Operations Management Chapter 5 Capacity Planning

The upper limit or ceiling on the load that an operating unit can handle
Capacity needs include
Space (classroom can hold 100 people)
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-term demand
Overcapacity – operating costs that are too high
Undercapacity – strained resources and possible loss of customers
Capacity decisions are
strategic (long term)

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
have become more important and complex due to globalization
need to be planned for in advance due to their consumption of financial and other resources

Design capacity
Maximum output rate or service capacity an operation, process, or facility is designed for

accommodated was accommodated to have 100 students

Effective Capacity
Design capacity minus allowances such as personal time, maintenance, and scrap

but because there are chairs/desks actually can have 60 people

Actual Output
Rate of output actually achieved–cannot exceed effective capacity.

27 people actually come to class

Efficiency Formula
actual output/effect capacity
Utilization Formula
actual output/design capacity
Deteriminants of effective capaciy
Product and service factors
Process factors
Human factors
Policy factors
Operational factors
Supply chain factors
External factors
Strategy Formulation
Strategies are typically based on assumptions and predictions about:
Long-term demand patterns
Technological change
Competitor behavior

-want to increase students but don’t want to derease acceptance rates

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
Capacity Planning Steps
Estimate future capacity requirements
Evaluate existing capacity and facilities; identify gaps
Identify alternatives for meeting requirements
Conduct financial analyses
Assess key qualitative issues
Select the best alternative for the long term
Implement alternative chosen
Monitor results
Service Capacity Planing
Service capacity planning can present a number of challenges related to:
The need to be near customers
The inability to store services
Cannot store services for consumption later
The degree of demand volatility
Volume and timing of demand
Time required to service individual customers
Demand Management Strategies
Strategies used to offset capacity limitations and that are intended to achieve a closer match between supply and demand
Other tactics to shift demand from peak periods into slow periods
In-House or Outsource?
Once capacity requirements are determined, the organization must decide whether to produce a good or service itself or outsource
Factors to consider:
Available capacity
Quality considerations
The nature of demand
Developing Capacity Alternatives
Things that can be done to enhance capacity management:
Design flexibility into systems
Take stage of life cycle into account
Take a “big-picture” approach to capacity changes
Prepare to deal with capacity “chunks”
Attempt to smooth capacity requirements
Identify the optimal operating level
Choose a strategy if expansion is involved
Capacity Strategies: Leading
Build capacity in anticipation of future demand increases
(expect students to increase by 5000 so build building ahead of time – what happens if capacity doesn’t increase)
Capacity Strategies:
Build capacity when demand exceeds current capacity
(building new dorm just in time)
Capacity Strategies:
Similar to the following strategy, but adds capacity in relatively small increments to keep pace with increasing demand
(Building a small piece at a time)
Bottleneck Operation
An operation in a sequence of operations whose capacity is lower than that of the other operations
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
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 smaller facilities
Complexity increases costs
Inflexibility can be an issue
Additional levels of bureaucracy
Something that limits the performance of a process or system in achieving its goals
Resolving Constraint Issues
Identify the most pressing constraint
Change the operation to achieve maximum benefit, given the constraint
Make sure other portions of the process are supportive of the constraint
Explore and evaluate ways to overcome the constraint
Repeat the process until the constraint levels are at acceptable levels
Cost-Volume Analysis
Focuses on the relationship between cost, revenue, and volume of output
Fixed Costs (FC)
tend to remain constant regardless of output volume
Variable Costs (VC)
vary directly with volume of output
VC = Quantity(Q) x variable cost per unit (v)
Total Cost
TC = FC + VC
Total Revenue (TR)
TR = revenue per unit (R) x Q
Break-Even Point
The volume of output at which total cost and total revenue are equal
Profit (P) = TR – TC = R x Q – (FC +v x Q)
= Q(R – v) – FC

Qbep = FC/R-v

Cash Flow
The difference between cash received from sales and other sources, and cash outflow for labor, material, overhead, and taxes
Present Value
The sum, in current value, of all future cash flow of an investment proposal