Lec 14 - Capacity Planning
Lec 14 - Capacity Planning
Lec 14 - Capacity Planning
Lec- 14
Learning Objectives
• Explain the importance of capacity planning.
• Describe the determinants of effective
capacity.
• Discuss the major considerations related to
developing capacity alternatives.
• Briefly describe approaches that are useful
for evaluating capacity alternatives
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?
Strategic Capacity Planning
Actual output
Efficiency =
Effective capacity
Actual output
Utilization =
Design capacity
Minimum
cost
0 Rate of output
Economies of Scale
Minimum cost & optimal operating rate are
Average cost per unit functions of size of production unit.
Small
plant Medium
plant Large
plant
0 Output rate
Factors contributing to Economies of Scale
Variable cost is $10 per unit, and revenue is $40 per unit.
a. Determine the break-even point for each range.
b. If projected annual demand is between 580 and 660 units,
how many machines should the manager purchase?
Example