Capacity planning involves determining the production capacity needed to meet demand. Key questions in capacity planning include determining the type, amount, timing, and location of capacity required. Maintaining the proper balance between capacity and demand is important to control costs and ensure customer needs are met. Various strategies such as incremental expansion, outsourcing, and demand management can be used to match capacity with fluctuating demand levels over time.

1. CAPACITY PLANNINGCAPACITY PLANNING
FOR PRODUCTS AND SERVICESFOR PRODUCTS AND SERVICES

2.  What kindWhat kind of capacity is needed?
 How muchHow much capacity is needed to match demand?
 WhenWhen more capacity is needed?
 WhereWhere facilities should be located (location)
 HowHow facilities should be arranged (layout)
Facility planning answers:
FFACILITY PLANNINGACILITY PLANNING

3. CAPACITY (DEFINITION OF)CAPACITY (DEFINITION OF)
The number of units a facility can hold, receive, store
or produce in a period of time
It is the upper limit or ceiling on the load that an
operating unit can handle. It includes
 equipment,
 space,
 employee skills

4. STRATEGIC CAPACITY PLANNINGSTRATEGIC CAPACITY PLANNING
 Goal
 To achieve a match between the long-term supply
capabilities of an organization and the predicted
level of long-run demand
 OvercapacityOvercapacity  operating costs that are too
high
 UndercapacityUndercapacity  strained resources and
possible loss of customers

5. CAPACITY PLANNING QUESTIONSCAPACITY PLANNING QUESTIONS
 Key Questions:Key Questions:
What kind of capacity is needed?
How much capacity is needed to match demand?
When is it needed?
 Related Questions:Related Questions:
How much will it cost?
What are the potential benefits and risks?
Are there sustainability issues?
Should capacity be changed all at once, or through several smaller changes
Can the supply chain handle the necessary changes?

6. ISSUES TO BE CONSIDERED INISSUES TO BE CONSIDERED IN
STRATEGY FORMULATIONSTRATEGY FORMULATION
Capacity strategy
Demand patterns
Growth rate and variability
Facilities
 (Cost of the building and operating)
Technological changes
 (Rate and direction of technology changes)
Behavior of competitors
Availability of capital and other inputs.

7. TYPES OF PLANNING OVER ATYPES OF PLANNING OVER A
TIME HORIZONTIME HORIZON
Add Facilities
Add long lead time equipment
Schedule Jobs
* Schedule Personnel
AllocateMachinery
Sub-Contract
Add Equipment
Add Shifts
Add Personnel
Build or Use Inventory
Long Range
Planning
Intermediate
Range Planning
Short Range
Planning
Modify Capacity Use Capacity
*
*
*Limited options exist

8. 1. impact the ability of the organization to meet future
demands
2. affect operating costs
3. affect lead time responsiveness
4. are a major determinant of initial costs
5. involve long-term commitment of resources
6. affect competitiveness
7. affect ease of management
8. are more important and complex due to globalization
9. need to be planned for in advance due to their
consumption of financial and other resources
IMPORTANCE OF CAPACITYIMPORTANCE OF CAPACITY
DECISIONSDECISIONS

9. CAPACITY MEASURESCAPACITY MEASURES
 Design capacityDesign capacity
Maximum output rate or service capacity an
operation, process, or facility is designed for
 Effective capacityEffective capacity
Capacity a firm can expect to attain given its
product mix, methods of scheduling, maintenance
and standards of quality. Design capacity minus
allowances such as personal time, maintenance and
scrap

10. CAPACITY RELATED CONCEPTSCAPACITY RELATED CONCEPTS
 Actual outputActual output
Rate of output actually achieved—cannot exceed
effective capacity
 UtilizationUtilization
Actual output as a percent of design capacity
 EfficiencyEfficiency
Actual output as a percent of effective capacity

11. Measure of how well a facility or machine is performing
when used
Efficiency
Actual output
Effective Capacity
=
EFFICIENCYEFFICIENCY
(expressed as a percentage)

12. Measure of actual capacity usage of a facility, work
center, or machine
Utilization
Actual Output
Design Capacity
=
UTILIZATIONUTILIZATION
(expressed as a percentage)

13. Actual output = 36 units/day
Efficiency = =
90%
Effective capacity 40 units/ day
Utilization = Actual output = 36 units/day
=
72% Design capacity 50 units/day
EXAMPLE- EFFICIENCY/UTILIZATIONEXAMPLE- EFFICIENCY/UTILIZATION
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day

14. DETERMINANTS OF EFFECTIVEDETERMINANTS OF EFFECTIVE
CAPACITYCAPACITY
Facilities
Product and Service Factors
Process Factors
Human Factors
Policy Factors
Operational Factors
Supply Chain Factors
External Factors

15. STRATEGY FORMULATIONSTRATEGY FORMULATION
Strategies are typically based on assumptions and
predictions about:
Long-term demand patterns
Technological change
Competitor behavior

16. SPECIAL REQUIREMENTS FORSPECIAL REQUIREMENTS FOR
MAKING GOOD CAPACITYMAKING GOOD CAPACITY
DECISIONSDECISIONS
 Forecasting the demand accurately
 Understanding the technology and capacity
increments
 Finding the optimal operating level (volume)
 Building for change

17. KEY DECISIONS IN CAPACITYKEY DECISIONS IN CAPACITY
PLANNINGPLANNING
 Amount of capacity needed
 Timing of changes (frequency of capacity additions)
 Extent of flexibility of facilities
 External sources of capacity
 Need to maintain balance

18. AMOUNT OF CAPACITY NEEDEDAMOUNT OF CAPACITY NEEDED

19. STEPS OF CAPACITY PLANNINGSTEPS OF CAPACITY PLANNING
 Estimate future capacity requirements
 Evaluate existing capacity and facilities and
identify gaps
 Identify alternatives for meeting requirements
 Conduct financial analysis
 Assess key qualitative issues
 Select the best alternative for the long term
 Implement the alternative chosen
 Monitor results

20. Long-term considerations relate to overall level of
capacity requirements
Short-term considerations relate to probable variations
in capacity requirements
FORECASTING CAPACITYFORECASTING CAPACITY
REQUIREMENTSREQUIREMENTS

21. CALCULATING PROCESSINGCALCULATING PROCESSING
REQUIREMENTSREQUIREMENTS
 Forecast sales within each individual product line
 Calculate equipment and labor requirements to
meet the forecasts

22. CALCULATING PROCESSINGCALCULATING PROCESSING
REQUIREMENTSREQUIREMENTS
Calculating processing requirements requires reasonably
accurate demand forecasts, standard processing times, and
available work time
horizonplanningtheduringavailabletimeprocessing
horizonplanningtheduringproductfordemand
productfortimeprocessingstandard
machinesrequiredofnumber
where
1
=
=
=
=
=
∑=
T
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ip
N
T
Dp
N
i
i
R
k
i
ii
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23. CCALCULATING PROCESSINGALCULATING PROCESSING
REQUIREMENTS: EXAMPLE 1 (1 of 2)REQUIREMENTS: EXAMPLE 1 (1 of 2)
P r o d u c t
A n n u a l
D e m a n d
S ta n d a r d
p r o c e s s in g tim e
p e r u n it ( h r .)
P r o c e s s in g tim e
n e e d e d ( h r .)
# 1
# 2
# 3
4 0 0
3 0 0
7 0 0
5 .0
8 .0
2 .0
2 ,0 0 0
2 ,4 0 0
1 ,4 0 0
5 ,8 0 0

24. CCALCULATING PROCESSINGALCULATING PROCESSING
REQUIREMENTS: EXAMPLE 1 (2 of 2)REQUIREMENTS: EXAMPLE 1 (2 of 2)
If the department works one eight hour shift, 250 days a
year, calculate the number of machines that would be
needed to handle the required volume.
Solution:
5800/(250)(8) = 2.9 (3 machines are needed)

25. CAPACITY CUSHIONCAPACITY CUSHION
 Capacity Cushion
 Extra capacity used to offset demand uncertainty
 Capacity cushion = 100% - Utilization
 Capacity cushion strategy
Organizations that have greater demand uncertainty
typically have greater capacity cushion
Organizations that have standard products and services
generally have greater capacity cushion

26. SERVICE CAPACITY PLANNINGSERVICE CAPACITY PLANNING
 Service capacity planning can present a number of
challenges related to:
 The inability to store services
 The need to be near customer
 The degree of demand volatility

27. SERVICE CAPACITY PLANNINGSERVICE CAPACITY PLANNING
 Time: Inability to store services for later consumption.
Capacity must be available to provide a service when it is
needed (capacity must be matched with the timing of demand)
 Location: Need to be near customers for convenience.
Capacity and location are closely tied. Service goods must be
at the customer demand point and capacity must be located
near the customer
 Volatility of Demand: (Much greater than in manufacturing)
 Volume and timing of demand
 Time required to service individual customers

28. CCAPACITY UTILIZATIONAPACITY UTILIZATION &&
SSERVICE QUALITYERVICE QUALITY
• Best operating point is near 70% of capacity
• From 70% to 100% of service capacity, what do
you think happens to service quality?

29. TIMING AND SIZE OF CHANGESTIMING AND SIZE OF CHANGES
(FREQUENCY OF CAPACITY(FREQUENCY OF CAPACITY
ADDITIONS)ADDITIONS)

30. CAPACITY EXPANSIONCAPACITY EXPANSION
Factors to be considered:
Volume and certainty of anticipated demand
 Strategic objectives for growth
 Costs of expansion and operation
 Incremental or one-step expansion
 Frequency of capacity additions

31. CAPACITY EXPANSION STRATEGIESCAPACITY EXPANSION STRATEGIES
(1 of 5)(1 of 5)
Expected Demand Expected Demand
Expected Demand Expected Demand
Time in Years Time in Years
Time in YearsTime in Years
DemandDemand
DemandDemand
New Capacity
New Capacity
New Capacity
New Capacity
Capacity leads demand with an incremental expansion Capacity leads demand with a one-step expansion
Capacity lags demand with an incremental expansion
Attempts to have an average capacity, with
an incremental expansion

32. CAPACITY EXPANSION STRATEGIESCAPACITY EXPANSION STRATEGIES
(2 of 5)(2 of 5)
Expected Demand
Time in Years
Demand
New Capacity
Capacity leads demand with an incremental expansion

33. CAPACITY EXPANSION STRATEGIESCAPACITY EXPANSION STRATEGIES
(3 of 5)(3 of 5)
Expected Demand
Time in Years
Demand
New Capacity
Capacity leads demand with a one-step expansion

34. CAPACITY EXPANSION STRATEGIESCAPACITY EXPANSION STRATEGIES
(4 of 5)(4 of 5)
Expected Demand
Time in Years
Demand
New Capacity
Capacity lags demand with an incremental expansion

35. CAPACITY EXPANSION STRATEGIESCAPACITY EXPANSION STRATEGIES
(5 of 5)(5 of 5)
Expected Demand
Time in Years
Demand
New Capacity
Attempts to have an average capacity, with an incremental
expansion

36. MAKE OR BUY?MAKE OR BUY?
1. Available capacity
2. Expertise
3. Quality considerations
4. Nature of demand
5. Cost
6. Risk

37. OPTIMAL OPERATING LEVELOPTIMAL OPERATING LEVEL

38. OPTIMAL OPERATING LEVELOPTIMAL OPERATING LEVELAveragecostperroomAveragecostperroom
Best operatingBest operating
levellevel
EconomiesEconomies
of scaleof scale
DiseconomiesDiseconomies
of scaleof scale
250250 500500 10001000
# Rooms# Rooms

39. ECONOMIES OF SCALEECONOMIES OF SCALE
 Economies of scaleEconomies of scale
If the output rate is less than the optimal level,
increasing output rate results in decreasing average
unit costs
Reasons for economies of scale:
Fixed costs are spread over a larger number of
units
Construction costs increase at a decreasing rate as
facility size increases
Processing costs decrease due to standardization

40. DISECONOMIES OF SCALEDISECONOMIES OF SCALE
 Diseconomies of scaleDiseconomies of scale
 If the output rate is more than the optimal level, increasing the
output rate results in increasing average unit costs
Reasons for diseconomies of scale
Distribution costs increase due to traffic congestion and
shipping from a centralized facility rather than multiple
smaller facilities
Complexity increases costs
Inflexibility can be an issue
Additional levels of bureaucracy

41. ECONOMIES OF SCALEECONOMIES OF SCALE
Minimum cost & optimal operating rate are
functions of size of production unit.Averagecostperunit
0
Small
plant Medium
plant Large
plant
Volume or output rate

42. ECONOMIES AND DISECONOMIES OFECONOMIES AND DISECONOMIES OF
SCALESCALE
100-unit
plant
200-unit
plant 300-unit
plant
400-unit
plant
Volume
Average
unit cost
of output
Economies of Scale and the Experience Curve workingEconomies of Scale and the Experience Curve working
Diseconomies of Scale start workingDiseconomies of Scale start working

43. THE
EXPERIENCE
CURVE
As plants produce more products, they gain
experience in the best production methods
and reduce their costs per unit
As plants produce more products, they gain
experience in the best production methods
and reduce their costs per unit
Total accumulated production of units
Cost or
price
per unit
Yesterday
Today
Tomorrow

44. EXTERNAL SOURCES OF CAPACITYEXTERNAL SOURCES OF CAPACITY

45. IN-HOUSE OR OURSOURCE?IN-HOUSE OR OURSOURCE?
Once capacity requirements are determined, the organization must decide
whether to produce a good or service itself or outsource
Factors to consider:
Available capacity
Expertise
Quality considerations
The nature of demand
Cost
Risks

46. NEED TO MAINTAIN BALANCENEED TO MAINTAIN BALANCE

47. CAPACITY PLANNING: BALANCECAPACITY PLANNING: BALANCE
Stage 1 Stage 2 Stage 3
Units
per
month
6,000 7,000 5,000
Unbalanced stages of productionUnbalanced stages of production
Stage 1 Stage 2 Stage 3
Units
per
month
6,000 6,000 6,000
Balanced stages of productionBalanced stages of production
Maintaining System Balance: Output of one stage is the
exact input requirements for the next stage

48. BOTTLENECK OPERATIONBOTTLENECK OPERATION
Machine #2Machine #2
Bottleneck
Operation
Bottleneck
Operation
Machine #1Machine #1
Machine #3Machine #3
Machine #4Machine #4
10/hr
10/hr
10/hr
10/hr
30/hr
Bottleneck operation: An operation
in a sequence of operations whose
capacity is lower than that of the
other operations

49. BOTTLENECK OPERATIONBOTTLENECK OPERATION
Operation 1
20/hr.
Operation 2
10/hr.
Operation 3
15/hr.
10/hr.
Bottleneck
Maximum output rate
limited by bottleneck

50. CONSTRAINT MANAGEMENTCONSTRAINT MANAGEMENT
 ConstraintConstraint
Something that limits the performance of a process or
system in achieving its goals
Categories
Market
Resource
Material
Financial
Knowledge or competency
Policy

51. RESOLVING CONSTRAINT ISSUESRESOLVING CONSTRAINT ISSUES
 Identify the most pressing constraint
 Change the operation to achieve maximum benefit,
given the constraint
 Make sure other portions of the process are supportive
of the constraint
 Explore and evaluate ways to overcome the constraint
 Repeat the process until the constraint levels are at
acceptable levels

52. STRATEGIES FOR MATCHINGSTRATEGIES FOR MATCHING
CAPACITY TO DEMANDCAPACITY TO DEMAND

53. DEMAND MANAGEMENTDEMAND MANAGEMENT
STRATEGIESSTRATEGIES
Strategies used to offset capacity limitations and that are intended to
achieve a closer match between supply and demand
 Pricing
 Promotions
 Backorders
 Offering complementary products
 Discounts
 Other tactics to shift demand from peak periods into slow periods

54. Time (Months)
Sales (Units)
Jet Skis
Snow-
mobiles
Total
0
1,000
2,000
3,000
4,000
5,000
J M M J S N J M M J S N J
COMPLEMENTARY PRODUCTSCOMPLEMENTARY PRODUCTS

55. CAPACITY MANAGEMENTCAPACITY MANAGEMENT
STRATEGIESSTRATEGIES
1. Adjusting equipment and processes – which might
include purchasing additional machinery or selling
or leasing out existing equipment
2. Making staffing changes (increasing or decreasing
the number of employees)
3. Improving methods to increase throughput
4. Redesigning the product to facilitate more
throughput (for faster processing)

56. THINGS THAT CAN BE DONE TOTHINGS THAT CAN BE DONE TO
ENHANCE CAPACITY MANAGEMENTENHANCE CAPACITY MANAGEMENT
1. Design flexibility into systems
2. Take stage of life cycle into account
3. Take a “big picture” approach to capacity changes
4. Prepare to deal with capacity “chunks”
5. Attempt to smooth out capacity requirements
6. Identify the optimal operating level
7. Choose a strategy if expansion is involved

57. CAPACITY FLEXIBILITYCAPACITY FLEXIBILITY

58. CAPACITY FLEXIBILITYCAPACITY FLEXIBILITY
 Flexible plants
 Flexible processes
 Flexible workers

59. EVALUATING ALTERNATIVESEVALUATING ALTERNATIVES
Alternatives should be evaluated from varying
perspectives
ECONOMIC
 Cost-volume analysis
 Break-even point
 Financial analysis
 Cash flow
 Present value
 Decision theory
 Waiting-line analysis
 Simulation
NON-ECONOMIC
 Public opinion

60. COST-VOLUME RELATIONSHIPSCOST-VOLUME RELATIONSHIPS
(1 OF 3)(1 OF 3)
Amount($)
0
Q (volume in units)
Total cost = VC + FC
Total variable cost (VC)
Fixed cost (FC)

61. COST-VOLUME RELATIONSHIPSCOST-VOLUME RELATIONSHIPS
(2 OF 3)(2 OF 3)
Amount($)
Q (volume in units)
0
Total revenue

62. COST-VOLUME RELATIONSHIPSCOST-VOLUME RELATIONSHIPS
(3 OF 3)(3 OF 3)
Amount($)
Q (volume in units)
0 BEP units
Profit
Total revenue
Total cost

63. BREAK-EVEN POINT (BEP)BREAK-EVEN POINT (BEP)
BEP
The volume of output at which total cost and total
revenue are equal
Profit (P) = TR – TC = R x Q – (FC +v x Q)
= Q(R – v) – FC
vR
QBEP
−
=
FC

64. COST-VOLUME RELATIONSHIPSCOST-VOLUME RELATIONSHIPS

65. BBREAK-EVEN PROBLEM WITH STEPREAK-EVEN PROBLEM WITH STEP
FIXED COSTS (1 of 2)FIXED COSTS (1 of 2)
Quantity
FC + VC = TC
FC + VC = TC
FC + VC = TC
Step fixed costs and variable costs.
1 machine
2 machines
3 machines

66. BBREAK-EVEN PROBLEM WITH STEPREAK-EVEN PROBLEM WITH STEP
FIXED COSTS (2 of 2)FIXED COSTS (2 of 2)
$
TC
TC
TC
BEP2
BEP
3
TR
Quantity
1
2
3
Multiple break-even points

67. 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 is the same regardless of
volume
6. Revenue per unit exceeds variable cost per unit
ASSUMPTIONS OF COST-VOLUMEASSUMPTIONS OF COST-VOLUME
ANALYSISANALYSIS

68. FINANCIAL ANALYSISFINANCIAL 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.