copy of capacity planning

8/6/2019 Copy of Capacity Planning

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Capacity Planning


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What is Capacity?

Capacity is the rate at which output can be produced by

an operating unit a machine, a process, a facility, a

company, an individual, a movie theater, a restaurant,

an auditorium, etc.

It is expressed as the number of units of output produced

per unit time

Examples: no. of cars assembled per day, no. ofstudents taught per semester, no. of computers

assembled per month, customers per day in a restaurant


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

Capacity also includes

Equipment

Space

Employee skills


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1. Impacts ability to meet future demands

2. Affects operating costs

3. Major determinant of initial costs

4. Involves long-term commitment

5. Affects competitiveness

6. Affects ease of management

7. Impacts long range planning

Importance of Capacity Decisions


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Capacity

Design capacity

maximum output rate or service capacity an

operation, process, or facility is designed for

Effective capacity

Design capacity minus allowances such as

personal time, maintenance, and scrap

Actual output

rate of output actually achieved- normally

cannot exceed effective capacity


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Efficiency and Utilisation

Actual outputEfficiency =

Effective capacity

Actual outputUtilisation =

Design capacity


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Efficiency/UtilisationExample

Design capacity = 50 trucks/day

Effective capacity = 40 trucks/day

Actual output = 36 units/day

Actual output = 36 units/dayEfficiency = = 90%

Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day= 72%

Design capacity 50 units/day


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Determinants ofEffective Capacity

Facilities equipment, technology

Product and service factors design

Process factors layout, process flow

Human factors motivation, training, job

design, job content


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Determinants ofEffective Capacity Cont..

Policy factors mission, management

capability/philosophy

Operational factors QC systems, variety

Supply chain factors materials management

External factors government regulations(hrs, safety, pollution), union agreements


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Need for Capacity Planning

Whenever the existing demand changes or addition/reduction of

products has to be made, then Capacity planning becomes a need


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Steps for Capacity Planning

1. Estimate future capacity requirements

2. Evaluate existing capacity

3. Identify alternatives

4. Conduct financial analysis

5. Assess key qualitative issues

6. Select one alternative7. Implement alternative chosen

8. Monitor results


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A

lternatives of meeting desired capacity through

Better Utilisation of resourcesHigher EfficiencyOvertime

Adding a shift or twoAdding new machinery, adding another

production unit

Capacity Reduction Sell-off existing facilities Sell-off surplus inventories Lay off or transfer employees to other units Shut down equipment & place them as standby


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Market

Considerations

Capacity

Decisions

Resources

Available

Capacity Planning

Classification

Based on time

horizon

Based on amount of

resources employed

Short term

Long term

Finite

Infinite

Capacity Planning


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Capacity Strategy

The main objective of capacity planning is to match

companysproduction capacity & customer demand in

the most profitable way.

Thus capacity planning should take into consideration

not only facility, production & distribution costs, but

also lost sales due to inability to supply on time & any

revenue gains due to quick response.

In addition, the capacity strategy should consider

demand patterns as well as supply capabilities.


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Strategy Formulation

Should Consider:

Demand patterns

Growth rate and variability

Facilities

Cost of building and operating

Technological changes

Rate and direction of technology changes

Behavior of competitors

Availability of capital and other inputs


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A few Questions regarding CapacityDecisions

How much capacity?

When do we add or eliminate capacity?

What type of capacity?

Where do we augment capacity?


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Key Decisions of Capacity Planning

1.Amount of capacity needed

2. Timing of changes

3. Need to maintain balance4. Extent of flexibility of facilities


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Capacity Planning Strategies

The term Strategy is derived from the Greek word strateg means

the art of the general

Alfred .D.Chandler defines Strategy as the determination of the basiclong term goals and objectives of an enterprise and the adoption of thecourses of action & the allocation of resources necessary for carryingout these goals

Strategy levels Corporate level

Business unit level

Functional level


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Strategies Involved Active strategies:

Objective- To smooth out the peaks and values of demand during planninghorizon to obtain a smoother load on production facilities; during periods of low

demand, sales can be encouraged through price cuts

Passive strategies:

1. Pure strategy- vary anyone of the factors such as work force, productionrate, inventory, sub contracting, capacity utilisation.

2. Mixed strategy- Involves two or more pure strategies

Strategy 1 : Vary the size of the work force in accordance with the fluctuationsin demand

Strategy 2 : Vary output rate keeping the same size of the work force and usingovertime

or idle time or short work week with reduced pay to workers.Strategy 3 : Maintaining the same level of production, keep inventory duringperiods of low

demand and using the accumulated inventory to meet high demandin other

time periods

Strategy 4 : Sub-contracting work during high demand periods

Strategy 5 : By varying the utilisation of capacity according to the demand tomet


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Capacity Expansion Strategies

1. Demand leading strategy (excess capacity)2. Demand Trailing strategy

(maximum capacity utilisation)

3. Demand matching strategy (Balanced capacity)

4. Steady expansion strategy (steady expansion)


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1. Demand leading (excess capacity)

+ can accommodate new/unexpecteddemand

+ can provide quick response and delivery

+ low overtime & subcontracting costs

high cost ofunused capacity

Note:+

= advantages- = disadvantages


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Eg.:

Hotel industry (immediate need of

rooms; if substitute exists can lose

sales)

Furnituremaker (can people wait?)

Restaurant

University


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2. Demand trailing (maximum capacity utilisation)

+ minimizes facility & equipment costs cannot accommodate new or unexpected demand

slow response at peak times

high overtime and/or subcontracting costs

often forced to add capacity at peaks of businesscycles

Loose sales

Note: (+) => advantages( - ) => disadvantages


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3. Demand matching strategy

+balances capacity & other costs

+provides reliable service & responsiveness

must be able to predict demand well or

have constant demand

Note: (+) => advantages

( - ) => disadvantages


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4. Steady expansion strategy

+ do not have to outguess competitors

+ price risk from adding capacity during peak

demand is reduced

Eg: Eggs- excess capacity can result if long term

demand falls short of expectations

Note: (+) => advantages

( - ) => disadvantages

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