CAPACITY

PLANNING

By: Marge Ethan Urbiztondo-Odoya, PhD BM

 “You can’t build it if you don’t have the capacity”

Strategic Capacity
Planning
 Planning of the overall capacity level of capital-
intensive resources—facilities, equipment, and overall
labor force size —that supports the company’s long-
range competitive strategy.
Capacity Planning
Basic Questions

 What kind of capacity is needed?

 How much is needed?

 When is needed?
 What Is Capacity?

 The amount of output that a system is capable

of achieving over a specific period of time
 has a time frame
 can be also measured in terms of resource inputs
 cannot be stored for later use
Capacity
• “throughput” or number therefore a large portion
of units a facility can of fixed cost
hold, receive, store or 50bag
50bag s
produce in a period of
s
time.
50bag 50ba
50bags
• Determines capital s gs
requirements and
Capacity 50bag
• Determines if demand will 50bag s
s
be satisfied or if facilities
will be idle. 50bag
50ba
s gs
50ba
• The ability to produce/ gs
deliver
Objective

 To reach an optimal level where

production capabilities meet
demand
Capacity Planning
Three time horizons
• Add facilities. • Subcontract *
• Add long lead time • Add equipment
Modify capacity equipment • Add shifts • Schedule jobs
Intermediate-range
Long-range planning • Schedule
planning/aggregate planning
( <1 year) • Add personnel personnel
( 3 to 18 months)

* • Build or use • Allocate

inventory machinery
Use capacity

Short-range Planning (scheduling)

– usually up to 3 months

*limited options exist

Design and Effective Capacity
• Design Capacity - is the maximum
theoretical output of a system in a
given period under ideal conditions.

• Effective Capacity – is the capacity a

firm expects to achieve given the
current operating constraints. It is
often lower than the design capacity.
( 82%)
Two measures of system
performance
• Utilization – percent of design capacity
actually
achieved.
• Efficiency – percent of effective capacity
actually
achieved.
 FORMULA

Utilization = Actual output/ Design capacity (s-7-

1)

Efficiency = Actual output/ Effective capacity (s-

7-2)
Example
 Sara James Bakery has a plant for processing Deluxe breakfast rolls and wants to better
understand its capability. Determine the design capacity,, utilization, and efficiency for
this plant when producing this deluxe roll.
 Approach. Last week the facility produced 148,000 rolls. The effective capacity is
175,000 rolls. The production line operates 7 days per week, eight three 8-hour shifts per
day. The line was designed to process the nut-filled, cinnamon, flavoured deluxe roll at a
rate of 1,200 per hour. The firm first computes the design capacity and then uses
equation (s-7-1) to determine utilization and equation (s-7-2) ton determine efficiency.

 Solution. Design Capacity= (7days x 3shifts x 8hours) x (1,200 rolls per hour) =
201,600 rolls
Utilization = Actual Capacity/Design capacity = 148,000 / 201,600 = 73.4%

Efficiency = Actual output/ Effective capacity = 148,000 / 175,000 = 84.6%

 Insight. The bakery now has the information necessary to evaluate efficiency.
 Learning Exercise. If the actual output is 150,000, what is efficiency? (answer: 85.7%)
Capacity Considerations
 Forecast demand accurately: An accurate forecast is
paramount to the capacity decision. Whatever the new product, it’s
prospects and the life cycle of existing products, must be determined
(which products are being added and which are being dropped, as well
as their expected volumes).

 Understand the technology and capacity

increments: The number of initial alternatives may be large, but
once the volume is determined, technology decisions may be aided by
analysis of cost, human resources required, quality, and reliability. Such
a review often reduces the number of alternatives to a few. The
operations manager is held responsible for the technology and the
correct capacity increment.
Capacity Considerations cont.
 Find the optimum operating level
(volume): Technology and capacity increments often
dictate an optimal size for a facility.
 e.g. A roadside motel may require 50 rooms to be viable. If
smaller, the fixed cost is too burdensome,. If larger, the facility
becomes more than one manager can supervise. This issue is
known as economies and diseconomies of scale.
Capacity Considerations cont.
 Build for change: In our fast-paced world,
change is inevitable. So operations managers built
flexibility into the facility and equipment. They
evaluate the sensitivity of the decision by testing
several revenue projections on both the upside and
downside for potential risks. Buildings can often be
built in phases; and buildings and equipment can be
designed with modifications in mind to accommodate
future changes in product, product mix, and
processes.

 ***Rather than strategically manage capacity, managers may tactically

manage demand.
Planning Service
Capacity
 Time – service is perishable and must be consumed
when it is produced

 Location – people are not willing to travel long

distances to obtain a service so they must be located
near the customer

 Volatility of Demand – demand for services is subject

to change
 Capacity Utilization & Service
Quality
 Best operating point is near 70% of capacity
 From 70% to 100% of service capacity, what might happen to
service quality? Why?
 Context specific tradeoff
 Capacity Planning Concept
Best Operating Level
 Design capacity for which average unit cost is at
the minimum

Average
unit cost
Underutilization Overutilization
of output
Best Operating
Level

Volume
 Capacity Planning Concept
Capacity Utilization

Capacity used
Utilization 
Best operating level
 Capacity used

rate of output actually achieved
 Best operating level

design capacity
 Capacity Planning Concept
Example - Capacity Utilization

 Design capacity = 50 trucks/day

 Actual output = 36 trucks/day

 Utilization = ?

Solution:
Capacity used 36 trucks/day
Utilization  = 0.72
Best operating level 50 trucks/day
 Economies & Diseconomies of Scale

Economies of Scale and the Experience Curve working

100-unit
Average plant
unit cost
of output 200-unit
plant 400-unit
300-unit
plant
plant

Diseconomies of Scale start working

Volume
 Determining Capacity Requirements

 Forecast sales within each individual product line

 Calculate equipment and labor requirements to meet the

forecasts

 Project equipment and labor availability over the planning

horizon
Managing Demand
Demand Exceeds Capacity Exceeds Adjusting to Seasonal
Capacity Demand Demand
When demand exceeds When capacity exceeds A seasonal or cyclical
capacity, the firm may be able demands, the firm may want pattern of demand is
to curtail demand simply by to stimulate demand through another capacity challenge.
raising prices, scheduling long price reductions or aggressive In such cases, management
lead times (which may be marketing, or it may may find it helpful to offer
inevitable), and discouraging accommodate the market products with complementary
marginally profitable business. through product changes. When demand patterns - that is,
However, because inadequate decreasing customer demand is products for which the
facilities reduce revenue below combined with old and demand is high for one when
what is possible, the long-term inflexible processes, layoffs and low for the other.
solution is usually to increase plant closing may be necessary
capacity. to bring capacity inline with
demand.
Options for adjusting capacity
1. Making staffing changes(increasing or decreasing the
number of employees or shifts)
2. Adjusting equipment (purchasing additional
machinery or selling or leasing out existing
equipment)
3. Improving processes to increase throughput
4. Redesigning products to facilitate more throughput
5. Adding process flexibility to better meet changing
product preferences
6. Closing facilities.
Demand Capacity Management in
the
In the service sector Service
, scheduling customersSector
is demand management, and
scheduling the work force is capacity management.

Demand Management
When demand and capacity are fairly well matched,
demand management can often be handled with
appointments, reservations, or first-come, first-served
rule. In some business, business such as doctors’ and
lawyers’ offices, an appointment system is the schedule
and is adequate.
Reservation Systems work well in rental car agencies,
hotels, and some restaurants as a means of minimizing
customer waiting time and avoiding disappointment
over unfilled service.
 Demand Capacity Management in
the
When managing Service
demand Sector
is not feasible, then managing
capacity through changes in full-time , temporary, or
part-time staff may be an option.
For instance:
Hospitals may find capacity limited by a
shortage of board certified radiologist willing to
cover the graveyard shifts. Getting fast and
reliable radiology readings can be the difference
between life and death for an emergency room
patient.
 Strategies for Meeting
Demand
 Level production - produce at constant rate & use
inventory as needed to meet demand
 Chase demand - change workforce levels so that
production matches demand
 Subcontracting - useful if supplier meets quality &
time requirements
 GOODS AND SERVICES SELECTION

Product Life Cycles

Introductory Phase – products are still being “fine-
tuned”
Growth Phase– product design has begun to stabilize.
Effective forecasting
of capacity requirement is necessary.
Maturity Phase - competitors are “established”
Decline – product life cycle is at an end.
 End