Capacity Planning

1. Capacity Planning ABI301

2. Introduction • Capacity refers to an upper limit or ceiling on the load that an operating unit can handle. • The operating unit might be a plant, department, machine, store, or worker. • The importance of capacity : • It enables managers to quantify production capability in terms of inputs or outputs, • makes other decisions or plans related to those quantities. • The basic questions in capacity planning are the following: • 1. What kind of capacity is needed? • 2. How much is needed? • 3. When is it needed?

3. Importance of Capacity Decisions • Capacity decisions have a real impact on the ability of the organization to meet future demands for products and services; capacity essentially limits the rate of output possible. • Capacity decisions affect operating costs. Ideally, capacity and demand requirements will be matched, which will tend to minimize operating costs. • Capacity is usually a major determinant of initial cost. Typically, the greater the capacity of a productive unit, the greater its cost. • Capacity decisions often involve long-term commitment of resources and the fact that, once they are implemented, it may be difficult or impossible to modify those decisions without incurring major costs. • Capacity decisions can affect competitiveness. • Capacity affects the ease of management.

4. Defining and Measuring Capacity • It can be refined into three useful definitions of capacity: • Design capacity: the maximum output that can possibly be attained. • Effective capacity: the maximum possible output given a product mix, scheduling difficulties, machine maintenance, quality factors, and so on. • Actual Capacity: The actual production at specific time.

5. Defining and Measuring Capacity • These different measures of capacity are useful in defining two measures of system effectiveness: efficiency and utilization. • Efficiency is the ratio of actual output to effective capacity. • Utilization is the ratio of actual output to design capacity.

6. Example

7. Determinants of Effective Capacity • Many decisions about system design have an impact on capacity. • The main factors relate to the following: • Facilities • Products or services • Processes • Human considerations • Operations • External forces

8. Developing Capacity Alternatives • The alternative things that can be done to enhance capacity management: • Design flexibility into systems. • Differentiate between new and mature products or services. • Take a “big picture” approach to capacity changes. • Prepare to deal with capacity “chunks.” • Attempt to smooth out capacity requirements. • Identify the optimal operating level.

9. COST–VOLUME ANALYSIS • Cost–volume analysis focuses on relationships between cost, revenue, and volume of output. • The purpose of cost–volume analysis is to estimate the income of an organization under different operating conditions. • One of the famous mathematical modeling using to identify capacity is break-even point (BEP) the volume of output at which total cost and total revenue are equal.

10. COST–VOLUME (BEP) ASSUMPTIONS • Cost–volume analysis can be a valuable tool for comparing capacity alternatives if certain assumptions are satisfied: • One product is involved. • Everything produced can be sold. • The variable cost per unit is the same regardless of the volume. • Fixed costs do not change with volume changes, or they are step changes. • The revenue per unit is the same regardless of volume. • Revenue per unit exceeds variable cost per unit.

11. Cost-Volume Equations

12. Problem(1) • The efficiency of a productive unit is 60%. The unit produces an average of 20 forklift trucks per day. Determine the effective capacity of the unit.

13. Problem(2) • The utilization of a machine is 50%. The machine has a design capacity of 70 units per hour and an effective capacity of 60 units per hour. Find the efficiency of the machine.

14. Problem(2) - Continue