Capacity Planning

• Capacity
– The upper limit or ceiling on the load that an operating
unit can handle
– Capacity needs include
• Equipment
• Space
• Employee skills
Strategic Capacity Planning
• Goal
– To achieve a match between the long-term supply
capabilities of an organization and the predicted level
of long-run demand
• Overcapacity operating costs that are too high
• Undercapacity strained resources and possible loss of
customers
Capacity Planning Questions

• Key Questions:
– What kind of capacity is needed?
– How much capacity is needed to match demand?
– When is it needed?
• Related Questions:
– How much will it cost?
– What are the potential benefits and risks?
– Are there sustainability issues?

–– Should
Can thecapacity be changed
supply chain handle all
theatnecessary
once, or through several
changes?
smaller changes
Capacity Decisions Are Strategic

• Capacity decisions
– impact the ability of the organization to meet future demands
– affect operating costs
– are a major determinant of initial cost
– often involve long-term commitment of resources
– can affect competitiveness
– affect the ease of management
– are more important and complex due to globalization
– need to be planned for in advance due to their consumption of
financial and other resources
Capacity

Design capacity
– maximum output rate or service capacity an operation, proces
facility is designed for
Effective capacity
– Design capacity minus allowances such as personal time,
maintenance, and scrap
Actual output
– rate of output actually achieved--cannot
exceed effective capacity.
Measuring System Effectiveness
• Actual output
– The rate of output actually achieved
– It cannot exceed effective capacity
• Efficiency
actual
Efficiency
output
effective

capacity
• Utilization
actual
Utilization
outputcapacity
design

Measured as percentages
Example– Efficiency and Utilization
• Design Capacity = 50 trucks per day
• Effective Capacity = 40 trucks per day
• Actual Output = 36 trucks per day

actual
Efficiency 36
 effective capacity 40 
output 
90%
actual
Utilization 36
output
design capacity  

50 72%
Determinants of Effective Capacity

• Facilities
• Product and service factors
• Process factors
• Human factors
• Policy factors
• Supply chain factors
• External factors
Capacity Strategies

• Leading
– Build capacity in anticipation of future demand increases
• Following
– Build capacity when demand exceeds current capacity
• Tracking
– Similar to the following strategy, but adds capacity in relatively
small increments to keep pace with increasing demand
Capacity Leading and Lagging
Strategies
Strategy Formulation

• Strategies are typically based on predictions

about:
– Long-term demand patterns
– Technological change
– Competitor behavior
Capacity Cushion

• Capacity Cushion
– Extra capacity used to offset demand uncertainty
– Capacity cushion = 100% - Utilization
– Capacity cushion strategy
• Organizations that have greater demand uncertainty
typically have greater capacity cushion
• Organizations that have standard products and
services generally have greater capacity cushion
Forecasting Capacity Requirements

l
• Long-term considerations relate to overall level
of capacity requirements
• Short-term considerations relate to probable
variations in capacity requirements
Calculating Processing Requirements

• Calculating processing requirements requires

reasonably accurate demand forecasts, standard
processing
k
times, and available work time
 pi Di
i1
N 
R
T
N R  number of
required machines
p i  standard processing time for product i
D i  demand for product i during the planning horizon
T  processing time available during the planning
horizon
Problem 1
An automobile brake supplier operates on two eight hour shifts, five
days per week, 52 weeks per year. The table below shows the data
for three components. Because of demand uncertainties, the
operations manager obtained three demand forecasts (pessimistic,
expected and optimistic). The manager believes a 20 percent
capacity cushion is best.
What is the minimum number of machines needed? The expected
number? The maximum number?
If the operation currently has three machines and the manager is
willing to expand capacity by 20 percent through short term options
in the event that the optimistic demand occurs, what is the capacity
gap?
Processing Set up Lot Size
Component Pessimistic Expected Optimistic
(hr/unit) (hr/lot) (units/lot)

A 0.05 1 60 15,000 18,000 25,000

B 0.2 4.5 80 10,000 13,000 17,000

C 0.05 8.2 120 17,000 25,000 40,000

Problem 2
You have been asked to put together a capacity plan for a
critical bottleneck operation at the Surefoot Sandal Company.
Your capacity measure is number of machines. Three
products (men’s women’s, and kid’s sandals) are
manufactured. The time standards (processing and setup), lot
sizes, and demand forecasts are given in the following table.
The firm operates two 8-hour shifts, 5 days per week, 50
weeks per year. Experience shows that a capacity cushion of
5 percent is sufficient.
Time Standards
Demand
Forecast
Processing Setup Lot Size
(pairs/yr)
Product (hr/pair) (hr/lot) (pairs/lot)
Men’s sandals 0.05 0.5 240 80,000

Women’s sandals 0.10 2.2 180 60,000

Kid’s sandals 0.02 3.8 360 120,000

Problem 2
1. How many machines are needed at the bottleneck?
2. If the operation currently has two machines, what is the
capacity gap?
3. If the operation only has 2 machines, which products should
be made? What is the maximum profit? Profit contribution
per pair is as follows:
Men’s = $2.5, Women’s = $4, Kid’s = $ 2
4. If the operation currently has five machines, what is the
utilization?
Long Term Capacity Decisions

1. Estimate future capacity requirements

2. Identify gaps by comparing requirements with

available capacity

3. Develop alternatives to fill the capacity gaps

4. Evaluate each alternative and make a final choice

Example 3
• Grandmother’s Chicken Restaurant is experiencing a
boom in business. The owner expects to serve 80,000
meals this year. Although the kitchen is operating at
100 percent capacity, the dining room can handle
105,000 diners per year. Forecasted demand for the
next five years is 90,000 meals for next year, followed
by a 10,000-meal increase in each of the succeeding
years. The average meal is priced at $10, and the
before-tax profit margin is 20 percent. What should the
owner do?
Economies of Scale
• Economies of Scale
– If output rate is less than the optimal level, increasing
the output rate results in decreasing average per
unit costs
– Reasons for economies of scale:
• Fixed costs are spread over a larger number of units
• Construction costs increase at a decreasing rate as
facility size increases
• Processing costs decrease due to standardization
Diseconomies of Scale
• Diseconomies of Scale
– If the output rate is more than the optimal level, increasing
the output rate results in increasing average per unit costs
– Reasons for diseconomies of scale
• Distribution costs increase due to traffic congestion and
shipping from a centralized facility rather than multiple
small facilities
• Complexity increases costs
• Inflexibility can be an issue
• Additional levels of bureaucracy
Facility Size and Optimal Operating Level
Minimum cost & optimal operating rate
are functions of size of production
unit.
Average cost per

Small
unit

plant Medium
plant
Large

plant

Output rate