Capacity planning is the process of determining the production capacity needed to meet changing demand. It involves assessing existing capacity, forecasting future needs, identifying options to modify capacity, evaluating alternatives, and selecting the best option. Measures of capacity include design capacity which is the maximum output rate, and effective capacity which accounts for downtime. Capacity planning considers options over different time horizons and aims to balance utilization and efficiency.

1. Capacity Planning

2. CAPACITY PLANNING
 Capacity planning is the process of determining the production
capacity needed by an organization to meet changing
demand for its products.
 The throughput, or the number of units a facility can hold,
receive, store, or produce in a period of time
 Capacity is the upper limit or ceiling on the load that an
operating unit can handle.

3. MEASURES OF CAPACITY
Capacity can be expressed in terms of input & output,
depending on the nature of business.
Organization Measure
Output
Automobile manufacturer Numbers of autos
Steel producer Tones of steel
Power company Megawatts of electricity
Input
Airline Numbers of seat
Hospital Number of beds
Tax office Number of accountants

4. Design capacity
Maximum output rate or service capacity an
operation, process, or facility is designed for.
Effective 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.
MEASURES OF CAPACITY

5. PLANNING OVER A TIME HORIZON
Modify capacity Use capacity
Intermediate-
range planning
Subcontract Add personnel
Add equipment Build or use inventory
Add shifts
Short-range
planning
Schedule jobs
Schedule personnel
Allocate machinery
Long-range
planning
Add facilities
Add long lead time equipment
* Limited options exist
*
*

6. CAPACITY PLANNING DECISION
Capacity planning normally involves the following
activities:
 Assessing existing capacity.
 Forecasting capacity needs.
 Identifying alternative ways to modify capacity.
 Evaluating financial, economical, and technological capacity
alternatives.
 Selecting a capacity alternative most suited to achieving
strategic mission.

7. UTILIZATION AND EFFICIENCY
Utilization is the percent of design capacity
achieved
Efficiency is the percent of effective capacity
achieved
Utilization = Actual output/Design capacity
Efficiency = Actual output/Effective capacity

8. Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls
BAKERY EXAMPLE

9. Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls
Utilization = 148,000/201,600 = 73.4%
BAKERY EXAMPLE

10. Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls
Utilization = 148,000/201,600 = 73.4%
Efficiency = 148,000/175,000 = 84.6%
BAKERY EXAMPLE

11. Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Efficiency = 84.6%
Efficiency of new line = 75%
Expected Output = (Effective Capacity)(Efficiency)
= (175,000)(.75) = 131,250 rolls
BAKERY EXAMPLE

12. THREE STEPS OF CAPACITY PLANNING
 Determine Service Level Requirements
 Analyse current capacity
 Planning for future

13. Decision Tree Analysis
 Structures complex, multiphase decisions
 Allows objective evaluation of alternatives
 Incorporates uncertainty
 Develops expected values

14. Example: Decision Tree Analysis
To absorb some short-term excess production capacity at its Chennai
plant, Special Instrument Products is considering a short
manufacturing run for either of two new products, a temperature
sensor or a pressure sensor. The market for each product is known if
the products can be successfully developed. However, there is some
chance that it will not be possible to successfully develop them.
Revenue of Rs10,00,000 would be realized from selling the
temperature sensor and revenue of Rs4,00,000 would be realized from
selling the pressure sensor. Both of these amounts are net of
production cost but do not include development cost. If development
is unsuccessful for a product, then there will be no sales, and the
development cost will be totally lost. Development cost would be
Rs1,00,000 for the temperature sensor and Rs10,000 for the pressure
sensor.

15. Example: Decision Tree Analysis
Temperature
sensor
Pressure
sensor
Neither
Development
Cost
Development
outcome
Sales Revenue Net Profit
Rs1,00,000
Rs10,000
Success
Failure
Success
Failure
Rs10,00,000
Rs0
Rs4,00,000
Rs0
Rs9,00,000
-Rs1,00,000
Rs3,90,000
-Rs10,000
Rs0