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Capacity Planning
o Capacity is the upper limit or ceiling on the load that an operating unit can handle.
What kind of capacity is needed?Depends on the product or the service management intends to produce or
provide.
How much capacity is needed?
When the capacity is needed?Forecasting process helps us to find out how much is needed and when it
is needed.
CAPACITY PLANNINGCAPACITY PLANNING
Design Capacity: The maximum output rate or service capacity an operation, process or facility is designed for.
◦ Design capacity is the maximum rate of output achieved under ideal conditions.
Effective Capacity: Design capacity minus allowances such as personal time, maintenance and scrap.
◦ Effective capacity is usually less than design capacity owing to realities of changing product mix, periodic maintenance of equipment, lunch breaks, coffee breaks etc.
Actual Capacity: Rate of output actually achieved, cannot exceed effective capacity.
◦ Machine breakdowns, shortages of materials, quality problem etc.
CAPACITYCAPACITY
CAPACITY DECISIONS ARE STRATEGIC …CAPACITY DECISIONS ARE STRATEGIC …
• 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
EFFICIENCY AND UTILIZATIONEFFICIENCY AND UTILIZATION
Actual outputEfficiency =
Effective capacity
Actual outputUtilization =
Design capacity
Effective capacity acts as a lid on actual output. Increasing effective capacity is the key to
improve capacity utilization – correcting quality problems, maintain good operating condition,
fully trained employees etc.
EXAMPLE 01EXAMPLE 01
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual 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
EXAMPLE 02EXAMPLE 02
A loan processing operation that processes an average of 7 loans per day. The operation has a design capacity of 10 loans and per day and effective capacity of 8 loans per day.
STEPS FOR CAPACITY PLANNINGSTEPS 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
CAPACITY REQUIREMENTSCAPACITY REQUIREMENTS
A department works 8 hours a day, 250 days a year, and has these figures for usage of a machine:
Product Annual Demand
Processing Time Per Unit (hrs)
Total Processing Time (hrs)
1 400 5.0 2000
2 300 8.0 2400
3 700 2.0 1400
Total 5800
Requirement = 5800 hrs / (8 x 250) hrs per machine = 2.90 machines
1. One product is involved
2. Everything produced can be sold
3. Variable cost per unit is the same regardless of volume
4. Fixed costs do not change with volume
5. Revenue per unit constant with volume
6. Revenue per unit exceeds variable cost per unit
COST VOLUME ANALYSISCOST VOLUME ANALYSIS
Amou
nt ($
)
0Q (volume in units)
Total cost = VC + FC
Total variable cost (VC)
Fixed cost (FC)
COST VOLUME ANALYSISCOST VOLUME ANALYSIS
Amou
nt ($
)
Q (volume in units)0 BEP units
Profit
Total revenue
Total cost
COST VOLUME ANALYSIS (CONTD.)COST VOLUME ANALYSIS (CONTD.)
1. Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC)2. Profit (P) = Q (R – v) – FC3. Quantity to generate specific profit, Q = (P + FC) / (R –
v)4. QBEP = FC / (R – v)
Where,v = Variable cost per unitR = Price per unit (Also called revenue)
EXAMPLE 03EXAMPLE 03
The owner of old fashion berry pies, Mr. Simon, is planning a new lines of pies, which will require leasing new equipments for a monthly payment of $6,000. Variable costs would be $2.00 per pie, and pies retail for $7.00 each.
How many pies must be sold in order to break even? What would be profit or loss if 1,000 pies sold in a month? How many pies must be sold to realize a profit of $4,000? If 2,000 can be sold. And profit target is $5,000, what price
should be charged per pie?
CHALLENGES OF PLANNING SERVICE CHALLENGES OF PLANNING SERVICE CAPACITYCAPACITY• The need to be near customers
• The inability to store service
• The degree of volatility of demand
