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TOPIC:

Capacity PlanningCapacity Planning

TOPIC:

Capacity PlanningCapacity Planning

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What is Capacity?What is Capacity?What is Capacity?What is Capacity?

“ “Capacity is the rate at which output can be produced Capacity is the rate at which output can be produced by an operating unit --- a machine, process, facility, by an operating unit --- a machine, process, facility, or company”.or company”.

Capacity is expressed as:Capacity is expressed as:

The No. of units of output produced per unit time.The No. of units of output produced per unit time.

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Importance of Capacity DecisionsImportance of Capacity DecisionsImportance of Capacity DecisionsImportance of Capacity Decisions

Capacity information is imp. for planning & scheduling.Capacity information is imp. for planning & scheduling.

Its strategically important that you select the amount of Its strategically important that you select the amount of production capacity to have.production capacity to have.

Capacity decision establish the parameters within which Capacity decision establish the parameters within which the organization must operate in short to intermediate the organization must operate in short to intermediate term.term.

Capacity decision will fix the production technology & Capacity decision will fix the production technology & cost structure. e.g. Large-capacity facilities often use cost structure. e.g. Large-capacity facilities often use large, specialized, high-speed equipment & specialized large, specialized, high-speed equipment & specialized labor; consequently high fixed costs but low marginal labor; consequently high fixed costs but low marginal costs will be observed.costs will be observed.

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Capacity decisions require large financial Capacity decisions require large financial investments and long planning lead times and investments and long planning lead times and are not easily reversible in short term.are not easily reversible in short term.

This also affect the company’s ability to serve This also affect the company’s ability to serve customers quickly and conveniently.customers quickly and conveniently.

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Key Capacity Issues :Key Capacity Issues :Key Capacity Issues :Key Capacity Issues :

How much capacity to have.How much capacity to have.

When to add or eliminate it.When to add or eliminate it.

What type of capacity to add.What type of capacity to add.

As capacity and location decisions are clearly As capacity and location decisions are clearly interrelated so you have to coordinate them as well.interrelated so you have to coordinate them as well.

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Terms of Capacity PlanningTerms of Capacity PlanningTerms of Capacity PlanningTerms of Capacity Planning

Following are the terms of Capacity PlanningFollowing are the terms of Capacity Planning

Long-term capacity planningLong-term capacity planning

Short-term capacity planning Short-term capacity planning

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Steps in the Capacity Planning ProcessSteps in the Capacity Planning ProcessSteps in the Capacity Planning ProcessSteps in the Capacity Planning Process

Estimate the capacity of the present facilities.Estimate the capacity of the present facilities. Forecast the long-range future capacity needs.Forecast the long-range future capacity needs. Identify and analyze sources of capacity to meet these Identify and analyze sources of capacity to meet these

needs.needs. Select from among the alternative sources of Select from among the alternative sources of

capacity.capacity.

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Measurements of CapacityMeasurements of CapacityMeasurements of CapacityMeasurements of Capacity

As we have previously defined capacity as the rate at which output As we have previously defined capacity as the rate at which output can be produced by an operating unit --- a machine, process, facility, can be produced by an operating unit --- a machine, process, facility, or company. Whereas, we said that it can be expressed as the no. of or company. Whereas, we said that it can be expressed as the no. of units of output produced per unit time.units of output produced per unit time.

While measuring capacity we encounter problems at:While measuring capacity we encounter problems at:

(i)(i) Defining outputDefining output : :

Complication occurs when the process or facility produces two or Complication occurs when the process or facility produces two or more products that have different output rates. more products that have different output rates.

(ii)(ii) Conditions under which the system is assumed toConditions under which the system is assumed to

operateoperate..

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Measurements of CapacityMeasurements of CapacityMeasurements of CapacityMeasurements of Capacity

1 Output Rate Capacity1 Output Rate Capacity For a facility having a single product or a few For a facility having a single product or a few

homogeneous products, the unit of measure is homogeneous products, the unit of measure is straightforward (barrels of beer per month)straightforward (barrels of beer per month)

For a facility having a diverse mix of products, an For a facility having a diverse mix of products, an aggregate unit of capacityaggregate unit of capacity must be established must be established using a common unit of output (sales dollars per using a common unit of output (sales dollars per week)week)

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Measurements of Capacity Cont…Measurements of Capacity Cont…Measurements of Capacity Cont…Measurements of Capacity Cont…

2 Input Rate Capacity2 Input Rate Capacity Commonly used for service operations where Commonly used for service operations where

output measures are particularly difficultoutput measures are particularly difficult Hospitals use available beds per monthHospitals use available beds per month Airlines use available seat-miles per monthAirlines use available seat-miles per month Movie theatres use available seats per monthMovie theatres use available seats per month

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Measurements of CapacityMeasurements of CapacityMeasurements of CapacityMeasurements of Capacity

3 Capacity Utilization Percentage3 Capacity Utilization Percentage Relates actual output to output capacityRelates actual output to output capacity

Example: Actual automobiles produced in a Example: Actual automobiles produced in a quarter divided by the quarterly automobile quarter divided by the quarterly automobile production capacityproduction capacity

Relates actual input used to input capacityRelates actual input used to input capacity Example: Actual accountant hours used in a Example: Actual accountant hours used in a

month divided by the monthly account-hours month divided by the monthly account-hours availableavailable

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Analyzing Capacity-Planning DecisionsAnalyzing Capacity-Planning DecisionsAnalyzing Capacity-Planning DecisionsAnalyzing Capacity-Planning Decisions

Break-Even Analysis Break-Even Analysis Present-Value AnalysisPresent-Value Analysis Computer Simulation Computer Simulation Waiting Line Analysis Waiting Line Analysis Linear Programming Linear Programming Decision Tree AnalysisDecision Tree Analysis

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Example: King PublishingExample: King PublishingExample: King PublishingExample: King Publishing

Break-Even AnalysisBreak-Even AnalysisKing Publishing intends to publish a book in King Publishing intends to publish a book in

residential landscaping. Fixed costs are $125,000 per residential landscaping. Fixed costs are $125,000 per year, variable costs per unit are $32, and selling price year, variable costs per unit are $32, and selling price per unit is $42.per unit is $42.

A) How many units must be sold per year to A) How many units must be sold per year to break even? B) How much annual revenue is break even? B) How much annual revenue is required to break even? C) If annual sales are 20,000 required to break even? C) If annual sales are 20,000 units, what are the annual profits? D) What variable units, what are the annual profits? D) What variable cost per unit would result in $100,000 annual profits cost per unit would result in $100,000 annual profits if annual sales are 20,000 units?if annual sales are 20,000 units?

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Example: King PublishingExample: King PublishingExample: King PublishingExample: King Publishing

Break-Even AnalysisBreak-Even Analysis

A) How many units must be sold per year to break even?A) How many units must be sold per year to break even?

Q = FC/(p-v) = $125,000/(42 – 32) = 12,500 booksQ = FC/(p-v) = $125,000/(42 – 32) = 12,500 books

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Example: King PublishingExample: King PublishingExample: King PublishingExample: King Publishing

Break-Even AnalysisBreak-Even Analysis

B) How much annual revenue is required to break even?B) How much annual revenue is required to break even?

TR = pQ = 42(12,500) = $525,000TR = pQ = 42(12,500) = $525,000

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Example: King PublishingExample: King PublishingExample: King PublishingExample: King Publishing

Break-Even AnalysisBreak-Even Analysis

C) If annual sales are 20,000 units, what are the annual C) If annual sales are 20,000 units, what are the annual profits?profits?

P = pQ – (FC + vQ)P = pQ – (FC + vQ)

= 42(20,000) – [125,000 + 32(20,000)]= 42(20,000) – [125,000 + 32(20,000)]

= 840,000 – 125,000 – 640,000= 840,000 – 125,000 – 640,000

= $75,000= $75,000

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Example: King PublishingExample: King PublishingExample: King PublishingExample: King Publishing

Break-Even AnalysisBreak-Even AnalysisD) What variable cost per unit would result in $100,000 D) What variable cost per unit would result in $100,000

annual profits if annual sales are 20,000 units?annual profits if annual sales are 20,000 units?

P = pQ – (FC + vQ)P = pQ – (FC + vQ)

100,000 = 42(20,000) – [125,000 + v(20,000)]100,000 = 42(20,000) – [125,000 + v(20,000)]

100,000 = 840,000 – 125,000 – 20,000v100,000 = 840,000 – 125,000 – 20,000v

20,000v = 615,00020,000v = 615,000

v = $30.75v = $30.75

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Ultimately, the output production facility or system is Ultimately, the output production facility or system is not determined simply by the physical size of the not determined simply by the physical size of the facility, the sizes or types of machines, or the no. of facility, the sizes or types of machines, or the no. of employees working. Production capacity, especially employees working. Production capacity, especially effective capacity, is affected by the design of the effective capacity, is affected by the design of the products and processes, the training of employees, the products and processes, the training of employees, the management of quality, and many other factors.management of quality, and many other factors.

The most important factors affecting production The most important factors affecting production capacity are:-capacity are:-

Factors that determine capacityFactors that determine capacity Factors that determine capacityFactors that determine capacity

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1. 1. Process DesignProcess Design : :

In multistage production processes the max. rate of output In multistage production processes the max. rate of output that can be achieved is governed by the slowest (lowest that can be achieved is governed by the slowest (lowest capacity) stage.capacity) stage.

2. 2. Product DesignProduct Design : :

With exactly the same personnel & equipment, the capacity With exactly the same personnel & equipment, the capacity for making a product that is well designed for production for making a product that is well designed for production will be greater than for a poorly designed one. will be greater than for a poorly designed one.

Factors that determine capacity (Contd…)Factors that determine capacity (Contd…)Factors that determine capacity (Contd…)Factors that determine capacity (Contd…)

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3. 3. Product QualityProduct Quality : :

In some cases, work methods, testing, and inspections intended In some cases, work methods, testing, and inspections intended to improve quality can reduce production capacity; In other to improve quality can reduce production capacity; In other cases, these methods and the resulting reduction in product cases, these methods and the resulting reduction in product defects can actually increase effective capacity.defects can actually increase effective capacity.

4. 4. Product VarietyProduct Variety : :

Processes that need to produce a wide variety of products must Processes that need to produce a wide variety of products must be structured in a fundamentally different way than those that be structured in a fundamentally different way than those that produce a single type of product. This structure and product produce a single type of product. This structure and product variety will reduce production capacity in exchange for greater variety will reduce production capacity in exchange for greater flexibility.flexibility.

Factors that determine capacity (Contd…)Factors that determine capacity (Contd…)Factors that determine capacity (Contd…)Factors that determine capacity (Contd…)

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5. 5. Production SchedulingProduction Scheduling : :

Scheduling that keeps product flows well balanced & Scheduling that keeps product flows well balanced & synchronized and unproductive time minimized will utilize synchronized and unproductive time minimized will utilize machines & personnel better and result in greater effective machines & personnel better and result in greater effective capacity.capacity.

6. 6. Materials ManagementMaterials Management : :

Shortages of materials can cause work stoppages, while excess Shortages of materials can cause work stoppages, while excess inventories can cause congestion and wasted time searching inventories can cause congestion and wasted time searching for materials. Procedures that keep all processes stocked with for materials. Procedures that keep all processes stocked with just enough materials enhance productivity and capacity.just enough materials enhance productivity and capacity.

Factors that determine capacity (Contd…)Factors that determine capacity (Contd…)Factors that determine capacity (Contd…)Factors that determine capacity (Contd…)

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7. 7. MaintenanceMaintenance : :

Equipment breakdowns and defects due to machine Equipment breakdowns and defects due to machine wear are two major sources of lost production.wear are two major sources of lost production.

8. 8. Job Design & Personnel ManagementJob Design & Personnel Management : :

Inadequate training, poor job design, overwork, and Inadequate training, poor job design, overwork, and absenteeism all lead to lost production.absenteeism all lead to lost production.

Factors that determine capacity (Contd…)Factors that determine capacity (Contd…)Factors that determine capacity (Contd…)Factors that determine capacity (Contd…)