capacity planning

Capacity Planning

Capacity

• Productive Capacity, generally measured in physical units, refers either to the maximum output rate for products or services or to the amounts of key resources available in each operating period.

Strategic Capacity Planning• CapacityCapacity is the ability to hold, receive, store, or

accommodate raw materials, finished products, customers, etc.

• Strategic capacity planningStrategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labour force size.

• Capacity usedCapacity used is the rate of output actually achieved.• The best operating levelbest operating level is nominally the capacity for

which the process was designed.

Capacity UsedCapacity Utilization Rate

Best Operating Level

Capacity Decisions

• Capacity– maximum capability to produce

• rated capacity is theoretical• effective capacity includes

efficiency and utilization

• Capacity utilization– percent of available time spent working

• Capacity efficiency– how well a machine or worker performs

compared to a standard output level• Capacity load

– standard hours of work assigned to a facility• Capacity load percent

– ratio of load to capacity

Dimension of Demand Effect on capacity requirements

Quantity How much capacity is needed?

Timing When should capacity be available?

Quality What kind of capacity is needed?

Location Where should capacity be installed?

Capacity planning

• Capacity is the maximum output rate of a production or service facility

• Capacity planning is the process of establishing the output rate that may be needed at a facility:– Capacity is usually purchased in “chunks”– Strategic issues: how much and when to

spend capital for additional facility & equipment

– Tactical issues: workforce & inventory levels, & day-to-day use of equipment

Measuring Capacity Examples

• There is no one best way to measure capacity• Output measures like cars per day are easier to

understand • With multiple products, inputs measures work better

Type of Business Input Measures of Capacity

Output Measures of Capacity

Car manufacturer Labor hours Cars per shift

Hospital Available beds Patients per month

Pizza parlor Labor hours Pizzas per day

Retail store Floor space in square feet Revenue per foot

Facility Unit of Measure

Class A Uniform output characteristicsSteel Mill Tons of steel produced

daily

Shoe factory Pairs of shoes/shift

Commercial airline Passenger per route

Bottling plant gallon

Facility Unit of Measure

Class A Variable output characteristicsHospital (or hotel) Number of beds

Machine shop Machine hours daily

Stadium, night club Seating capacity

Telephone switchboard Number of trunklines


• Example:Example:– Engineers design engines and assembly lines

to operate at an ideal or best operating level to maximize output and minimize wear.

Under-utilization


Averageunit costof output

Volume

Over-utilization


Best Operating Level for a Hotel

How Much Capacity Is Best?

• The Best Operating Level is the output than results in the lowest average unit cost

• Economies of Scale:– Where the cost per unit of output drops as

volume of output increases– Spread the fixed costs of buildings &

equipment over multiple units, allow bulk purchasing & handling of material

• Diseconomies of Scale:– Where the cost per unit rises as volume

increases– Often caused by congestion (overwhelming

the process with too much work-in-process) and scheduling complexity

Economies of Scale

100-unitplant

200-unitplant 300-unit

plant

400-unitplant

Volume

Averageunit costof output

Economies of scale and operating level curves

Diseconomies of scale start to take effect

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/price per unit

Yesterday

TodayTomorrow

Capacity Decisions (cont.)

• Capacity increase depends on– volume and certainty of anticipated demand– strategic objectives– costs of expansion and operation

• Best operating level– % of capacity utilization that minimizes unit

costs• Capacity cushion

– % of capacity held in reserve for unexpected occurrences

Economies of Scale

• it costs less per unit to produce high levels of output– fixed costs can be spread over a larger

number of units– production or operating costs do not increase

linearly with output levels– quantity discounts are available for material

purchases– operating efficiency increases as workers gain

experience

Diseconomies of Scale

• Occur above a certain level of output– Diseconomies of Distribution– Diseconomies of Bureaucracy– Diseconomies of Confusion– Diseconomies of Vulnerability

Diseconomies of Confusion

Capacity Utilization

• Example:Example:– During one week of production, a plant

produced 83 units of a product. Its historic best utilization was 120 units per week. What is this plant’s capacity utilization rate?

Capacity UsedCapacity Utilization Rate


83 / 0.69 69%120 /

units weekunits week

Capacity Planning

• Three important considerations in capacity planning:– Maintaining system balance

• In the ideal case, the output of one stage is the exact input requirements for the next stage.

– Frequency of capacity additions• There are costs in adding capacity too frequently

as well as too infrequently.– External sources of capacity

• It might be cheaper to outsource some production.

• Determining capacity requirements– Forecast sales (within each individual product

line)– Calculate equipment and labour requirements

to meet forecasts– Project equipment and labour availability

Making Capacity Planning Decisions

• The three-step procedure for making capacity planning decisions is as follows:– Step 1: Identify Capacity Requirements

– Step 2: Develop Capacity Alternatives

– Step 3: Evaluate Capacity Alternatives

Determine project capacity requirements given a demand forecast

Formulate alternatives to meet future capacity requirements

Evaluate alternatives based on economicFactors, costs, revenues, risks, competition, Flexibility, quality, organizational and managerial adjustments

Select optimum alternative and implement capacity development plan

Procedure for developing a plan to change capacity

Capacity Requirements Example

• A manufacturer produces mustard in small and family-sized plastic bottles, with the following demand forecasts.

– Three 100,000 units-per-year machines are available for small bottle production. 2 operators are required per machine.

– Two 120,000 units-per-year machines are available for family-sized bottle production. 3 operators are required per machine.

• How much capacity is used and what are the machine and labour requirements?

Year 1 Year 2 Year 3 Year 4Small (000's) 150 170 200 240

Family (000's) 115 140 170 200

• Machine capacity: 300 000 small, 240 000 family size

• Labour availability: 6 for small, 6 for family size

Capacity Requirements Example (2)


Family (000's) 115 140 170 200Small% capacity used 50.00%machines req'd 1.50

labour req'd 3.00Family Size% capacity used 47.92%machines req'd 0.96

labour req'd 2.88

115 000 0.4792240 000

115 0000.96

120 000 per machine

3 0.96 2.88operatorsmachinesmachine


Family (000's) 115 140 170 200Small% capacity used 50.00% 56.67% 66.67% 80.00%machines req'd 1.50 1.70 2.00 2.40

labour req'd 3.00 3.40 4.00 4.80Family Size% capacity used 47.92% 58.33% 70.83% 83.33%machines req'd 0.96 1.17 1.42 4.25

labour req'd 2.88 3.50 4.25 5.00

capacity planning

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