STRATEGIC CAPACITY
PLANNING
GROUP 5
WHAT IS CAPACITY ?
•Capacity
-The upper limit or ceiling on the load that an operating
unit can handle.
-Capacity needs include:
•Equipment
•Space
•Employee skills
Goal- to achieve a match between the long-term supply
capabilities of an organization and the predicted level of
long-term demand.
What is Capacity Planning?
1. Long Range Capacity Planning
2. Intermediate Range Capacity
Planning
3. Short Range Capacity Planning
Capacity Planning
Questions
•Key Questions:
-What kind of capacity needed?
-How much capacity is needed to match demand?
-When is it needed?
•Capacity plans are made a two level:
1.Long-term capacity plans
2.Short-term capacity plans
Importance of Capacity
Planning
1. Helps the company meet the future demands for product
and services
2. Affects operation decisions
3. Major determinant of initial cost
4. Affects competitiveness
5. Capacity affect the ease of managememt
Type of Capacity
•Production capacity
•Design capacity
•Effective capacity
•Maximum capacity
•Measure of capacity
. -Capacity utilization rate
-Efficiency
•Determinants of effective capacity
OPERATIONAL HUMAN RESOURCES
•training, job design,
•Inventory
employee
EXTERNAL decisions, motivation,
inspection and absenteeism, turn
•Product standard quality control over
safety regulations,
labor activities
PROCESS-quality and quantity of process
FACILITY-cost of transportation, distance to
market, energy resources etc.
PRODUCT-uniformity of product/services
Step in the Capacity Planning
Process
THERE ARE SEVERAL STEP IN THE CAPACITY PLANNING
PROCESS:
1. Estimate future capacity requirements.
2. Evaluate existing capacity and facilities and identity gaps.
3. Identity alternative for meeting requirements.
4. Conduct financial analysis of each alternative.
5. Assess key qualitative issues of each alternative.
6. Select the alternative to pursue that will be best in the long term.
7. Implement the selected alternative.
8. Monitor results.
Long range capacity
planning
•Long range capacity planning involves providing facilities
such as land, buildings, machine, tools, equipment,
material, personnel, utilities. Planning and stablishing a
new production facilitu could take 5-10 yrs.and therefore
such a facility would be expected to remain economically
productive to another 15-20:years or so.
ADVANTAGE OF HAVING A CAPACITY CUSHION
• Extra capacity to meet demand excess of forecasted demand
• Ability to satisfy peak demands
• Reduced production costs
• Product and volume flexibility
• Improved quality of product and services
SOURCES OF CAPACITY TO MEET
CAPACITY NEEDS
•There are many ways available to a firm to change its capacity. Firms may either
have shortage of capacity or excess capacity. The long-range capacity needs of an
organization can be changed in the following ways:
Where present capacity is not sufficient to meet the forecast demand for the products
and services, capacity can be expanded by:
• Subcontracting component parts, sub units or even entire products to other
firms.
• Acquiring other firms, facilities or resources.
• Building new plants and buying equipment/machinery etc.
• Expanding, modernizing or modifying existing facilities.
• Reactivating facilities which are on standby status.
When the present capacity is in excess of the expected
future needs, capacity can be reduced by:
•Selling off existing facilities, selling inventories and laying-
off or transferring employees placing some facilities on
standby status and selling the inventories and laying off or
transferring employers of such surplus facilities
CAPACITY MANAGEMENT
To enhance capacity management the following approaches to capacity
alternative could be developed:
1. Designing flexibility into the system
2. Differentiating between new and nature products or services
3. Taking a big picture approach to capacity changes
4.Preparing to deal with 'chunks' of capacity
5. Attempting to smoothen out capacity requiREMENTS
6. Identifying the optinal operating level
SELECTING FROM ALTERNATIVE SOURCES OF
CAPACITY
Before selecting the best alternative from among the several alternative sources
of capacity an organization needs to examine or evaluate the alternatives for
future capacity from several different perspectives.
The most important perspective is economic consideration. The questions to be
answered are:
• Will an alternative be economically feasible?
• What would be the operating and maintenance cost?
• How soon it can be acquired?
• What would be the operating and maintenance cost?
• What would be its useful life?
• Would it be compatible with present personnel and present operating methods?
• What would be the public opinion or reaction to a new facility?
APPROACHES IN CAPACITY PLANNING AND
FACILITY PLANNING DECISIONS
Break-even Analysis
• It focuses on relationships between cost, revenue and volume of
output
• This analysis facilitates estimation of profit under different
operating conditions; it is particularly useful for comparing
capacity alternatives
• This technique involves identification of all costs related to the
production of a given product .
-ASSUMPTION
For cost volume analysis following assumptions to be made:
• One or a few products having the same cost characteristics are
involved
• The volume of the product produced can be sold
• The variable cost per unit does not change with volume of output
• Fixed cost does not change when volume of output changes or they
are set up changes
• The revenue per unit is the same regardless of volume sold
• Revenue per unit exceeds variable cost per unit
FINANCIAL ANALYSIS
•Financial analysis helps manager to take decisions
regarding allocationg of scarce funds to alternative
investment proposals.
Two important terms used in financial analysis are:
•Cash flows
•Present value
DECISION THEORY/DECISION TREE
ANALYSIS
• Decision analysis is helpful for financial comparison of alternatives under
conditions of risk or uncertainty.
• A decision tree is a schematic model of the sequence of steps in a problem and
the condition and consequences of each step.
• Decision trees are used in situations involving multiphase decisions and
interdependent decisions as aids to managers who must see clearly what
decisions must occur and the interdependence of the decision.
WAITINGS LINE ANALYSIS
•Waiting line analysis or queuing theory is
often used for designing of service system by
determining the service capacity and expected
cost for various levels of service capacity.
