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Capacity Planning
Dr. Richard Jerz
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Product Design & Manufacturing
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Capacity Planning
• Capacity is the upper limit or ceiling on the load that an operating unit can handle.
• The basic questions in capacity handling are:• What kind of capacity is needed?• How much is needed?• When is it needed?
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Importance of Capacity Decisions
• Impacts ability to meet future demands• Affects operating costs• Major determinant of initial costs• Involves long-term commitment• Affects competitiveness• Affects ease of management
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Capacity
• Design capacity• maximum obtainable output
• Effective capacity• Maximum capacity given product mix, scheduling
difficulties, and other doses of reality.• Actual capacity
• rate of output actually achieved--cannot exceed effective capacity.
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Efficiency and Utilization
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Actual outputEfficiency =
Effective capacity
Actual outputUtilization =
Design capacity
Actual outputEfficiency =
Effective capacity
Actual outputUtilization =
Design capacity
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Efficiency/Utilization Example
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Design capacity = 50 trucks/dayEffective capacity = 40 trucks/dayActual output = 36 units/day
Actual output = 36 units/day Efficiency = = 90%
Effective capacity 40 units/ day
Utilization = Actual output = 36 units/day = 72%
Design capacity 50 units/day
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Determinants of Effective Capacity
• Facilities• Products or services• Processes• Human considerations• Operations• External forces
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Strategy and Capacity
• Capacity planning linked to strategy• Product demand patterns• Growth rate and variability• Technological changes• Availability of capital and other inputs• Behavior of competitors• Make versus buy
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Decisions of Capacity Planning
• Amount of capacity needed• Timing of changes• Need to maintain balance between resource
utilization and company flexibility
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Steps for Capacity Planning
1. Estimate future capacity requirements2. Evaluate existing capacity3. Identify alternatives4. Conduct financial analysis5. Assess key qualitative issues6. Select one alternative7. Implement alternative chosen8. Monitor results
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Developing Capacity Alternatives
• Design flexibility into systems• Consider which “life-cycle” stage• Consider interaction of parts and bottlenecks• Attempt to smooth out capacity
requirements• Determine the optimal operating level
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Evaluating Alternatives
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Minimumcost
Aver
age
cost
per
uni
t
0 Rate of output
Production units have an optimal rate of output for minimal cost.
Figure 5-3
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Planning Service Capacity
• Need to be near customers• Capacity and location are closely tied
• Inability to store services• Capacity must be matched with timing of
demand • Degree of volatility of demand
• Peak demand periods
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Evaluating Alternatives
• Cost-volume analysis (break-even)• Financial analysis (engineering
economics/financial analysis)• Others• “Resource Consumption Model”
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Break-even Analysis
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Assumptions of Cost-Volume Analysis
• One product is involved• Everything produced can be sold• Variable cost per unit is the same regardless
of volume• Fixed costs do not change with volume• Revenue per unit constant with volume• Revenue per unit exceeds variable cost per
unit
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Financial Analysis
• Cash Flow - the difference between cash received from sales and other sources, and cash outflow for labor, material, overhead, and taxes.
• Present Value - the sum, in current value, of all future cash flows of an investment proposal.
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Engineering Economics
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Resource Consumption Model
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0.0
2.5
5.0
7.5
10.0
12.5
15.0
10000 20000 30000 40000 50000 60000 70000 80000 90000 100000
Average Part Cost($) vs Production VolumeProj= Should the tandem or single torch robotic system be purchased? , for Selected Alternatives
Avera
ge P
art
Cost(
$)
Production Volume
Tandem Torch Single Torch Manual Welding
Single Torch Op2 Tandem Torch Op2
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End
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