Chapter 5

Strategic Capacity Planning for Products and Services

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

Introduction
After selection of a production process, we need to determine capacity. Capacity: is the throughput, or the number of units a facility can hold, receive, store, or produce in a period of time.

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

Introduction
Capacity determines large portion of the fixed cost. Capacity determines if demand will be satisfied or if facilities will be idle. If the facility is too large, portion of if will set and add cost to existing production. If the facility is too small, customers and perhaps the entire market are lost.

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

Capacity Planning
Capacity
The upper limit or ceiling on the load that an operating unit can handle Capacity needs include
Equipment Space Employee skills

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Strategic Capacity Planning

Goal
To achieve a match between the long-term supply capabilities of an organization and the predicted level of long-run demand
Overcapacity operating costs that are too high Undercapacity strained resources and possible loss of customers

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Capacity Planning Questions

Key Questions:
What kind of capacity is needed? How much capacity is needed to match demand? When is it needed? 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?

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Capacity Decisions Are Strategic

Capacity decisions
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 are more important and complex due to globalization need to be planned for in advance due to their consumption of financial and other resources

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Capacity
Design capacity

maximum output rate or service capacity an operation, process, or facility is designed for Design capacity minus allowances such as personal time, maintenance, and scrap rate of output actually achieved--cannot exceed effective capacity.

Effective capacity

Actual output

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Design and Effective Capacity

Most organizations operate their facilities at a rate less than the design capacity (about 82% of design capacity). It is more efficient to operate when resources are not stretched to the limit. This concept is called effective capacity.

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Design and Effective Capacity

Effective Capacity: is the capacity a firm expects to achieve given the current operating constraints (i.e. can only operate in the morning shift). Effective capacity is always lower than design capacity.

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Measuring System Effectiveness

Actual output
The rate of output actually achieved It cannot exceed effective capacity

Efficiency
actual output Efficiency effective capacity

Utilization
actual output Utilizatio n design capacity
Measured as percentages
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Example Efficiency and Utilization

Design Capacity = 50 trucks per day Effective Capacity = 40 trucks per day Actual Output = 36 trucks per day
actual output 36 Efficiency 90 % effective capacity 40 actual output 36 Utilizatio n 72 % design capacity 50
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Determinants of Effective Capacity

Facilities Product and service factors Process factors Human factors Policy factors Supply chain factors External factors

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