Capacity Planning

1. Topic 4. Capacity Planning

Lecturer: Nazarov Nikita Constantinovich
Management and
business department

2. Structure of topic

1
Manufacturing and Service Systems
2
The Essence of Capacity
3
Capacity planning
4
Process Of Capacity Planning

3. Manufacturing System

Manufacturing systems produce
standardized products in large volumes.
finite capacity
contribute fixed costs
variable costs are added as labour
productivity is measurable quantity.

4. Service Systems

Service systems present more uncertainty with
respect to both capacity and costs.
services are produced and consumed in the
presence of the customer
services must be sufficiently flexible to
accommodate a highly variable demand
many services involves professional or
intellectual services judgments that are not
easily standardized.
difficult to accumulate costs and measure the
productivity of the services.

5. Capacity definition

Capacity is the maximum output rate of a
production or service facility
Capacity = (number of machines or
workers)*(number of shifts)*(utilization)*(efficiency)
The basic questions in capacity handling are:
What kind of capacity is needed?
How much is needed?
When is it needed?

6. Measures of capacity

Capacity can be difficult to quantify due to …
– Day-to-day uncertainties such as employee
absences, equipment breakdowns, and
material-delivery delays
– Products and services differ in production
rates (so product mix is a factor)
– Different interpretations of maximum capacity

7. Measures of capacity

8. Importance of Capacity Decisions

1.
2.
3.
4.
5.
6.
7.
8.
Impacts ability to meet future demands
Affects operating costs
Major determinant of initial costs
Involves long-term commitment
Affects competitiveness
Affects ease of management
Globalization adds complexity
Impacts long range planning

9. Relationship between Capacity and Output

10. Various Capacities

Designed capacity of a facility is the planned or
engineered rate of output of goods or services
under normal or full scale operating conditions. =
maximum obtainable output
System/effective capacity is the maximum output of
the specific product or product mix the system of
workers and machines is capable of producing as
an integrated whole. = expected variations
Actual output – rate of output actually achieved –
cannot exceed effective capacity = unexpected
variations and demand

11. Efficiency and Utilization

Both measures expressed as percentages

12. Determinants of Effective Capacity

Facilities
Product and service factors
Process factors
Human factors
Operational factors
Supply chain factors
External factors

13. Capacity Management Goal

The objective of capacity management (i.e.
planning and control of capacity) is to
match the level of operations to the level of
demand.

14. Capacity Planning

Capacity planning is the process used to
determine how much capacity is needed
(and when) in order to manufacture greater
product or begin production of a new
product.

15. Three Steps for Capacity Planning

1. Determine Service Level Requirements
2. Analyze Current Capacity
3. Planning for the future

16. How Much Capacity Is Best?

The Best Operating Level is the output than
results in the lowest average unit cost
Economies of Scale:
– Where the cost per unit of output drops as volume
of output increases
– Spread the fixed costs of buildings & equipment
over multiple units, allow bulk purchasing &
handling of material
Diseconomies of Scale:
– Where the cost per unit rises as volume increases
– Often caused by congestion (overwhelming the
process with too much work-in-process) and
scheduling complexity

17. Best Operating Level

18. Evaluating Alternatives

19. Evaluating Alternatives

20. Cost-Volume Relationships

21. Break-Even Problem

22. Assumptions of Cost-Volume Analysis

One product is involved
Everything produced can be sold
Variable cost per unit is the same
regardless of volume
Fixed costs do not change with volume
Revenue per unit constant with volume
Revenue per unit exceeds variable cost
per unit

23. Evaluating Capacity Alternatives

Cost-Volume Formulas
TC=FC+(VCxQ)
TR=RxQ
P=TR–TC
P=(RXQ)–[FC+(VCXQ)]
Volume=(SP+FC)/(R-VC)
QBEP=FC/(R-VC)

24. Process of Capacity Planning

Capacity planning is concerned with defining
the long-term and the short-term capacity
needs of an organisation and determining
how those needs will be satisfied.
Capacity requirements can be evaluated
from two perspectives—long-term capacity
strategies and short-term capacity
strategies.

25. Long-term capacity strategies

Long-term capacity requirements are:
are more difficult to determine
are dependent on marketing plans, product
development and life-cycle of the product.
is concerned with accommodating major
changes that affect overall level of the
output in long-term.

26. Long-range Capacity Decisions

Multiple products: Company’s produce more
than one product using the same facilities in
order to increase the profit.
Phasing in capacity: In high technology
industries, and in industries where technology
developments are very fast, the rate of
obsolescence is high. The products should be
brought into the market quickly.
Phasing out capacity: The outdated
manufacturing facilities cause excessive plant
closures and down time.

27. Short-term capacity strategies

Managers looking ahead up to 12 months
Fundamental capacity is fixed.
Many short-term adjustments for increasing
or decreasing capacity are possible
Capital-intensive processes depend on
physical facilities, plant and equipment.
Short-term capacity can be modified by
operating these facilities more or less
intensively than normal

28. Types of Short-term Capacity Strategies

1. Inventories: Stock finished goods during slack periods to
meet the demand during peak period.
2. Backlog: During peak periods, the willing customers are
requested to wait and their orders are fulfilled after a peak
demand period.
3. Employment level (hiring or firing): Hire additional
employees during peak demand period and layoff
employees as demand decreases.
4. Employee training: Develop multi skilled employees
through training so that they can be rotated among
different jobs. The multi skilling helps as an alternative to
hiring employees.
5. Subcontracting: During peak periods, hire the capacity of
other firms temporarily to make the component parts or
products.
6. Process design: Change job contents by redesigning the
job.

29.

Management and
business department