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Capacity Planning

- Capacity planning involves determining the optimal production capacity level to meet demand while minimizing costs. It considers factors like equipment capacity, labor requirements, economies and diseconomies of scale. - The best operating level is the capacity that results in the lowest average unit cost by balancing utilization and avoiding under- or over-utilization. - This example calculates the machine and labor capacity requirements over four years given demand forecasts for small and family-sized bottles to determine if additional capacity is needed.

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Nirupam Choudhury
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371 views30 pages

Capacity Planning

- Capacity planning involves determining the optimal production capacity level to meet demand while minimizing costs. It considers factors like equipment capacity, labor requirements, economies and diseconomies of scale. - The best operating level is the capacity that results in the lowest average unit cost by balancing utilization and avoiding under- or over-utilization. - This example calculates the machine and labor capacity requirements over four years given demand forecasts for small and family-sized bottles to determine if additional capacity is needed.

Uploaded by

Nirupam Choudhury
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Capacity Planning

Capacity
Productive Capacity, generally measured in physical units, refers either to the maximum output rate for products or services or to the amounts of key resources available in each operating period.

Strategic Capacity Planning


Capacity is the ability to hold, receive, store, or accommodate raw materials, finished products, customers, etc. Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labour force size. Capacity used is the rate of output actually achieved. The best operating level is nominally the capacity for which the process was designed.
Capacity Used Capacity Utilization Rate Best Operating Level

Capacity Decisions
Capacity maximum capability to produce rated capacity is theoretical effective capacity includes efficiency and utilization

Capacity utilization
percent of available time spent working

Capacity efficiency
how well a machine or worker performs compared to a standard output level

Capacity load
standard hours of work assigned to a facility

Capacity load percent


ratio of load to capacity

Dimension of Demand

Effect on capacity requirements How much capacity is needed?

Quantity

Timing
Quality Location

When should capacity be available? What kind of capacity is needed? Where should capacity be installed?

Capacity planning
Capacity is the maximum output rate of a production or service facility 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

Measuring Capacity Examples


There is no one best way to measure capacity Output measures like cars per day are easier to understand With multiple products, inputs measures work better
Type of Business Car manufacturer Hospital Pizza parlor Retail store Input Measures of Output Measures Capacity of Capacity Labor hours Available beds Labor hours Floor space in square feet Cars per shift Patients per month Pizzas per day Revenue per foot

Facility Class A Uniform output characteristics Steel Mill

Unit of Measure

Tons of steel produced daily Pairs of shoes/shift Passenger per route gallon

Shoe factory Commercial airline Bottling plant

Facility Class A Variable output characteristics Hospital (or hotel) Machine shop Stadium, night club Telephone switchboard

Unit of Measure

Number of beds
Machine hours daily Seating capacity Number of trunklines

Best Operating Level


Example:
Engineers design engines and assembly lines to operate at an ideal or best operating level to maximize output and minimize wear.

Best Operating Level

Average unit cost of output


Under-utilization Over-utilization

Best Operating Level


Volume

Best Operating Level for a Hotel

How Much Capacity Is Best?


The Best Operating Level is the output than results in the lowest average unit cost Economies of Scale: Where the cost per unit of output drops as volume of output increases Spread the fixed costs of buildings & equipment over multiple units, allow bulk purchasing & handling of material

Diseconomies of Scale: Where the cost per unit rises as volume increases Often caused by congestion (overwhelming the process with too much work-in-process) and scheduling complexity

Economies of Scale
Economies of scale and operating level curves

Average unit cost of output

100-unit plant
200-unit plant 300-unit plant 400-unit plant

Diseconomies of scale start to take effect Volume

As plants produce more products, they gain experience in the best production methods and reduce their costs per unit.
Yesterday

Cost/price per unit

Today

Tomorrow

Total accumulated production of units

Capacity Decisions (cont.)


Capacity increase depends on volume and certainty of anticipated demand strategic objectives costs of expansion and operation Best operating level % of capacity utilization that minimizes unit costs Capacity cushion % of capacity held in reserve for unexpected occurrences

Economies of Scale
it costs less per unit to produce high levels of output fixed costs can be spread over a larger number of units production or operating costs do not increase linearly with output levels quantity discounts are available for material purchases operating efficiency increases as workers gain experience

Diseconomies of Scale
Occur above a certain level of output
Diseconomies of Distribution Diseconomies of Bureaucracy Diseconomies of Confusion Diseconomies of Vulnerability

Diseconomies of Confusion

Capacity Utilization
Example: During one week of production, a plant produced 83 units of a product. Its historic best utilization was 120 units per week. What is this plants capacity utilization rate?
Capacity Utilization Rate Capacity Used Best Operating Level

83 units / week 0.69 69% 120 units / week

Capacity Planning
Three important considerations in capacity planning: Maintaining system balance In the ideal case, the output of one stage is the exact input requirements for the next stage. Frequency of capacity additions There are costs in adding capacity too frequently as well as too infrequently. External sources of capacity It might be cheaper to outsource some production.

Determining capacity requirements Forecast sales (within each individual product line) Calculate equipment and labour requirements to meet forecasts Project equipment and labour availability

Making Capacity Planning Decisions


The three-step procedure for making capacity planning decisions is as follows:
Step 1: Identify Capacity Requirements Step 2: Develop Capacity Alternatives

Step 3: Evaluate Capacity Alternatives

Determine project capacity requirements given a demand forecast

Formulate alternatives to meet future capacity requirements

Evaluate alternatives based on economic Factors, costs, revenues, risks, competition, Flexibility, quality, organizational and managerial adjustments

Select optimum alternative and implement capacity development plan

Procedure for developing a plan to change capacity

Capacity Requirements Example


A manufacturer produces mustard in small and family-sized plastic bottles, with the following demand forecasts.
Year 1 150 115 Year 2 170 140 Year 3 200 170 Year 4 240 200

Small (000's) Family (000's)

Three 100,000 units-per-year machines are available for small bottle production. 2 operators are required per machine. Two 120,000 units-per-year machines are available for familysized bottle production. 3 operators are required per machine. How much capacity is used and what are the machine and labour requirements?

Capacity Requirements Example (2)


Machine capacity: 300 000 small, 240 000 family size Labour availability: 6 for small, 6 for family size

Small (000's) Family (000's) Small % capacity used 50.00% 115 000 machines 1.50 120 000 per machine 0.96 115 000 req'd 0.4792 240 000 req'd labour 3.00 Family Size 3 operators 0.96 machines 2.88 % capacity used 47.92% machine machines req'd 0.96 labour req'd 2.88

Year 1 150 115

Year 2 170 140

Year 3 200 170

Year 4 240 200

Small (000's) Family (000's) Small % capacity used 50.00% machines req'd 1.50 labour req'd 3.00 Family Size % capacity used 47.92% machines req'd 0.96 labour req'd 2.88

Year 1 150 115

Year 2 170 140 56.67% 1.70 3.40 58.33% 1.17 3.50

Year 3 200 170 66.67% 2.00 4.00 70.83% 1.42 4.25

Year 4 240 200 80.00% 2.40 4.80 83.33% 4.25 5.00

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