CAPACITY PLANNING

Group members : Maymay Galvez Instructor: Ms. Fraulein M. Herrera

Lynard Torreliza
Janessa Vianca Dote
Jamil S. Brillantes
Mark Atabilo
• Capacity
 The maximum amount that something can contain.
 Capacity is the number of units or the upper limit a facility can hold,
receive, store, or produce in a period of time. The capacity of an operating
unit is vital information in process planning and in quantifying production
capability in terms of inputs and outputs.

The following are the questions that should be answered in doing capacity
planning:
1. What kind of capacity needed?
2. How much is needed?
3. When is it needed?
 • Importance of Capacity Decisions
(Stevenson, 1999)

1. Capacity decisions have a strong influence on the ability of the

company to meet future demands for products and services they offer.
If there is a strong demand for the product, the company can take
advantage of a lot of opportunities if they were able to satisfy the
demand.
2. Capacity decisions affect operating costs. At some rate, capacity
should be balanced with demand requirements to minimize the
operating costs. However, in practice, actual demand is not always the
same with expected demand.
3. Capacity is usually a major determinant of cost. Usually, the greater the
capacity, the greater is its initial cost. However, this is not the case all
the time, larger units tend to cost proportionately less than smaller units.
4. Capacity decisions often involve long-term commitment to resources.
Once the decisions is made, it may be difficult or impossible to alter the
decisions without acquire costs.
5. Capacity decisions can affect competitiveness. If a firm has the ability
to increase their capacity or has excess capacity, other firms may find it
difficult to enter the market.
This Photo by Unknown Author is licensed under CC BY-NC-ND
• Defining and Measuring Capacity
1. Design Capacity – maximum output that can possibly be attained under
ideal conditions.
2. Effective Capacity – the maximum possible output given its product mix,
methods of scheduling, maintenance, and standards of quality.
To measure system effectiveness, efficiency and utilization:
Efficiency is the actual output over effective capacity:
Actual Output
Efficiency = x 100%
Effective Capacity
Utilization is the actual output over design capacity:
Actual Output
Utilization = x 100%
Design Capacity
Examples :
• Determinants of Effective Capacity
The following are some of the factors that greatly impact capacity
and other operating decisions.
1. Facilities factors – the following factors under facilities that
determine if the human labor can perform their job well or can
accomplish the design characteristics are: design of facilities,
ventilation provision for expansion, location, distance,
transportation costs, and layout of the area among others.
2. Product/Service factors – the design of the of the product and
service influence capacity. The more similar the items are, the
greater the number can be produces. Same with a restaurant
business, the fewer items on the menu. The service can be
performed at a faster rate. Thus, if the company has standardized
methods and materials. It can result to greater capacity.
3. Process factors – the quantity capability of a process is an obvious
influencing element of capacity. With regards to quality, if it is not
achieved or at part with the standards, rate of output will be slowed
by the inspection and improvement activities.
4. Human factors – training, skills, and experience needed to perform
the job, and the level of difficulty of the tasks has an impact on the
potential and actual output.
5. Operational factors – inventory stocking decisions scheduling, quality
inspection, and control procedures influence effective capacity.
6. External factors – government regulatory agencies requirements,
labor unions contract limits can restrict the management’s plans of
increasing capacity. As an example, too much paper work and red
tape in government agencies can hinder the company to further
expand the business, limiting capacity. Also, clauses in the union
contract that limits the working hours of employees can have an
effect on production.
• Determining Capacity Requirements
Capacity planning decisions involve long-term and short-term
considerations.
 Long-term capacity needs are determined by forecasting demand
over a time horizon.
 Short-term capacity is more concerned with seasonal variations
and other variations from average.

Yearly Tourism, vacations, sports and recreation, gasoline

consumptions, education
Monthly Bank Transactions
Weekly Restaurant meals, retail sales, automotive rentals
Daily Telephone calls, retail sales, public transportation
• Developing Capacity Alternatives

The following are some of the considerations in developing capacity

alternatives:

1. Design flexibility into the system

2. Take a “big picture” approach to capacity changes.
3. Smooth out uneven capacity requirements.
4. Identify the optimal operating level.
• Evaluation Alternatives

 In evaluating alternatives, possible negative opinions from the

public must also be considered. As an example, a decision to build
a new power plant would definitely cause hostile reactions. Any
decision that would disrupt people’s lives and property is bound to
generate negative reactions
In economic standpoint, the following techniques are used to
evaluate capacity alternatives.
 Break-even analysis - Is the technique for evaluating process and
equipment alternatives.
 Break-even Point(BEP)- is the volume of output at which total cost
(TC) and total revenue (TR) are equal.
Elements of Break-even Analysis:
1. Fixed costs (FC): costs that continue even if no units are produced
such as depreciation, taxes, debt, and mortgage payments.
2. Variable costs (VC): costs that vary with the volume of units
produced such as labor, materials, and portion of utilities.
Assumptions underlying basic Break-even Model
 Revenue and costs are related linearly to volume. However, neither
fixed cost nor variable cost need to be in straight line.
 All information is known with certainty.
 No time value of money.