Capacity Planning

Capacity Planning
• Capacity refers to :
The upper limit or ceiling on the load that an
operating unit (Plant, department, Machine,
Store, worker)can handle
• Capacity planning aims to :
Achieve a match between supply capabilities and the
predicted level of demand
• 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?
5-1
Reasons of capacity planning
Changes in
demand
Changes in
Opportunity
technology
capacity
planning
Changes in Perceived
environment threats
Examples of Capacity Measures
Type of Measures of Capacity

Organization Inputs Outputs
Manufacturer Machine hours Number of units
per shift per shift
Hospital Number of beds Number of
patients treated
Airline Number of planes Number of
or seats seat-miles flown
Restaurant Number of seats Customers/time
Retailer Area of store Sales dollars
Theater Number of seats Customers/time
Importance of Capacity Decisions
1. Impacts ability to meet future demands

2. Affects operating costs
3. Major determinant of initial costs
4. Involves long-term commitment
5. Affects competitiveness
6. Affects ease of management
7. Globalization adds complexity
8. Impacts long range planning
5-4
Steps for Capacity Planning
Estimate future capacity requirements
Evaluate existing capacity
Identify alternatives
Conduct financial analysis for each alt.
Assess key qualitative issues for each alt.
Select one alternative
Implement alternative chosen
Monitor results
Various Capacities
• Design capacity
– Maximum obtainable output
• Effective capacity, expected variations
– Maximum capacity subject to planned and expected
variations such as maintenance, coffee breaks,
scheduling conflicts.
• Actual output, unexpected variations and demand
– Rate of output actually achieved--cannot exceed
effective capacity. It is subject to random disruptions:
machine break down, absenteeism, material
shortages and most importantly the demand.
6
Efficiency and Utilization
Actual output
Efficiency =
Effective capacity
Actual output
Utilization =
Design capacity
7
Efficiency/Utilization Example
for a Trucking Company
Design capacity = 50 trucks/day available

Effective capacity = 40 trucks/day, because 20% of truck
capacity goes through planned maintenance
Actual output = 36 trucks/day, 3 trucks delayed at
maintenance, 1 had a flat tire
Actual Output 36 units / day

Efficiency    90%
Effective Capacity 40 units / day
Actual Output 36 units / day
Utilization    72%
Design Capacity 50 units / day
8
Determinants of Effective Capacity
• Facilities (size, location, layout, heating, lighting, ventilations)

• Product and service factors (similarity of products)
• Process factors (productivity, quality)
• Human factors (training, skills, experience, motivations,
absentation, turnover)
• Policy factors (overtime system, no. of shifts)

• Operational factors (scheduling problems, purchasing
requirements, inventory shortages)
• Supply chain factors (warehousing, transportation,
distribution)
• External factors (product standards, government agencies,

pollution standard)
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
5-10
Some Possible Growth/Decline Patterns
Volume
Volume
Growth Decline
0 Time 0 Time
Figure 5-1
Cyclical Stable
Volume
Volume
0 0
Time Time
11
Developing Capacity Alternatives
• Design flexibility into systems,

– modular expansion
• Take a “big picture” approach to capacity changes,
– hotel rooms, car parks, restaurant seats
• Differentiate new and mature products,
– pay attention to the life cycle, demand variability vs.
discontinuation
• Prepare to deal with capacity “chunks”,
– no machine comes in continuous capacities
• Attempt to smooth out capacity requirements,
– complementary products, subcontracting
• Identify the optimal operating level,
– facility size
12
Outsourcing: Make or Buy
• Outsourcing: Obtaining a good or service from
an external provider
• Decide on outsourcing by considering
– Available capacity
– Expertise
– Quality considerations
– The nature of demand: Stability
– Cost
– Risk: Loss of control over operations with outsourcing;
loss of know-how. Loss of revenue.
13
Planning Service Capacity
• Need to be near customers

– Capacity and location are closely tied
• Inability to store services
– Capacity must me matched with timing of demand
• Degree of volatility of demand
– Peak demand periods
16
Cost Volume Profit Analysis
Definition
• Cost is a kind of expenditure to produce
goods and services which can be
calculated as under
– Total cost = variable cost + Fixed cost
• Volume is the total no of qty. to be
produced.
• Profit is the difference between sales and
total cost.
• CVP analysis deals about the relationship
between sales, total cost and profit. Some
of the calculations can be done as below :
1. Total cost = Fixed cost + Variable cost
2. Contribution margin= Sales – Variable
cost
3. Contribution margin per unit = selling
price per unit – variable cost per unit
• 4. profit volume ratio = Sales – variable cost
Sales
Or,
1 – v/s
5. Break Even point = fixed cost/CMPU
……. Unit
Or,
FC/Pv ratio
Rs…..
• BEP Rs. = BEP unit x sppu
6. Margin of Safety = Actual sales – BEP sales
7. Margin of safety ratio = MOS/sales
8. Required sales for desired profit
FC + DP
CMPU
…………. Unit
FC + DP
P/v ratio
Rs.,,,,,,
• Required sales for desired profit after tax
FC + DP/1-t
S-V
……………… unit
Required sales for desired profit after tax
FC + DP/1-t
Pv ratio
Rs ……………..
• Required sales for desired profit(per unit
profit)
= FC/Sppu-vcpu – ppu
Profit volume ratio = 1 – variable cost ratio
Variable cost= Sales x variable cost ratio
Example
• A company has Rs. 100000 fixed cost,
variable cost per unit Rs. 100 and selling
cost per unit Rs. 150 Calculate
– Pv ratio
– BEP
– Required sales to earn Rs. 50,000
– Required sales to earn Rs. 50,000 after tax
40%
• Given,
Fixed cost = Rs. 1,00,000
Selling price per unit(sppu) = Rs. 150
Variable cost per unit = Rs. 100
Here,
P/V ratio = 1- v/s
1-100/150
= Rs. 0.33 or 33%
• Break Even point = Fixed cost/S-V
100000/150-100
= 2000 unit
= 2000 x 150
Rs. 300,000
Required sales for desired profit Rs. 50,000
= FC + DP
CMPU
100000+ 50,000
150-100
= 3000 unit
= 3000 x 150
= Rs. 450000
Required sales for desired profit after tax
FC + DP/1-tax
S-V
• = 100000 + 40,000/1-0.4
150 – 100
= 3333 unit
= Rs. 3333.33 x 150
= Rs. 499,999
Class work
• A company has Rs. 150000 fixed cost,
variable cost per unit Rs. 170 and selling
cost per unit Rs. 125 Calculate
– Pv ratio
– BEP
– Required sales to earn Rs. 50,000
– Required sales to earn Rs. 50,000 after tax
40%
Decision Theory
Decision Theory represents a general

approach to decision making which is
suitable for a wide range of operations
management decisions, including:
capacity product and

planning service design
location equipment
planning selection
37

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Capacity Planning

Type of Measures of Capacity

1. Impacts ability to meet future demands

Design capacity = 50 trucks/day available

Actual Output 36 units / day

• Facilities (size, location, layout, heating, lighting, ventilations)

• Policy factors (overtime system, no. of shifts)

• External factors (product standards, government agencies,

• Design flexibility into systems,

• Need to be near customers

Decision Theory represents a general

capacity product and

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