The document discusses capacity planning, which involves determining the production capacity needed by an organization to meet changing demands. It defines design capacity as the maximum output that can be achieved in a short period, while effective capacity is the maximum output under normal conditions. When making capacity planning decisions, companies identify capacity requirements, develop alternatives to meet future needs, and evaluate the alternatives to select the best option. This may involve considering factors like economies and diseconomies of scale. A case study example uses a decision tree to illustrate Anna's Greek Restaurant's choice between a large or small expansion given uncertainties in demand.

1. CAPACITY PLANNING
Sumiya ShamsThebo
Bs Public Administration 2k17
University of Sindh Jamshoro

2. CONTENTS:
Capacity planning.
• Measuring capacity.
• Capacity considerations.
Making capacity planning.
• Identify Capacity Requirements.
• Develop Capacity Alternatives.
• Evaluate capacity alternatives.
Decision tress.
• Case study.

3. Capacity planning:
“Capacity planning is the process of establishing the output rate that
can be achieved by a facility.”
OR
“Is the process of determining the production capacity needed by an
organization to meet changing demands for its products.”

4. Importance of capacity
1.Ability to meet future demands.
2.Affects operating costs.
3.Determinant of initial costs.
4.Affect competitiveness.
5.Impact long range planning.

5. Measuring Capacity
Example of different capacity measures:

6. Measuring capacity
Design
capacity
• Is the maximum output rate that can be achieved by a
facility.
• Short period of time.
• Temporary measures.
• Overtime, overstaffing ,maximum use of equipment.
Effective
capacity
• Is the maximum output rate that can be sustained
under normal conditions.
• Realistic work schedules and breaks, regular staff ,
scheduled machine maintenance.
• None of the temporary measures

7. Capacity Considerations:

8. Capacity Considerations
Economies of scale
A condition in which the average
cost of a unit produced is reduced
as the amount of output is
Increased.
Diseconomies of scale
A condition in which the
cost of each additional unit
made increases.
Best operating level :
The volume of output
that results in the lowest
average unit cost.

9. Capacity considerations.
o Focused factories
Facilities that are small, specialized, and focused on a narrow set of
objectives.
• Economies of scale: A condition in which the average cost of a
unit produced is reduced as the amount of output is increased.
• Diseconomies of scale : A condition in which the cost of
each additional unit made increases.
• Best operating level
The volume of output that results in the lowest average unit cost.

10. Making Capacity Planning Decision
• Identify
Capacity
Requirements
Step 1
• Develop
Capacity
Alternatives
Step 2 • Evaluate
Capacity
Alternatives
Step 3
The three-step procedure for making capacity planning
decisions is as:

11. The three-step procedure for making capacity planning decisions is as
follow:
Step 1
Identify Capacity Requirements :
 Is to identify the levels of capacity needed by the company now,
as well as in future.
• .Forecasting Capacity: It is a process under which a company tries to
estimate the production and where will be the company in future.
• .Capacity cushion :Additional capacity added to regular capacity
requirements to provide greater flexibility.
• .Strategic Implications: how certain information impact a strategy to meet
• specific goals.

12. Step 2
Develop Capacity Alternatives: Once capacity requirements have been
identified, the company needs to develop a set of alternatives that would enable it
to meet future capacity needs.
Capacity Alternatives:
Step 3
Evaluate Capacity Alternatives: The last step in the procedure is to evaluate
the capacity alternatives and select the one alternative that will best meet the
company’s requirements.
Do
nothing
Expand
Large
Expand
small

13. 1.Decision point
outcomes
outcomes
outcomes
2.Chance event

14. Decision trees contain the following information:
● Decision points.
These are the points in time when decisions, such as whether or
not to expand, are made.They are represented by squares, called “nodes.”
● Decision alternatives.
Buying a large facility and buying a small facility are two decision
alternatives. They are represented by “branches” or arrows leaving a
decision point.
● Chance events.These are events that could affect the value of a decision.
Chance events are “branches” or arrows leaving nodes.
● Outcomes. For each possible alternative an outcome is listed.

15. Anna, the owner of Anna’s Greek Restaurant, has determined that she needs to
expand her facility.The decision is whether to expand now with a large facility,
incurring additional costs and taking the risk that demand will not materialize, or
expand now on a smaller scale, knowing that she will have to consider expanding
again in three years.
She has estimated the following chances for demand:
•The likelihood of demand being high is 0.70.
•The likelihood of demand being low is 0.30.
She has also estimated profits for each alternative:
• Large expansion has an estimated profitability of either $300,000 or $50,000, depending on
whether demand turns out to be high or low.
• Small expansion has a profitability of $80,000, assuming that demand is low.
• Small expansion with an occurrence of high demand would require considering whether to expand
further. If she expands at that point, her profitability is expected to be $200,000. If she
does not expand further, profitability is expected to be $150,000.
Next we develop a decision tree to solveAnna’s problem.
• Solution: draw the decision tree.
Case study:

16. Example:
chances for demand:
•The likelihood of demand being high is
0.70.
•The likelihood of demand being low is
0.30.
Estimated profits for
each alternative:
• Large expansion has
an estimated
profitability of either
$300,000 or $50,000,
depending on high and
low demand.
• Small expansion has a
profitability of $80,000.
For small organization decision
tree will be small in size.

17. Thank you