Capacity Planning

Capacity
Amount of output a system is capable of achieving
over a specific period of time.

Capacity planning
Capacity planning is central to the long-term success
of an organisation. Capacity plans are made at two
levels: (i) Long-term capacity plans which deal
with investments in new facilities and equipments
covering the requirements for at least two years into
the future and (ii) Short-term capacity plans which
focus on work-force size, overtime
budgets,
inventories etc.

Long-Range Capacity Planning

A long term strategic decision that establishes a
firms overall level resources.
Three major capacity decisions are:
How much capacity to be installed,
ii. When to increase capacity and
iii. How much to increase.
i.

Types of Capacity
Production capacity: Maximum rate of production or

output of an organisation.
Design capacity: The maximum output that can possibly
be attained.
Effective capacity: The maximum output given a product
mix, scheduling difficulties, machine maintenance, quality
factors, absenteeism etc.
Maximum capacity: The maximum output that a facility
can achieve under ideal conditions. Also known as peak
capacity.

Efficiency and Utilization

Actual output
Efficiency =
Effective capacity
Actual output
Utilization =
Design capacity
Both measures expressed as percentages

Efficiency/Utilization Example

Design capacity = 50 trucks/day

Effective capacity = 40 trucks/day
Actual output = 36 units/day

Efficiency =
Utilization =
capacity

Actual output

36 units/day
=90%
40 units/ day

Effective capacity
Actual output
50 units/day

= 72%

36 units/day
Design

Determinants of Effective Capacity

Facilities
Product and service factors
Process factors
Human factors
Operational factors
External factors

Steps for Capacity

Planning
1.
2.
3.
4.
5.
6.
7.
8.

Estimate future capacity requirements

Evaluate existing capacity
Identify alternatives
Conduct financial analysis
Assess key qualitative issues
Select one alternative
Implement alternative chosen
Monitor results

Economies and Diseconomies of Scale

Economies scale: The concept which states that the

average unit cost of product can be reduced by

increasing the rate of output.
Best operating level: The annual output which
results in the least average unit cost.
Diseconomies of scale: Above a certain level of
output, additional volume of output results in everincreasing average unit costs. This phenomenon is
referred to as diseconomies of scale.

Economies of scope: The ability of a firm to

produce many product types in one highly

flexible manufacturing facility at a lesser cost
than in separate production facilities
The experience curve: The concept that allows a
firm to increase its production capacity without
additional capital investment.

Economies & Diseconomies of Scale

Average cost per unit

Production units have an optimal rate of output for minimal cost.

Minimum average cost per unit

Minimum
cost

Rate of output

Developing Capacity Alternatives

To enhance capacity management, the following

i.
ii.
iii.
iv.
v.

approaches to capacity alternatives could be

developed:
Designing flexibility into the system
Differentiating between new and mature products
or services
Taking a big-picture approach to capacity
changes
Preparing to deal with chunks of capacity
Attempting to smooth out capacity requirements

Approaches for Analysing Capacity

Decisions
Break even analysis & CVP analysis
Financial Analysis
Decision analysis & decision tree analysis
Computer simulation & Waiting line analysis

Amount
($)

Cost-Volume Relationships

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BEP units
Q (volume in units)

Financial Analysis
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 flows of an investment

proposal.

Decision theory or Decision tree

analysis
Helpful for financial comparison of

alternatives under conditions of risk or

uncertainty.
Decision trees are used in situations involving
multiphase decisions and interdependent
decisions that must be made in sequence.

Waiting line analysis

Used for designing of service system by

determining the service capacity and

expected costs for various levels of service
capacity.