1. Capacity Planning For Products and Services5
Capacity Planning
For Products and Services

2. Strategic Capacity Planning Chapter 5 - Lesson 2
Lecture/Discussion
Capacity planning – what and why
Measures of Capacity - Utilization and Efficiency
Comparing Capacity Alternatives - Breakeven Analysis
Management tools exercises:
Capacity Planning Exercise - Running the Business School
Problem Solving:
Utilization and Efficiency
Breakeven Analysis

3. Capacity Planning
Capacity is the upper limit or ceiling on the load that an operating unit can handle.
Capacity also includes
Equipment
Space
Employee skills
The basic questions in capacity handling are:
What kind of capacity is needed?
How much is needed?
When is it needed?

4. Importance of Capacity Decisions
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

5. Capacity Design capacity Effective capacity Actual output
maximum output rate or service capacity an operation, process, or facility is designed for
Effective capacity
Design capacity minus allowances such as personal time, maintenance, and scrap
Actual output
rate of output actually achieved--cannot exceed effective capacity.

6. Efficiency and Utilization
Actual output
Efficiency =
Effective capacity
Utilization =
Design capacity
Both measures expressed as percentages

7. Efficiency/Utilization Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
Actual output = units/day
Efficiency = = 90%
Effective capacity units/ day
Utilization = Actual output = units/day
= 72% Design capacity units/day

8. Determinants of Effective Capacity
Facilities
Product and service factors
Process factors
Human factors
Policy factors
Operational factors
Supply chain factors
External factors

9. Key Decisions of Capacity Planning
Amount of capacity needed
Capacity cushion (100% - Utilization)
Timing of changes
Need to maintain balance
Extent of flexibility of facilities
Capacity cushion – extra demand intended to offset uncertainty

10. Steps for Capacity Planning
Estimate future capacity requirements
Evaluate existing capacity
Identify alternatives
Conduct financial analysis
Assess key qualitative issues
Select one alternative
Implement alternative chosen
Monitor results

11. Forecasting Capacity Requirements
Long-term vs. short-term capacity needs
Long-term relates to overall level of capacity such as facility size, trends, and cycles
Short-term relates to variations from seasonal, random, and irregular fluctuations in demand

12. Calculating Processing Requirements
If annual capacity is 2000 hours, then we need three machines to handle the required volume: 5,800 hours/2,000 hours = 2.90 machines

13. Planning Service Capacity
Need to be near customers
Capacity and location are closely tied
Inability to store services
Capacity must be matched with timing of demand
Degree of volatility of demand
Peak demand periods

14. In-House or Outsourcing
Outsource: obtain a good or service from an external provider
Available capacity
Expertise
Quality considerations
Nature of demand
Cost
Risk

15. Developing Capacity Alternatives
Design flexibility into systems
Take stage of life cycle into account
Take a “big picture” approach to capacity changes
Prepare to deal with capacity “chunks”
Attempt to smooth out capacity requirements
Identify the optimal operating level

16. Bottleneck Operation Machine #1 Machine #2 Bottleneck Operation
Figure 5.2
Bottleneck operation: An operation in a sequence of operations whose capacity is lower than that of the other operations
Bottleneck
Operation
Machine #1
Machine #3
Machine #4
10/hr
30/hr
Machine #2

17. Bottleneck Operation Operation 1 20/hr. Operation 2 10/hr.
Maximum output rate limited by bottleneck

18. Evaluating Alternatives
Cost-volume analysis
Break-even point
Financial analysis
Cash flow
Present value
Decision theory
Waiting-line analysis

19. Cost-Volume Relationships
Figure 5.6a
Amount ($)
Q (volume in units)
Total cost = VC + FC
Total variable cost (VC)
Fixed cost (FC)

20. Cost-Volume Relationships
Figure 5.6b
Amount ($)
Q (volume in units)
Total revenue

21. Cost-Volume Relationships
Figure 5.6c
Amount ($)
Q (volume in units)
BEP units
Profit
Total revenue
Total cost

22. Break-Even Problem with Step Fixed Costs
Figure 5.7a
Quantity
FC + VC = TC
Step fixed costs and variable costs.
1 machine
2 machines
3 machines

23. Break-Even Problem with Step Fixed Costs
Figure 5.7b $ TC
BEP 2 3 TR
Quantity 1
Multiple break-even points

24. Capacity Planning Exercise Running the Business School
What is the major capacity planning issue when operating a University “School”?
How would you go about developing a strategic capacity plan for the Stetson School of Business?
What data is important to obtain? __
Develop a capacity plan for:
Number of full time professors
Number of adjunct professors
Classrooms (not for this exercise)

25. Utilization and Efficiency Exercises
Determine the utilization and efficiency for the following:
a. A loan processing operation that processes an average of 7 loans per day. The operation has a design capacity of 10 loans per day and an effective capacity of 8 loans per day.
b. A furnace repair team that services an average of four furnaces a day if the design capacity is six furnaces per day and the effective capacity is five furnaces a day.

26. Utilization and Efficiency Exercises
In a job shop, effective capacity is only 50 percent of design capacity, and actual output is 80% of effective output. What design capacity would be needed to achieve an actual output of eight jobs per week?

27. Breakeven Analysis
A producer of pottery is considering the addition of a new plant to absorb the backlog of demand. The primary location being considered will have fixed costs of $9,200 per month and variable costs of 70 cents per unit produced. Each item is to retailers at a price that averages 90 cents.
What volume per month is required in order to break even?
What profit would be realized on a monthly volume of 61,000 units? 87,000 units?

28. Breakeven Analysis
A producer of pottery is considering the addition of a new plant to absorb the backlog of demand. The primary location being considered will have fixed costs of $9,200 per month and variable costs of 70 cents per unit produced. Each item is to retailers at a price that averages 90 cents.
What volume is needed to obtain a profit of $16,000 per month?

29. Breakeven Analysis
A small firm intends to increase the capacity of a bottleneck operation by adding a new machine.
Alternative A Alternative B
Annual fixed cost $40, $30,000
Variable cost/unit $ $15
Revenue / unit = $15
Determine each alternative’s breakeven point.

30. Breakeven Analysis
A small firm intends to increase the capacity of a bottleneck operation by adding a new machine.
Alternative A Alternative B
Annual fixed cost $40, $30,000
Variable cost/unit $ $11
Revenue / unit = $15
At what volume would the two alternative yield the same profit?