Capacity Planning

CAPACITY PLANNING

Capacity planning is the process of determining the production capacity needed by an organization to meet changing demand for its products.

The throughput, or the number of units a facility can hold, receive, store, or produce in a period of time

Capacity is the upper limit or ceiling on the load that an operating unit can handle.

MEASURES OF CAPACITY

Capacity can be expressed in terms of input & output, depending on the nature of business.

Organization Measure

OutputAutomobile manufacturer Numbers of autosSteel producer Tones of steelPower company Megawatts of electricity

InputAirline Numbers of seatHospital Number of bedsTax office Number of accountants 

Design capacity Maximum output rate or service capacity an operation, process, or facility is designed for.

Effective capacity Capacity a firm can expect to attain given its product mix, methods of scheduling, maintenance and standards of quality. Design capacity minus allowances such as personal time, maintenance and scrap.

MEASURES OF CAPACITY

PLANNING OVER A TIME HORIZON

Modify capacity Use capacity

Intermediate-range planning

Subcontract Add personnelAdd equipment Build or use inventory Add shifts

Short-range planning

Schedule jobs Schedule personnel

Allocate machinery

Long-range planning

Add facilitiesAdd long lead time equipment

* Limited options exist

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CAPACITY PLANNING DECISION

Capacity planning normally involves the following activities:  Assessing existing capacity. Forecasting capacity needs. Identifying alternative ways to modify capacity. Evaluating financial, economical, and technological

capacity alternatives. Selecting a capacity alternative most suited to

achieving strategic mission.

UTILIZATION AND EFFICIENCY

Utilization is the percent of design capacity achieved

Efficiency is the percent of effective capacity achieved

Utilization = Actual output/Design capacity

Efficiency = Actual output/Effective capacity

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

BAKERY EXAMPLE

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

BAKERY EXAMPLE

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

Efficiency = 148,000/175,000 = 84.6%

BAKERY EXAMPLE

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shiftsEfficiency = 84.6%Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

= (175,000)(.75) = 131,250 rolls

BAKERY EXAMPLE

THREE STEPS OF CAPACITY PLANNING

Determine Service Level Requirements

Analyse current capacity

Planning for future

Decision Tree Analysis

Structures complex, multiphase decisions Allows objective evaluation of alternatives Incorporates uncertainty Develops expected values

Example: Decision Tree Analysis

To absorb some short-term excess production capacity at its Chennai plant, Special Instrument Products is considering a short manufacturing run for either of two new products, a temperature sensor or a pressure sensor. The market for each product is known if the products can be successfully developed. However, there is some chance that it will not be possible to successfully develop them.

Revenue of Rs10,00,000 would be realized from selling the temperature sensor and revenue of Rs4,00,000 would be realized from selling the pressure sensor. Both of these amounts are net of production cost but do not include development cost. If development is unsuccessful for a product, then there will be no sales, and the development cost will be totally lost. Development cost would be Rs1,00,000 for the temperature sensor and Rs10,000 for the pressure sensor.

Example: Decision Tree Analysis

Temperature sensor

Pressure sensor

Neither

DevelopmentCost

Development outcome Sales Revenue Net Profit

Rs1,00,000

Rs10,000

Success

Failure

Success

Failure

Rs10,00,000

Rs0

Rs4,00,000

Rs0

Rs9,00,000

-Rs1,00,000

Rs3,90,000

-Rs10,000

Rs0