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Capacity Planning

Capacity refers to an upper l imit or ceiling on theload that an operating unit can handle

The basic questions are:

• What kind of capacity is needed?

• How much is needed?

• When it is needed? 

Impact on the ability of the organization to meet future

demands for products & services

Major determinant of initial cost – greater the capacity,larger the investment

Can affect competitiveness – excess capacity or flexible

capacity

 Affects the ease of management

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Design Capacity:  maximum attainable output

Effective Capacity: maximum possible output with

scheduling difficulties, machine maintenance & so on 

t i l iza t ion i s a lw ays l ess than e f f i c iency

capacity Effective

output  Actual Efficiency  =

capacity Designoutput  ActualnUtilizatio   =

Capacity Planning

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Determinants of Effective Capacity 

Facilities • Design – including size & provision of expansion

• Location – transportation cost, distance to market, labor supply

• Layout – smoothness of flow, as will as lighting & ventilation

Capacity Planning

Product / services• Design – easier the design, easier to produce

• Product Mix – varieties of product reduce capacity

Process• Quantity – obvious determinant of capacity 

• Quality – low quality will require inspection & rework  

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Determinants of Effective Capacity Human Factor  

• Job content

• Training/Experience

• Motivation

• Compensation

Capacity Planning

Operational• Scheduling dif ferences in equipment capabili ties

• Materials management – shortage of materials/ complaints

• Quality assurance – in process & incoming materials

External• Product standard – can restricts increasing capacity

• Safety regulations

• Unions

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Capacity Requirement

Long term – relates to overall level of capacity e.g., facility size

Short term – relates to probable variations e.g., seasonal, random

Determined by forecasting demand over a time horizon, and then

converting those forecasts into capacity requirement  

Trend- How long

- Slope of trend

Deviations are important as they can place severe strain to satisfy

demand at sometimes & yet result in idle capacity at other times  

Capacity Planning

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Developing Capacity Alternatives 

Design flexibil ity into systems

Provisions for future expansions in the original design  

Capacity Planning

Differentiate between new and matured products/services

Matured product/services tends to be more predictable

Prepare to deal with capacity chunks 

Capacity increases are often acquired in fairly large chunks

 Attempt to smooth out capacity requirement 

Need to identify products which can offset each other

Identify the optimal operation level

In terms of unit cost of output 

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Evaluating Alternatives

Cost volume nalysis

Total cost VC FC TC    +=

Variable cost U QVC    *=

Total revenue  RQTR   *=

Total Profit

FC U  RQ   −−=   )(*

TC TRP   −=

U  R

FC PQ

−

+=

U  R

FC Q

−

=For breakeven

Financial nalysis

• Pay back period 

• Net present value • Internal rate of return 

Capacity Planning