Capacity PlanningCapacity refers to an upper limit or ceiling on the load that an operating unit can handle

The basic questions are:

• What kind of capacity is needed? • How much is needed? • When it is needed?

Impact on the ability of the organization to meet future demands for products & services

Major determinant of initial cost – greater the capacity, larger the investment

Can affect competitiveness – excess capacity or flexible capacity

Affects the ease of management

Design Capacity: maximum attainable output

Effective Capacity: maximum possible output with scheduling difficulties, machine maintenance & so on

Utilization is always less than efficiency

capacityEffectiveoutputActual

Efficiency

capacityDesignoutputActualnUtilizatio

Capacity Planning

Determinants of Effective Capacity

Facilities • Design – including size & provision of expansion• Location – transportation cost, distance to market, labor supply • Layout – smoothness of flow, as will as lighting & ventilation

Capacity Planning

Product / services• Design – easier the design, easier to produce • Product Mix – varieties of product reduce capacity

Process• Quantity – obvious determinant of capacity • Quality – low quality will require inspection & rework

Determinants of Effective CapacityHuman Factor

• Job content• Training/Experience• Motivation• Compensation

Capacity Planning

Operational• Scheduling differences in equipment capabilities • Materials management – shortage of materials/ complaints • Quality assurance – in process & incoming materials

External• Product standard – can restricts increasing capacity • Safety regulations • Unions

Capacity Requirement

Long term – relates to overall level of capacity e.g., facility size

Short term – relates to probable variations e.g., seasonal, random

Determined by forecasting demand over a time horizon, and then converting those forecasts into capacity requirement

Trend - How long- Slope of trend

Deviations are important as they can place severe strain to satisfy demand at sometimes & yet result in idle capacity at other times

Capacity Planning

Developing Capacity Alternatives

Design flexibility into systems Provisions for future expansions in the original design

Capacity Planning

Differentiate between new and matured products/servicesMatured product/services tends to be more predictable

Prepare to deal with capacity chunks Capacity increases are often acquired in fairly large chunks

Attempt to smooth out capacity requirement Need to identify products which can offset each other

Identify the optimal operation levelIn terms of unit cost of output

Evaluating Alternatives

Cost volume Analysis Total cost VCFCTC

Variable cost UQVC *

Total revenue RQTR *

Total Profit FCURQ )(*

TCTRP

URFCPQ

URFCQ

For breakeven

Financial Analysis

• Pay back period • Net present value • Internal rate of return

Capacity Planning