1. Operations Management Capacity Planning Supplement 7
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J

2. Capacity – Definition
The “throughput,” or number of units a facility can hold, receive, store, or produce in a period of time.
This slide can be used to frame a discussion of capacity.
Points to be made might include:
- capacity definition and measurement is necessary if we are to develop a production schedule
- while a process may have “maximum” capacity, many factors prevent us from achieving that capacity on a continuous basis.
Students should be asked to suggest factors which might prevent one from achieving maximum capacity.
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J

3. Design and Effective Capacity
Design capacity:
The theoretical maximum output of a system in a given period.
Utilization:
Actual output / Design capacity.
Effective capacity:
Capacity a firm can expect to achieve given its product mix, methods of scheduling, maintenance, and standards of quality.
Efficiency:
Actual output / Effective capacity.
This slide can be used to frame a discussion of capacity.
Points to be made might include:
- capacity definition and measurement is necessary if we are to develop a production schedule
- while a process may have “maximum” capacity, many factors prevent us from achieving that capacity on a continuous basis.
Students should be asked to suggest factors which might prevent one from achieving maximum capacity.
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J

4. Requirements for Good Capacity Decisions
Forecast demand accurately
Understanding the technology and capacity increments
Finding the optimal operating level (volume)
Build for change – flexibility
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J

5. Cost Structure for a Hospital
250 bed hospital
750 bed hospital
Average Unit Cost
(dollars per patient)
500 bed hospital
Economies of Scale
Diseconomies of Scale
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J

6. Types of Planning Over a Time Horizon
Long Range Planning
Add Facilities
Add long lead time equipment *
Intermediate Range Planning
Sub-Contract
Add Equipment
Add Shifts
Add Personnel
Build or Use Inventory
Schedule Jobs
Schedule Personnel
Allocate Machinery *
Short Range Planning
Modify Capacity
Use Capacity *
Limited options exist
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J

7. Managing Capacity and Demand
Capacity Management
Demand Management
Vary staffing
Subcontracting/ joint ventures
Change equipment & processes
Change methods
Redesign the product for faster processing
Vary prices
Vary promotion
Change lead times (e.g., backorders)
Offer complementary products
You might begin by reminding students that the real issue is matching capacity to demand, and that we can do that by varying either capacity or demand.
It might also be helpful to have students consider the magnitude of variation we can achieve for each of the alternatives listed above - and the consequences of using the alternative.
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J

8. Complementary Products
Time (Months)
Sales (Units)
Jet Skis
Snow-mobiles
Total
1,000
2,000
3,000
4,000
5,000 J M S N
Ask students to suggest difficulties one might encounter when attempting to balance capacity through the use of complementary products.
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J

9. Approaches to Capacity Expansion
Expected Demand
Expected Demand
New Capacity
New Capacity
Demand
Demand
Time in Years
Time in Years
Expected Demand
Expected Demand
New Capacity
New Capacity
This slide probably requires some discussion or explanation. Perhaps the best place to start is the left hand column where capacity either leads or lags demand incrementally. As you continue to explain the options, ask students to suggest advantages or disadvantages of each.
Demand
Demand
Time in Years
Time in Years
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J

10. Linking Capacity and Other Decisions
Competitive Priorities
Quality Management
Capital Intensity
Resource Flexibility
Inventory
Scheduling
Expected Demand
Time in Years
New Capacity
Demand
This slide probably requires some discussion or explanation. Perhaps the best place to start is the left hand column where capacity either leads or lags demand incrementally. As you continue to explain the options, ask students to suggest advantages or disadvantages of each.
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J

11. Breakeven Analysis (Revenue vs. Cost)
A means of finding the point, in dollars and units, at which costs equal revenues
Breakeven point
Total cost = Total revenue
BEP = F P – V X
Total revenue line
Profit
Total cost line
Cost in Dollars
Variable cost
Loss
Fixed cost
Volume (units/period)
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J

12. Breakeven Analysis (Crossover Chart)
A means of finding the point, in dollars and units, at which one alternative equals the other
Fixed cost (A)
Variable cost (A)
B wins
Cost in Dollars
A wins
Fixed cost (B)
Variable cost (B)
Volume (units/period)
Breakeven point
Total cost (A) = Total cost (B) BEP = D Fixed cost D Variable cost X
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J

13. Crossover Chart Breakeven Worksheet
Process A: low volume, high variety
Process B: Repetitive
Process C: High volume, low variety
Total cost - Process B
Total cost - Process A
Total cost - Process C
Fixed cost - Process C
This slide can be used to introduce the role of breakeven analysis in the process selection decision.
Fixed cost - Process B
Fixed cost - Process A
Lowest cost process
Process A
Process B
Process C
Breakeven Worksheet
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J

14. Decision Tree and Capacity Decision
–$14,000
Market favorable (0.4)
$100,000
Market unfavorable (0.6)
–$90,000
Large Plant
$18,000
Market favorable (0.4)
$60,000
Medium Plant
Market unfavorable (0.6)
–$10,000
Small Plant
$13,000
Market favorable (0.4)
$40,000
Do nothing
Market unfavorable (0.6)
–$5,000 $0
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J

15. Conclusions
Capacity planning is crucial to an organization. The desirable amount of capacity utilization varies
Capacity can be stated in terms of:
Output – useful for standardized products or services
Input – useful for customized products or services
There are both economies of scale and diseconomies of scale
Capacity at the bottleneck limits the capacity of the entire system. Bottlenecks may “float”
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J