, and
scrap

• Actual output
• rate of output actually achieved--cannot
exceed effective capacity.
Efficiency and Utilization

Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity

Both measures expressed as percentages

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
Determinants of Effective Capacity

• Facilities

• Product and Service factors

• Process factors

• Human factors

• Operational factors

• Supply chain factors

• External factors
Strategy

• Demand patterns
• Growth rate and variability

• Facilities
• Cost of building and operating

• Technological changes
• Rate and direction of technology changes

• Behavior of competitors
• Availability of capital and other inputs
Key Decisions of Capacity Planning
1. Amount needed
2. Timing of changes
3. maintain balance
4. flexibility of facilities
Steps
1. estimate future capacity requirements
2. evaluate existing capacity
3. alternatives
4. financial analysis
5. key qualitative issues
6. select one alternative
7. implement alternative chosen
8. monitor results
Make or Buy?

1. Available capacity
2. Expertise
3. Quality considerations
4. Nature of demand
5. Cost
6. Risk
7. Outsourcing
Other Aspect

1. System flexibility
2. Product life Cycle Stage
3. Capacity Changes-Incremental or Steps
4. Smooth out Capacity Requirements
5. Optimal operating level
Economies of scale
If output rate < optimal level, increasing output rate  decreasing avg unit costs
Diseconomies of scale
If output rate > optimal level, increasing output rate  increasing avg unit costs

Average cost per unit

Minimum average cost per unit

Minimum
cost

0 Rate of output

Production units have an optimal rate of output for minimal cost.

Economies of Scale
Minimum cost & optimal operating rate are
Average cost per unit functions of size of production unit.

Small
plant Medium
plant Large
plant

0 Output rate
Service Capacity

• Need to be near customers

• Capacity and location are closely tied

• Inability to store services

• Capacity must be matched with timing of demand

• Degree of volatility of demand

• Peak demand periods
CVP Analysis

ue ue
C n n fit
+F ev
e ve ro
C r re + P
=V l l
Amount

st C) ota ota st
co V T o
ta l t( T
tal
c
To cos To
iabl e
r
Va
ss
Fixed cost (FC)
- Lo

Q (Quantity in units) BEP

Q (Quantity in units) Q (Quantity in units)

Total cost (TC) Total revenue

= Fixed cost (FC) + Variable cost (VC) = Revenue per unit (R) X Quantity (Q)
= Fixed cost (FC) + Unit cost (v) X
Quantity (Q)
 Break-Even Problem with Step Fixed Costs

C TR
=T
3

VC3
+
FC 3

C
=T
2

C 2
3 machines
+V
FC 2

C 1

=T 2 machines
VC
1
+
FC
1

1 machine
Quantity
Multiple break-even points
 Calculating Capacity Requirements

S ta n d a rd
A nnual p r o c e s s in g tim e P r o c e s s in g t im e
P ro d u c t D em and p e r u n it ( h r .) n e e d e d (h r.)

#1 400 5 .0 2 ,0 0 0

#2 300 8 .0 2 ,4 0 0

#3 700 2 .0 1 ,4 0 0
5 ,8 0 0

Q: How many machines are needed? A machine operates 10 hours per

day and 250 days a year.
One machine has total processing time per year:
10 X 250 = 2500.
Number of machines needed is 5800/2500 = 2. 35
THREE machines!
 Capacity Requirement & Utilization !

S ta n d a rd
A nnual p r o c e s s in g tim e P r o c e s s in g t im e
P ro d u c t D em and p e r u n it ( h r .) n e e d e d (h r.)

#1 400 5 .0 2 ,0 0 0

#2 300 8 .0 2 ,4 0 0

#3 700 2 .0 1 ,4 0 0
5 ,8 0 0

Q: How many machines are needed? Average utilization of a machine

is 50%.
One machine has total effective processing time per year:
10 X 250 X 50% = 1250.
Number of machines needed is 5800/1250 = 4. 7
FIVE machines!
 Financial Analysis
• Initial Outlay

• Cash Flow - the difference between cash received from sales and other sources,
and cash outflow for labor, material, overhead, and taxes.

• Present Value - the sum, in current value, of all future cash flows of an
investment proposal.

• and …?