Strategic Capacity Planning for Products and

Services

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

You should be able to:1. Summarize the importance of capacity

planning2. Discuss ways of defining and measuring

capacity3. Describe the determinants of effective

capacity4. Discuss the major considerations related to

developing capacity alternatives5. Briefly describe approaches that are useful

for evaluating capacity alternatives

5-2Student Slides

CapacityThe upper limit or ceiling on the load that an

operating unit can handleIt can be measured in terms of input or outputCapacity needs include

EquipmentSpaceEmployee skills

Student Slides 5-3

Key Questions: What kind of capacity is needed? How much in total to match demand? How much currently exists? How much in shortage or excess? When to change the capacity?

Related Questions: How much will it cost? What are the potential benefits and risks? Are there sustainability issues? Should capacity be changed all at once, or through

several smaller changes Can the supply chain handle the necessary changes?

Student Slides 5-4

Two useful definitions of capacity Design capacity

The maximum output rate or service capacity an operation, process, or facility is designed for

Effective capacityDesign capacity minus allowances such as personal

time and maintenance, and scrap

Unit of Measure for capacity Dollars Raw material in lbs. Yields (of output)

All are potentially problematic?

5-5Student Slides

Actual outputThe rate of output actually achievedIt cannot exceed effective capacity

Efficiency

Utilization

Measured as percentages

capacity effective

output actualEfficiency

capacitydesign

output actualnUtilizatio

5-6Student Slides

1. Estimate future capacity requirements

2. Evaluate existing capacity and facilities; identify gaps

3. Identify alternatives for meeting requirements

4. Conduct financial analyses

5. Assess key qualitative issues

6. Select the best alternative for the long term

7. Implement alternative chosen

8. Monitor results

5-7Student Slides

Service capacity planning can present a number of challenges related to:The need to be near customers

Convenience The inability to store services

Cannot store services for consumption laterThe degree of demand volatility

Volume and timing of demandTime required to service individual customers

5-8Student Slides

Once capacity requirements are determined, the organization must decide whether to produce a good or service itself or outsource

Factors to consider: Available capacity Expertise Quality considerations The nature of demand Cost Risks

5-9Student Slides

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

5-10Student Slides

Minimum cost & optimal operating rate are functions of size of production unit.

5-11Student Slides

Cost-volume analysisFocuses on the relationship between cost,

revenue, and volume of outputFixed Costs (FC)

tend to remain constant regardless of output volumeVariable Costs (VC)

vary directly with volume of outputVC = Quantity(Q) x variable cost per unit (v)

Total CostTC = FC + VC

Total Revenue (TR)TR = revenue per unit (R) x Q

Student Slides 5-12

BEPThe volume of output at which total cost and

total revenue are equalProfit (P) = TR – TC = R x Q – (FC +v x Q)

= Q(R – v) – FC

vRQBEP

FC

Student Slides 5-13