CAPACITY PLANNING

Capacity

CapacityIs the ability to hold, receive, store or accommodate

Strategic capacity planningIs an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size

Capacity increase depends onvolume and certainty of anticipated demand

strategic objectivescosts of expansion and operation

Best operating level% of capacity utilization that minimizes unit costs

capacity for which the process was designed

Capacity cushion% of capacity held in reserve for unexpected occurrences

Capacity Utilization

Example: During one week of production, a plant

produced 83 units of a product. Its historic highest or best utilization recorded was 120 units per week. What is this plant’s capacity utilization rate?

level operating Best

usedCapacity rate nutilizatioCapacity

Capacity utilization rate = Capacity used Best operating level

= 83/120 =0.69 or 69%

Economies of Scale

It costs less per unit to produce high levels of outputfixed costs can be spread over a larger number of units

quantity discounts are available for material purchases

operating efficiency increases as workers gain experience

The Experience Curve

As plants produce more products, they gain experience in the best production methods and reduce their costs per unit

The Experience Curve

Graph

Total accumulated production of units

Cost orpriceper unit

Yesterday

Today Tomorro

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STRATEGIES FOR TIMING CAPACITIES

Capacity Lead strategy:• Adding capacity in anticipation of an increase in demand.

• Aggressive strategy; to snatch customers from competitors.

Disadvantage: excess inventory, costly and often wasteful.

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STRATEGIES FOR TIMING CAPACITIES

Capacity Lag strategy: • Adding capacity only after the organization is running at full capacity or beyond due to increase in demand.

• Conservative strategy; decreases the risk of waste.

Disadvantage: It may result in the loss of possible customers.

Average Capacity Strategy:• Here average expected demand is calculated and then capacity is increased accordingly.

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Capacity Expansion Strategies

Example of Capacity RequirementsA manufacturer produces two lines of mustard, FancyFine and Generic line. Each is packaged in small and family-size plastic bottles.

The following table shows forecast demand for the next four years.

Year: 1 2 3 4FancyFine

Small (000s) 50 60 80 100Family (000s) 35 50 70 90Generic

Small (000s) 100 110 120 140Family (000s) 80 90 100 110

Example of Capacity Requirements (Continued) : Equipment and Labor

Requirements

Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200

•Three 100,000 units-per-year machines are available for small-bottle production. Two operators required per machine.

•Two 120,000 units-per-year machines are available for family-sized-bottle production. Three operators required per machine.

Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6Family-size Mach. Cap. 240,000 Labor 6

Small

Percent capacity used 50.00%Machine requirement 1.50Labor requirement 3.00Family-size

Percent capacity used 47.92%Machine requirement 0.96Labor requirement 2.88

Question: What are the Year 1 values for capacity, machine, and labor?

Question: What are the Year 1 values for capacity, machine, and labor?

150,000/300,000=50%

At 2 operators for 100,000, it takes 3 operators for 150,000

At 1 machine for 100,000, it takes 1.5 machines for 150,000

©The McGraw-Hill Companies, Inc., 2004

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Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6Family-size Mach. Cap. 240,000 Labor 6

Small

Percent capacity used 50.00%Machine requirement 1.50Labor requirement 3.00Family-size

Percent capacity used 47.92%Machine requirement 0.96Labor requirement 2.88

Question: What are the values for columns 2, 3 and 4 in the table below?Question: What are the values for columns 2, 3 and 4 in the table below?

56.67%1.703.40

58.33%1.173.50

66.67%2.004.00

70.83%1.424.25

80.00%2.404.80

83.33%1.675.00

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©The McGraw-Hill Companies, Inc., 2004

Some Short-Term Capacity Options

lease extra space temporarily authorize overtime staff second or third shift with

temporary workers add weekend shifts alternate routings, using different

work stations that may have excess capacity

schedule longer runs to minimize capacity losses

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