1. For Products and Services
Capacity Planning
For Products and Services

2. Facility Planning Facility planning answers:
What kind of capacity is needed?
How much capacity is needed?
When more capacity is needed?
Where facilities should be located (location)
How facilities should be arranged (layout)

3. Capacity (Definition of)
The number of units a facility can hold, receive, store or produce in a period of time
It is the upper limit or ceiling on the load that an operating unit can handle. It includes equipment, space, employee skills

4. Capacity Planning Establishes overall level of productive resources
Affects lead time responsiveness,
cost & competitiveness
Determines when and how much to increase capacity

5. Types of Planning Over a Time Horizon
Add Facilities
Add long lead time equipment
Schedule Jobs
Schedule Personnel
Allocate Machinery
Sub-Contract
Add Equipment
Add Shifts
Add Personnel
Build or Use Inventory
Long Range Planning
Intermediate Range Planning
Short Range Planning
Modify Capacity
Use Capacity *
*Limited options exist

6. 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
Globalization adds complexity
Impacts long range planning

7. Capacity Measures Design capacity Effective 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

8. Capacity Related Concepts
Actual output
Rate of output actually achieved—cannot exceed effective capacity
Utilization
Actual output as a percent of design capacity
Efficiency
Actual output as a percent of effective capacity

9. Actual or Expected Output
(Effective Capacity)(Efficiency)

10. Efficiency
Measure of how well a facility or machine is performing when used
Actual output
Efficiency =
Effective Capacity
(expressed as a percentage)

11. Utilization
Measure of planned or actual capacity usage of a facility, work center, or machine
Actual Output
Utilization =
Design Capacity
(expressed as a percentage)

12. Efficiency/Utilization Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
Actual output = units/day
Efficiency = = 90%
Effective capacity units/ day
Utilization = Actual output = units/day
= 72% Design capacity units/day

13. Determinants of Effective Capacity
Facilities
Product and Service Factors
Process Factors
Human Factors
Policy Factors
Operational Factors
Supply Chain Factors
External Factors

14. Key Decisions in Capacity Planning
Amount of capacity needed
Timing of changes (frequency of capacity additions)
Need to maintain balance
Extent of flexibility of facilities
External sources of capacity

15. Steps for Capacity Planning
Estimate future capacity requirements
Evaluate existing capacity
Identify alternatives
Conduct financial analysis
Assess key qualitative issues
Select the best alternative
Implement the alternative chosen
Monitor results

16. Calculating Processing Requirements: Example 1 (1 of 2)

17. Calculating Capacity Requirements Example 1 (2 of 2)
If the department works one eight hour shift, 250 days a year, calculate the number of machines that would be needed to handle the required volume.
Solution:
5800/(250)(8) = 2.9
3 machines are needed

18. Special Requirements for Making Good Capacity Decisions
Forecasting the demand accurately
Understanding the technology and capacity increments
Finding the optimal operating level (volume)
Build for change

19. Make or Buy Available capacity Expertise Quality considerations
Nature of demand
Cost
Risk

20. Economies of Scale Economies of scale Diseconomies of scale
If the output rate is less than the optimal level, increasing output rate results in decreasing average unit costs
Diseconomies of scale
If the output rate is more than the optimal level, increasing the output rate results in increasing average unit costs

21. Best Operating Levels Average cost per room Best operating level
Economies of scale
Diseconomies of scale
# Rooms

22. Economies of Scale Small Medium plant Large plant Volume
Minimum cost & optimal operating rate are
functions of size of production unit.
Small
plant
Medium
plant
Average cost per unit
Large
plant
Volume

23. Economies & Diseconomies of Scale
100-unit
plant
200-unit
300-unit
400-unit
Volume
Average
unit cost
of output
Economies of Scale and the Experience Curve working
Diseconomies of Scale start working

24. The Experience Curve Cost or price per unit
As plants produce more products, they gain experience in the best production methods and reduce their costs per unit
Total accumulated production of units
Cost or
price
per unit
Yesterday
Today
Tomorrow

25. Strategies for Matching Capacity to Demand
Making staffing changes (increasing or decreasing the number of employees)
Adjusting equipment and processes – which might include purchasing additional machinery or selling or leasing out existing equipment
Improving methods to increase throughput; and/or
Redesigning the product to facilitate more throughput

26. Capacity Expansion Volume and certainty of anticipated demand
Strategic objectives for growth
Costs of expansion and operation
Incremental or one-step expansion
Frequency of capacity additions

27. Capacity Expansion Strategies
Expected Demand
Time in Years
Demand
New Capacity
Capacity leads demand with an incremental expansion
Capacity leads demand with a one-step expansion
Capacity lags demand with an incremental expansion
Attempts to have an average capacity, with an incremental expansion

28. Issues in Capacity Management
Design flexibility into systems
Take stage of life cycle into account
Take a “big picture” approach to capacity changes
Prepare to deal with capacity “chunks”
Attempt to smooth out capacity requirements
Identify the optimal operating level

29. Capacity Planning: Balance
Unbalanced stages of production
Units
per
month
Stage 1
Stage 2
Stage 3
6,000
7,000
5,000
Maintaining System Balance: Output of one stage is the exact input requirements for the next stage
Balanced stages of production
Units
per
month
Stage 1
Stage 2
Stage 3
6,000
6,000
6,000

30. Bottleneck Operation Machine #1 Machine #2 Bottleneck Operation
Bottleneck operation: An operation in a sequence of operations whose capacity is lower than that of the other operations
Bottleneck
Operation
Machine #1
Machine #3
Machine #4
10/hr
30/hr
Machine #2

31. Bottleneck Operation Operation 1 20/hr. Operation 2 10/hr.
Maximum output rate limited by bottleneck

32. Capacity Flexibility Flexible plants Flexible processes
Flexible workers

33. Evaluating Alternatives
Cost-volume analysis
Break-even point
Financial analysis
Cash flow
Present value
Decision theory
Waiting-line analysis

34. Cost-Volume Relationships (1 of 3)
Amount ($)
Q (volume in units)
Total cost = VC + FC
Total variable cost (VC)
Fixed cost (FC)

35. Cost-Volume Relationships (2 of 3)
Amount ($)
Q (volume in units)
Total revenue

36. Cost-Volume Relationships in Making Capacity Decisions (3 of 3)
Amount ($)
Q (volume in units)
BEP units
Profit
Total revenue
Total cost

37. Break-Even Problem with Step Fixed Costs (1 of 2)
Quantity
FC + VC = TC
Step fixed costs and variable costs.
1 machine
2 machines
3 machines

38. Break-Even Problem with Step Fixed Costs (2 of 2)$ TC
BEP 2 3 TR
Quantity 1
Multiple break-even points

39. 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

40. Decision Theory
Helpful tool for financial comparison of alternatives under conditions of risk or uncertainty
Suited to capacity decisions

41. Waiting-Line Analysis
Useful for designing or modifying service systems
Waiting-lines occur across a wide variety of service systems
Waiting-lines are caused by bottlenecks in the process
Helps managers plan capacity level that will be cost-effective by balancing the cost of having customers wait in line with the cost of additional capacity

42. Strategy Driven Investment
Select investments as part of a coordinated strategic plan
Choose investments yielding competitive advantage
Consider product life cycles
Include a variety of operating factors in the financial return analysis
Test investments in light of several revenue projections

43. 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.

44. Net Present Value F = future value P = present value I = interest rate
N = number of years

45. Planning Service Capacity
Inability to store services: Capacity must be available to provide a service when it is needed (capacity must be matched with the timing of demand)
Need to be near customers: Capacity and location are closely tied. Service goods must be at the customer demand point and capacity must be located near the customer
Volatility of Demand: Much greater than in manufacturing

46. Capacity Utilization & Service Quality
Best operating point is near 70% of capacity
From 70% to 100% of service capacity, what do you think happens to service quality?

47. Extras

48. Managing Existing Capacity
Demand Management
Capacity Management
Vary prices
Vary promotion
Change lead times (e.g., backorders)
Offer complementary products
Vary staffing
Change equipment & processes
Change methods
Redesign the product for faster processing

49. Complementary Products
Sales (Units)
5,000
Total
4,000
Snow-mobiles
3,000
2,000
1,000
Jet Skis J M M J S N J M M J S N J
Time (Months)