Capacity Planning

Capacity Planning
Dr. T. T. Kachwala
Introduction
 Capacity refers to an upper limit or ceiling on the load (number of physical units produced) that an operating unit
(manufacturing plant) can handle.
 Capacity needs include

 Equipment
 Space
 Employee skills
 Capacity planning is on going due to the following reasons:
 Changes in Demand
 Changes in Technology
 Changes in Environment
 Perceived Opportunities & Threats

Introduction
 Goal is to achieve a match between the long-term supply capabilities of an
organization and the predicted level of long-term demand (overcapacity results in

high cost & under capacity results in loss of customers)
 Kind of capacity depends on the product & services that the management intends to
produce or provide.
 Some organization add capacity after demand materializes. Some organizations
make a series of small changes before committing to the next change. Some
organizations add capacity in anticipation of demand.
Measures of Capacity
Business Inputs Outputs

Auto Manufacturing Labor Hours, Machine Hours Number of Cars per Shift
Steel Mill Furnace Size Tons of Steel per Day
Oil Refinery Refinery Size Gallons of Fuel per Day
Farming Number of Acres, Number of Cows Bushels of Grain per Acre per Year, Gallons of
Milk per Day
Restaurant Number of Tables, Seating Capacity Number of Meals Served per Day
Theater Number of Seats Number of Tickets Sold per Performance
Retail Sales Square Feet of Floor Space Revenue Generated per Day
Defining & Measuring Capacity
Design capacity
 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.
Effective capacity is always less than the design capacity due to changing product
mix, periodic maintenance, lunch breaks, scheduling & balancing problems.
Slide 5
Measuring System Effectiveness
 Actual output cannot exceed effective capacity because of machine

breakdowns, absenteeism, shortage of materials & quality problems.
 Efficiency
actual output
Efficiency 
effective capacity
 Utilization
actual output
Utilizatio n 
design capacity
(Measured as percentages)
Slide 6
Example – Efficiency and Utilization
Given:
Design Capacity = 50 trucks per day
Effective Capacity = 40 trucks per day
Actual Output = 36 trucks per day
Calculate:
1. Efficiency
2. Utilization
Slide 7
Example – Efficiency and Utilization
Design Capacity = 50 trucks per day

Effective Capacity = 40 trucks per day
Actual Output = 36 trucks per day
actual output 36
Efficiency    90%
effective capacity 40
actual output 36
Utilizatio n    72%
design capacity 50
Slide 8
Factors that determine Effective Capacity
1. Facilities factors: design (size), location, layout, environment (heating,

lighting).
2. Product/Service factors: design (standardization), product or service mix.
3. Process factors: quantity capabilities, quality capabilities.
4. Human factors: job content, job design, training and experience, motivation,
compensation, learning rates, absenteeism and labor turnover.
5. Policy factors: allowing overtime, 2nd / 3rd shift.
6. Operational factors: scheduling, materials management, quality assurance,
maintenance policies, equipment breakdowns.
7. Supply chain factors: suppliers, warehousing, transportation.
8. External factors: product standards, safety regulations, unions, pollution
control standards. Slide 9
Service Capacity Planning Challenges
Service capacity planning can present a number of challenges related to:

1. The need to be near customers
• Convenience
2. The inability to store services
• Cannot store services for consumption later.
3. The degree of demand volatility
• Volume and timing of demand
• Time required to service individual customers
• Demand management strategies
Slide 10
In-House or Outsource
1. Available Capacity (outsourcing can increase capacity & flexibility)
2. Expertise (lack of expertise)
3. Quality Considerations (Specialized firms offer higher quality)
4. Nature of Demand (Fluctuations in demand or small orders)
5. Cost (outsourcing reduces fixed cost)
6. Risks (outsourcing entails considerable risk – loss of control, knowledge sharing, need
to disclose proprietary information)
Slide 11
Constraint Management
Constraints limits the performance of a process. There are seven categories of constraints:
1. Market (insufficient demand)
2. Resource (insufficient workers, equipment, space)
3. Material
4. Financial (insufficient funds)
5. Supplier (unreliable)
6. Knowledge (incomplete or missing)
7. Policy (laws & regulations)
Slide 12

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Capacity Planning

(manufacturing plant) can handle.

 Capacity needs include

 Capacity planning is on going due to the following reasons:

 Perceived Opportunities & Threats

 Goal is to achieve a match between the long-term supply capabilities of an

organization and the predicted level of long-term demand (overcapacity results in

Business Inputs Outputs

 Actual output cannot exceed effective capacity because of machine

Design Capacity = 50 trucks per day

1. Facilities factors: design (size), location, layout, environment (heating,

Service capacity planning can present a number of challenges related to:

1. Available Capacity (outsourcing can increase capacity & flexibility)

2. Expertise (lack of expertise)

3. Quality Considerations (Specialized firms offer higher quality)

4. Nature of Demand (Fluctuations in demand or small orders)

5. Cost (outsourcing reduces fixed cost)

to disclose proprietary information)

1. Market (insufficient demand)

2. Resource (insufficient workers, equipment, space)

4. Financial (insufficient funds)

6. Knowledge (incomplete or missing)

7. Policy (laws & regulations)

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