CHAPTER 5: CAPACITY PLANNING

FOR PRODUCTS AND SERVICES

PRODUCTION MANAGEMENT
COMMERCE FACULTY
VAN LANG UNIVERSITY

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Chapter objectives
Explain the importance of capacity planning
Identify and measure competencies.
Describe the determinants of actual competence.
Explain what to consider when making capacity options.
1. Describe the approaches used to evaluate competency
options

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Capacity Planning
• Capacity is the upper limit or highest load that
an operating system can handle.
• Capacity include:
▪ Equipment
▪ Space
▪ Worker's skills/experiences
• Capacity Planning Issues:
▪ What kind of competence is needed?
▪ How much is needed?
▪ When?

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The importance of competency decisions
Influencing the ability to meet future needs
Impact on operating costs
Determinants of initial costs
Requires long-term commitment
Impact on competitiveness
Impact on ease of management
Globalization adds complexity
1. Influencing long-term planning

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Ability
▪ Năng lực (theo) thiết kế (Design capacity)
▪ Maximum capability that a device/process/system can perform/produce as designed.

▪ Năng lực thực tế (Effective capacity)

▪ The ability to produce in the actual time spent on production or otherwise excluding time
spent on individual activities, maintenance, or other non-production activities.

▪ Actual output

▪ The actual output of a system/process/equipment/worker can produce

▪ It is impossible to exceed practical capacity

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Performance and utilization

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 Performance and utilization
Design capacity = 50 units/day
Actual capacity = 40 units/day
Actual output = 36 units/day

Actual output 36 units/day

Performance = = = 90%
Actual capacity 40 units/day

Actual output 36 units/day

Utilization = = = 72%
Design capacity 50 units/day

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Performance and utilization

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Decisions of actual capacity
Workshop elements, equipment, features
Product and service elements
Process elements
Human factors
Policy factors
Task elements
Supply chain factors
▪ External factors

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Strategy development
Capacity strategy for long-term needs

▪ Demand models

▪ Growth rate and uncertainty

▪ Equipment/equipment

▪ Construction and operation costs

▪ Technology change

▪ Speed and direction of technology change

▪ Competitor behavior BỘ MÔN LOGISTICS VÀ QUẢN TRỊ CHUỖI CUNG ỨNG

Important decisions in capacity planning
1. Required Capacity
1. Capacity cushion = 100% - Utilization
2. Adjust changes
3. Maintain balance
4. Expand vehicle/equipment flexibility

Năng lực đệm (Capacity cushion) – Additional demand to

compensate for uncertainties

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Capacity planning steps
Estimation of future capability requirements
Assessment of current capacity
Identify options
Perform financial analysis
Assess important issues
Choose an option
Implement the selected option
1. Monitoring results

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Forecasting capacity planning
requirements
Long-term vs. short-term capacity needs
Long-term refers to the overall level of competencies such
as factory size, trends and cycles
▪ Short-term involves variations due to seasonality,
randomness and abnormal fluctuations in demand

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Calculation of production process
requirements
Product Standard
Annual Demand Production time
production time 1 required
product (hours)

#1 400 5.0 2,000

#2 300 8.0 2,400

#3 700 2.0 1,400

5,800

If the annual capacity is 2000h, 3 machines are required to meet the

required output.
( 5,800 hours/2,000 hours = 2.90 machines)

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Service Capacity Planning
▪ Need to be close to customers

▪ Competence and position are closely

related.
▪ Unable to store service

▪ Capacity must match needs at the right

time
▪ Fluctuations in demand

▪ Peak periods BỘ MÔN LOGISTICS VÀ QUẢN TRỊ CHUỖI CUNG ỨNG

In-house or Outsource?
Outsourcing: hire manufacture/manufacture products
or services

Readiness
Professional skills
Quality considerations Make or
The nature of the need Buy?!
Cost
1. Risk

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A manager must make the decision to make or buy certain parts in vending
machine manufacturing, producing these parts will cost the least $150000. Costs
and output are estimated as shown in the table below:

Make Buy
Annual Pricing $150000 None
Variable cost /Piece $60 $80
Annual output (pieces) 12000 12000

Should the company make or buy?

i. If output changes, with what output is production and buying out the
same?

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• Total cost = Price + (Sale * Variable Cost)
Production cost: TCost (make) = $150000 +
(12000*60) = $870000
Buying cost: TCost (buy) = 0 + (12000*80) =
o st
c
$960000 TCost (make) < TCost (buy) has
e
urc
 Choose the production solution. rn
alp
te
Ex

Cost
n c o st
r o d uctio
P
• Tcost (make) = Tcost (buy)
$150000 + Q*60 = 0 + Q*80
Q = 7500 (piece)
Q Productio
n
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Development of competency selection
Design flexibility for systems
Consider the phases of the life cycle in the
calculation process
A holistic approach to capacity change
Solving the problem of capacity "chunks"
Addressing capacity requirements
1. Determine the optimal operating level

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Bottleneck
Bottleneck

Stage 1 Stage 2 Stage 3

20/hr 10/hr 15/hr 10/giờ

Maximum output rate

limited by bottleneck

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Economies of scale
▪ Tính kinh tế theo quy mô (Economies of scale)
▪ If the yield level is less than optimal, increasing productivity will
lead to a reduction in average unit costs

▪ Tính phi kinh tế theo quy mô

(Diseconomies of scale)
▪ If the yield level is greater than optimal, increasing productivity
will increase the average unit costsh
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Optimum Yield Level – The manufacturing
process has an optimal output level at minimal cost

Upper minimum average cost

Average cost per

unit

unit

Lowest
cost

0 Output level

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Economies of scale – Minimal costs and optimal
operating levels are functions of production scale

Small
Medium
Average cost on
factory
factory Large
factory
unit

0
Output level

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Evaluating the plan
▪ Phân tích Chi phí - Sản lượng (Cost - Volume
analysis)

▪ Điểm hòa vốn (Break-even point)

▪ Phân tích tài chính (Financial analysis)

▪ Dòng tiền (Cash flow)

▪ Giá trị hiện tại (Present value)
▪ Lý thuyết ra quyết định (Decision theory)
▪ Phân tích hàng chờ (Waiting-line analysis)
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Cost-output relationship

C
+F C)

Amount ($)
VC (V
t = ts
cos cos
tal le
o ab
T
vari
tal
To
Fixed Costs (FC)

0
Q (Output)

Total cost = Fix cost + Variable cost (TC = FC + VC)

Variable = Output*variable unit fee (VC = Q * v)

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Cost-output relationship

e
m
nco
li

Amount ($)
ta
To

0
Q (Output)

Total income = Selling price * Output TR = R * Q

Price 1 unit R

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 Cost-output relationship

e
om
t
inc
r ofi
al P
t
To o st
ta lC
To

0 Break-even point (BEP units)

Q (Output)

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 Break-even analysis with step pricing
A manager is faced with the choice of buying 1, 2 or 3 machines. The valuation and
potential output of each machine are given in the following table:

# Machines Total annual fee Output

1 $ 9,600 0 – 300
2 $ 15,000 301 – 600
3 $ 20,000 601 – 900
The variable fee is $10 per product and the selling price of one product is $40.
a. Determine the break-even point for each interval.
b.If the annual demand of the project is between 580 and 660 products, how many
machines need to be purchased?

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The break-even analysis problem with step pricing

= TC
V C
C +
F

3 machine = TC
C
+V
FC

= TC
2 machine
+ VC
FC
1 machine

Amount

Tier and Variable Pricing

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Break-even analysis with step pricing
Solution:
a.Q(BEP) = FC/(R – v)
Buy 1 machine: Q(BEP)1 = 320 products 
Out of range
i. Buy 2 machines: Q(BEP)2 = 500 units
ii. Buy 3 units: Q(BEP)3 = 666.67 units

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Break-even analysis with step pricing
Solution:
b. Compare the demand range with 2 break-even points as shown below.

Buy 2 machines [301, 600]  BEP2 = 500

 It is profitable to produce more than 500 $ BEP
3
products
TC
BEP2
Buy 3 machines [601, 900]  BEP3 = 667
TC
 Suffered losses when producing less 3
than 667 products TC
2
So if the need is [580, 660], manager
TR 1
should buy 2 machines.
300 600 Số
lượng

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Assumptions of Cost-Output Analysis
Consider only 1 type of product
Every product can be sold after making
The variable charge per unit is the same regardless of output
Pricing does not change with output
Earnings per unit are invariant with output
1. Earnings per unit are greater than variable fees per unit

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Financial analysis
Cash flow – the difference between proceeds from sales and
other sources and cash flow spent on labor, materials,
administrative costs and taxes
▪ Present value – the total amount attributed to the present
value of all future cash flows of an investment proposal

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Queue analysis
Useful for designing or adapting service systems
Queues occur in many different service systems
The queues caused by bottlenecks in the process
▪ Help managers plan cost-effective capacity levels by
balancing the cost of waiting customers with the cost of
adding more capacity

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Do you have any questions?

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