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CAPACITY

Capacity decisions are strategic choices that determine the resources allocated for production to meet demand while balancing costs and efficiency. Effective capacity is influenced by various factors including facilities, processes, human resources, policies, operations, supply chains, and external conditions. The capacity planning process involves estimating future requirements, evaluating existing capacity, identifying alternatives, and selecting the best long-term option.

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7 views

CAPACITY

Capacity decisions are strategic choices that determine the resources allocated for production to meet demand while balancing costs and efficiency. Effective capacity is influenced by various factors including facilities, processes, human resources, policies, operations, supply chains, and external conditions. The capacity planning process involves estimating future requirements, evaluating existing capacity, identifying alternatives, and selecting the best long-term option.

Uploaded by

Joanna Sardido
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Capacity decisions refer to strategic choices made by

businesses regarding the level of resources they allocate


to produce goods or services.

These decisions involve determining the optimal level of


capacity that allows a company to meet current and future
demand while balancing costs and efficiency.

Capacity decisions are critical as they have long-term


implications for a company's competitiveness, profitability, and
ability to meet customer needs.
Determinants of Effective Capacity

Facilities

The size and provision for expansion are


key in the design of facilities. Other facility
factors include locational factors
(transportation costs, distance to market,
labor supply, energy sources). The layout of
the work area can determine how smoothly
work can be performed.
Determinants of Effective Capacity

Product and Service Factors

The more uniform the output, the more


opportunities there are for standardization of
methods and materials.

This leads to greater capacity.


Determinants of Effective Capacity

Process Factors

• Quantity capability is an important determinant


of capacity, but so is output quality.
• If the quality does not meet standards, then
output rate decreases because of need of
inspection and rework activities.
• Process improvements that increase quality and productivity can
result in increased capacity.
• Another process factor to consider is the time it takes to change
over equipment settings for different products or services.
Determinants of Effective Capacity

Human Factors

The tasks that are needed in certain jobs, the


array of activities involved and the training, skill,
and experience required to perform a job all
affect the potential and actual output. Employee
motivation, absenteeism, and labor turnover all
affect the output rate as well.
Determinants of Effective Capacity

Policy Factors

Management policy can affect capacity by


allowing or not allowing capacity options
such as overtime or second or third shifts
Determinants of Effective Capacity

Operational Factors

Scheduling problems may occur when an


organization has differences in equipment
capabilities among different pieces of
equipment or differences in job requirements.
Other areas of impact on effective capacity include inventory stocking
decisions, late deliveries, purchasing requirements, acceptability of
purchased materials and parts, and quality inspection and control
procedures.
Determinants of Effective Capacity

Supply Chain Factors

Questions include:
• What impact will the changes have on suppliers,
warehousing, transportation, and distributors?
• If capacity will be increased, will these elements of the supply
chain be able to handle the increase?
• If capacity is to be decreased, what impact will the loss of
business have on these elements of the supply chain?
Determinants of Effective Capacity

External Factors

Minimum quality and performance standards can


restrict management’s options for increasing and
using capacity.
Steps in the Capacity Planning Process

1. Estimate future capacity requirements


2. Evaluate existing capacity and facilities and identify gaps
3. Identify alternatives for meeting requirements
4. Conduct financial analyses of each alternative
5. Assess key qualitative issues for each alternative
6. Select the alternative to pursue that will be best in the long
term
7. Implement the selected alternative
8. Monitor results
The two most useful functions
of capacity planning are
DESIGN CAPACITY and
EFFECTIVE CAPACITY.
DESIGN CAPACITY refers to the maximum designed service
capacity or output rate.

Example:

XYZ bakery produces cake. The


design capacity of this bakery
could be defined as the maximum
number of cakes it can produce in
a given time period under ideal
conditions.
Assuming:

1. The bakery is designed to operate 24 hours a day, 7


days a week.
2. It can bake a cake for 4 hours.
3. Its machinery, workforce, and infrastructure are all
optimized to achieve maximum efficiency.

After careful analysis calculations, how many cakes can


the bakery produce per day? A week?
Assuming that all things are constant.

Daily production = 24 hours / 4 = 6 cakes

Weekly production = 7 days x 6 cakes = 42 cakes


EFFECTIVE CAPACITY is the design capacity minus
personal and other allowances

Example:

Design Capacity: 1000 units per day


Planned Downtime: 5%
Setup Time: 2%
Effective Capacity

Effective Capacity = Design Capacity – Planned Losses

Effective Capacity = Design Capacity * (1 - Planned


Downtime Percentage) * (1 - Setup Time Percentage) * (1 -
Other Planned Loss Percentages)

Effective Capacity = 1000 * (1 - 0.05) * (1 - 0.02) = 931


units per day.
These two functions of capacity can be used to find the
EFFICIENCY and UTILIZATION.

Efficiency
• Refers to the ability to accomplish a task or goal with minimal
waste of resources, including time, effort, or money.
• It focuses on optimizing processes to achieve maximum output
with minimum input, thereby reducing costs and increasing
productivity.
• Efficiency measures how well resources are utilized to produce a
desired output.
• It involves improving productivity, eliminating inefficiencies, and
enhancing overall performance.
EFFICIENCY is calculated by the formula:

EFFICIENCY = (OUTPUT / INPUT) * 100%


Example:

A solar panel produces 300 watts of electricity from


1000 watts of sunlight.

Eff = 300 watts / 1000 watts x 100

Eff = 30%
Example:

An eCar consumes 100 kWh


of electricity giving it 60 kWh
of power.

What is its efficiency rate?


Eff = 60 kWh / 100 kWh x 100

Eff = 60%
Example: Compute for your efficiency
rate.
Ice candy making. Output
30 pcs x P15.00
You need: P 450.00
1 kilo of mango = P 120.00 Input
¼ sugar = P 7.50 P 197.50
Milk = P 24.00
Eff = P 450 / P 197.50
Plastic = P 10.00 Eff = 227.8%
Electricity = P 10.00
Total No. of Ice Candies = 30 pcs
Selling Price = P 15.00/each
Example:
Compute for your efficiency
Baking Oven rate.
Output
Electricity 1 cake x P 300.00
Consumption = P 80.00/cake
Input
No. of cakes = 1 pc P 80.00
Selling Price = P 300.00 Eff = P 300 / P 80
Eff = 375%
These two functions of capacity can be used to find the
EFFICIENCY and UTILIZATION.

Utilization
• Utilization, on the other hand, specifically measures the extent to
which available resources are being used or employed.
• It assesses how effectively resources are utilized or deployed to
perform tasks or activities.
• Utilization often involves analyzing factors such as equipment
usage, workforce deployment, or capacity utilization to ensure
that resources are not sitting idle or underutilized.
UTILIZATION is calculated by the formula:

Utilization = Actual Output____


X 100%
Maximum possible Output​
Example: Restaurant Seating

Consider a restaurant that has a


dining area with 50 tables, each
capable of seating four guests.

The restaurant operates from


6:00 PM to 10:00 PM every day
for dinner service.
During the dinner service, the restaurant manager observes the
following:

 At 6:00 PM, when the restaurant opens, there are no empty


tables. All 50 tables are occupied.
 Between 7:00 PM and 8:00 PM, the restaurant gradually fills up,
and at any given time, there are around 45 tables in use.
 From 8:00 PM to 9:30 PM, the restaurant reaches peak
occupancy, with all 50 tables consistently filled.
 Towards the end of the evening, between 9:30 PM and 10:00 PM,
some tables start to become vacant as guests finish their meals,
and by closing time, around 40 tables are still occupied.

Calculate the utilization of the restaurant's seating capacity.


Utilization (%) = (Number of Tables in Use / Total
Number of Tables) * 100

6:00 PM = (50 / 50) * 100 = 100%


7:00 PM = (45 / 50) * 100 = 90%
8:00 PM = (50 / 50) * 100 = 100%
9:30 PM = (40 / 50) * 100 = 80%
Example: Photocopy Machine

Consider photocopier machine.


This machine is capable of
operating 24 hours a day, 7 days a
week.
Assuming:

• The machine requires scheduled maintenance for 8 hours every


Sunday, during which it cannot be used for production.
• During weekdays (Monday to Friday), the machine operates
continuously for 16 hours each day, with 1-hour breaks for
maintenance and tool changes.
• On Saturdays, the machine operates for only 8 hours due to
reduced demand or planned downtime for preventive
maintenance.

Based on this scenario, what is the machine’s utilization rate?


Total Available Hours = (16 hours/day * 5 days) + (8 hours * 1 day) =
80 hours + 8 hours = 88 hours
Total Operating Hours = Total Available Hours - Scheduled
Maintenance Hours = 88 hours - 8 hours = 80 hours
Assuming this week, the machine was operational for 72 hours for
actual production (excluding maintenance and idle time due to setup
or other factors).
What is its utilization rate?
Machine Utilization Rate = (Total Operating Hours / Total Available
Hours) * 100

= (72 hours / 80 hours) * 100 = 90% utilization rate

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