5-1 Capacity Planning
Operations Management
William J. Stevenson
8th edition
5-2 Capacity Planning
CHAPTER
5
Capacity Planning
For Products and Services
Operations Management, Eighth Edition, by William J. Stevenson
McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
5-3 Capacity Planning
Capacity Planning
• Capacity is the upper limit or ceiling on the
load that an operating unit can handle.
• The basic questions in capacity handling are:
• What kind of capacity is needed?
• How much is needed?
• When is it needed?
5-4 Capacity Planning
Importance of Capacity Decisions
1. Impacts ability to meet future demands
2. Affects operating costs
3. Major determinant of initial costs
4. Involves long-term commitment
5. Affects competitiveness
6. Affects ease of management
7. Globalization adds complexity
8. Impacts long range planning
5-5 Capacity Planning
Capacity
• Design capacity
• maximum output rate or service capacity an
operation, process, or facility is designed for
• Effective capacity
• Design capacity minus allowances such as
personal time, maintenance, and scrap
• Actual output
• rate of output actually achieved--cannot
exceed effective capacity.
5-6 Capacity Planning
Efficiency and Utilization
Actual output
Efficiency =
Effective capacity
Actual output
Utilization =
Design capacity
Both measures expressed as percentages
5-7 Capacity Planning
Efficiency/Utilization Example
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
5-8 Capacity Planning
Determinants of Effective Capacity
• Facilities
• Product and service factors
• Process factors
• Human factors
• Operational factors
• Supply chain factors
• External factors
5-9 Capacity Planning
Strategy Formulation
• Capacity strategy for long-term demand
• Demand patterns
• Growth rate and variability
• Facilities
• Cost of building and operating
• Technological changes
• Rate and direction of technology changes
• Behavior of competitors
• Availability of capital and other inputs
5-10 Capacity Planning
Key Decisions of Capacity Planning
1. Amount of capacity needed
2. Timing of changes
3. Need to maintain balance
4. Extent of flexibility of facilities
city cushion – extra demand intended to offset unce
5-11 Capacity Planning
Steps for Capacity Planning
1. Estimate future capacity requirements
2. Evaluate existing capacity
3. Identify alternatives
4. Conduct financial analysis
5. Assess key qualitative issues
6. Select one alternative
7. Implement alternative chosen
8. Monitor results
5-12 Capacity Planning
Make or Buy
1. Available capacity
2. Expertise
3. Quality considerations
4. Nature of demand
5. Cost
6. Risk
5-13 Capacity Planning
Developing Capacity Alternatives
• Design flexibility into systems
• Take stage of life cycle into account
• Take a “big picture” approach to capacity
changes
• Prepare to deal with capacity “chunks”
• Attempt to smooth out capacity requirements
• Identify the optimal operating level
5-14 Capacity Planning
Economies of Scale
• Economies of scale
• If the output rate is less than the optimal level,
increasing output rate results in decreasing
average unit costs
• Diseconomies of scale
• If the output rate is more than the optimal level,
increasing the output rate results in increasing
average unit costs
5-15 Capacity Planning
Evaluating Alternatives
Figure 5.3
Production units have an optimal rate of output for minimal cost.
Average cost per unit
Minimum average cost per unit
Minimum
cost
0 Rate of output
5-16 Capacity Planning
Evaluating Alternatives
Figure 5.4
Minimum cost & optimal operating rate are
functions of size of production unit.
Average cost per unit
Small
plant Medium
plant Large
plant
0 Output rate
5-17 Capacity Planning
Planning Service Capacity
• Need to be near customers
• Capacity and location are closely tied
• Inability to store services
• Capacity must be matched with timing of
demand
• Degree of volatility of demand
• Peak demand periods
5-18 Capacity Planning
Cost-Volume Relationships
Figure 5.5a
FC
+
Amount ($)
VC C )
t = t (V
s o s
co c
tal bl e
To a r i a
l v
ta
To
Fixed cost (FC)
0
Q (volume in units)
5-19 Capacity Planning
Cost-Volume Relationships
Figure 5.5b
ue
en
Amount ($)
ev
l r
t a
To
0
Q (volume in units)
5-20 Capacity Planning
Cost-Volume Relationships
Figure 5.5c
u e
e n f i t
Amount ($)
e v r o
r P
a l t
t o s
To t a l c
To
0 BEP units
Q (volume in units)
5-21 Capacity Planning
Break-Even Problem with Step Fixed Costs
Figure 5.6a
C =
+ V
FC
TC
= TC
V C
+
FC 3 machines
= TC
VC
C + 2 machines
F
1 machine
Quantity
Step fixed costs and variable costs.
5-22 Capacity Planning
Break-Even Problem with Step Fixed Costs
Figure 5.6b
$
BEP
3
TC
BEP2
TC
3
TC
2
TR 1
Quantity
Multiple break-even points
5-23 Capacity Planning
Assumptions of Cost-Volume Analysis
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
5-24 Capacity Planning
Financial Analysis
• Cash Flow - the difference between cash
received from sales and other sources, and
cash outflow for labor, material, overhead,
and taxes.
• Present Value - the sum, in current value, of
all future cash flows of an investment
proposal.
5-25 Capacity Planning
Calculating Processing Requirements
S ta n d a rd
Annual p r o c e s s i n g t im e P r o c e s s in g t im e
P ro d u c t Dem and p e r u n it ( h r .) n e e d e d (h r.)
#1 400 5 .0 2 ,0 0 0
#2 300 8 .0 2 ,4 0 0
#3 700 2 .0 1 ,4 0 0
5 ,8 0 0
5-26 Capacity Planning
Location/Criteria
PS11
Guitar site location
5-27 Capacity Planning
Capacity/Design
STA11
Demand/ patients/ staffing/ variation at St. Alexius Hospital
5-28 Capacity Planning
Process Flow Improvement
SU6
Redesign of layout at Toyota
