Capacity Planning
Capacity
- An upper limit or ceiling on the load that an operating
unit can handle
o the load might be in terms of the number of physical
units produced (e.g., bicycles assembled per hour)
or the number of services performed (e.g.,
computers upgraded per hour)
o the operating unit might be a plant, department,
machine, store, or worker
Capacity Planning
• The goal of strategic capacity planning is to
achieve a match between the long-term
supply capabilities of an organization and
the predicted level of long-term demand.
Key Questions in Capacity
Planning
1.What kind of capacity is needed?
2.How much is needed to match demand?
3.When is it needed?
Capacity Decisions are Strategic
1.Capacity decisions have a real impact on the ability of
the organization to meet future demands for products
and services.
2.Capacity decisions affect costs.
3.Capacity is usually a major determinant of initial cost.
4.Capacity decisions often involve long-term
commitment of resources.
Capacity Decisions are Strategic
5.Capacity decisions can affect competitiveness.
6.Capacity affects the ease of management.
7.Globalization has increased the importance and the
complexity of capacity decisions.
8.Because capacity decisions often involve substantial
financial and other resources, it is necessary to plan
for them far in advance
Defining and Measuring
Capacity
1. Design capacity: The maximum output
rate or service capacity an operation,
process, or facility is designed for.
2. Effective capacity: Design capacity minus
allowances such as personal time, and
maintenance.
Measures of Capacity
Defining and Measuring
Capacity
• The different measures of capacity are useful in defining
two measures of system effectiveness: efficiency and
utilization.
oEfficiency is the ratio of actual output to effective
capacity.
oCapacity utilization is the ratio of actual output to
design capacity.
Defining and Measuring
Capacity
• The different measures of capacity are useful in defining
two measures of system effectiveness: efficiency and
utilization.
Defining and Measuring
Capacity
• Computing Efficiency and Utilization Given the following
information, 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
Determinants of Effective
Capacity
Strategy Formulation
• A leading capacity strategy builds capacity in anticipation of
future demand increases. If capacity increases involve a long
lead time, this strategy may be the best option.
• A following strategy builds capacity when demand exceeds
current capacity.
• A tracking strategy is similar to a following strategy, but it adds
capacity in relatively small increments to keep pace with
increasing demand.
Strategy Formulation
• In some instances a decision may be made to incorporate a
capacity cushion, which is an amount of capacity in
excess of expected demand when there is some
uncertainty about demand.
oCapacity cushion = capacity − expected demand.
oTypically, the greater the degree of demand uncertainty,
the greater the amount of cushion used.
Capacity Planning Process
Select the
alternative to Implement the
Estimate future pursue that will selected
capacity be best in the alternative.
requirements. long term.
Evaluate existing Assess key
capacity and qualitative issues
Monitor results.
facilities and for each
identify gaps. alternative.
Identify
Conduct financial
alternatives for
analyses of each
meeting
alternative.
requirements.
Capacity Planning Process
• A bottleneck operation is
an operation in a
sequence of operations
whose capacity is lower
than the capacities of
other operations in the
sequence. As a
consequence, the capacity
of the bottleneck operation
limits the system capacity.
Forecasting Capacity
Requirements
• Long-term capacity needs forecasting demand over a time
horizon and then converting those forecasts into capacity
requirements.
• Short-term capacity needs are less concerned with cycles or
trends than with seasonal variations and other variations
from average.
DO IT IN HOUSE OR OUTSOURCE?
1.Available capacity
2.Expertise
3.Quality considerations
4.The nature of demand
5.Cost
6.Risks
DEVELOPING CAPACITY STRATEGIES
1. Design flexibility into systems.
2. Take stage of life cycle into account.
• introduction phase, it can be difficult to determine both the size of the market and the
organization’s eventual share of that market
• growth phase the overall market may experience rapid growth
• maturity phase the size of market levels off, and organizations tend to have stable
market shares.
• decline phase an organization is faced with underutilization of capacity due to
declining demand.
3. Take a “big-picture” (i.e., systems) approach to capacity changes.
4. Prepare to deal with capacity “chunks.”
5. Attempt to smooth out capacity requirements.
6. Identify the optimal operating level.
7. Choose a strategy if expansion is involved.
CONSTRAINT MANAGEMENT
Constraint management is a systematic approach used to identify, analyze, and
address limitations within an organization that hinder its ability to achieve its goals. By
focusing on constraints, businesses can optimize their processes, improve efficiency,
and enhance overall performance .
Constraint Something that limits the performance of a process or system
in achieving its goals.
• Seven categories of constraints:
• Market
• Resources
• Material
• Financial
• Supplier
• Knowledge or competency
• Policy
Cost-Volume Analysis
• Cost–volume analysis focuses on
relationships between cost, revenue,
and volume of output.
• The purpose of cost–volume
analysis is to estimate the income
of an organization under different
operating conditions. It is
particularly useful as a tool for
comparing capacity alternatives.
Cost-Volume Analysis
• TC = FC + VC VC = Q x v
• TR = R x Q
• P = TR – TC or P = (R x Q) – ((FC + (v x Q))
The difference between revenue per
unit and variable cost per unit, R – v,
• P = Q(R – v) – FC is known as the contribution
margin.
Cost-Volume Profit Analysis
• The volume of output needed for
total revenue to equal total cost is
computed using the formula
• The required volume, Q, needed
to generate a specified profit is
Cost-Volume Analysis
• The volume at which total cost and total revenue are equal
is referred to as the break-even point (BEP).
oWhen volume is less than the break-even point, there is
a loss; when volume is greater than the break-even
point, there is a profit.
oThe greater the deviation from this point, the greater the
profit or loss.
