OPERATIONS

MANAGEMENT

CAPACITY PLANNING

CAPACITY

No of beds in the hospital

Size of bus
No of counters in a bank
No of copies to be printed every hour by a
printer
Bandwidth of a communication network
No of cars to be produced per day

CAPACITY
Maximum rate of output from a process within
a defined time
Theoretical capacity vs. Effective capacity
250 ml glass
Output of assembly line
Ground realities decide the effective capacity
Capacity choices influence financial performance
Can affect the Industry

CAPACITY
Capacity can vary
Day-to-day uncertainties such as employee
absences, equipment breakdowns, and materialdelivery delays
Product Mix

MEASURES OF CAPACITY
Output units are homogeneous :
- Battery manufacturing unit

Output units are diverse :

- Restaurant
- Jobbing machine shop

MEASUREMENTS OF CAPACITY
Input Rate Capacity
Commonly used for service operations where
output measures are particularly difficult
Hospitals : No of beds
Airlines : seat-miles per month
Movie theatres :No of seats

CAPACITY PLANNING PROCESS

Estimate the capacity of the present facilities.
Forecast the long-range future capacity needs.
Identify and analyze sources of capacity to
meet these needs.
Select from among the alternative sources of
capacity.

ISSUES

Accuracy of demand forecast

Market trends : market size & location
Technological innovation
New products
Process innovation to affect production
method
Extent of capacity enhancement : strategy

STRATEGIC CAPACITY
PLANNING
Capacity level of capital intensive resources :
- Equipments
- Facilities
- Manpower
It impacts :
- Response rate
- Cost structure
- Inventory policy
- Management & staff support

CAPACITY STRATEGIES
CAPACITY CUSHION

UNIT
CAPACITY
DEMAND

TIME

CAPACITY STRATEGIES
CAPACITY CUSHION

UNIT
CAPACITY
DEMAND

TIME

CAPACITY STRATEGIES
DEMAND CUSHION

UNIT
CAPACITY
DEMAND

TIME

CAPACITY STRATEGIES
BALANCED APPROACH

UNIT
CAPACITY
DEMAND

TIME

OPTIONS

Overtime / Multiple shifts

Lost sales
Increase capacity in small steps
Increase capacity in large steps
Partially use alternate source
Establish new location for the additional
capacity
Relocate the entire operation

RETURNS TO SCALE
Increasing returns to scale
Law of diminishing returns
Decreasing returns to scale
Best operating level

Economies of Scale
Declining costs result from:
Fixed costs being spread over more and more
units
Longer production runs result in a smaller
proportion of labor being allocated to setups
Proportionally less material scrap
and other economies

Diseconomies of Scale
Increasing costs result from increased
congestion of workers and material, which
contributes to:
Increasing inefficiency
Difficulty in scheduling
Damaged goods
Reduced morale
Increased use of overtime
and other diseconomies

Economies and Diseconomies of Scale

Average Unit
Cost of Output

Economies
of Scale

Diseconomies
of Scale

Best Operating Level

Annual Volume (units)

ECONOMIES OF SCALE
VOL

VARI ABLE
COST
Rs / uni t

FI XED COST
Rs

500
750
1000
1250
1500
1750
2000
2250
2500
2750
3000
3250
3500
3750
4000
4250
4500
4750
5000
5250
5500

60
60
60
60
60
60
60
60
60
60
60
180
180
180
180
180
180
360
360
360
360

200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000

ECONOMIES OF SCALE
VOL

500
750
1000
1250
1500
1750
2000
2250
2500
2750
3000
3250
3500
3750
4000
4250
4500
4750
5000
5250
5500

VARIABLE
VARIABLE
COST
FIXED COST
COST
Rs /unit
Rs
Rs
60
60
60
60
60
60
60
60
60
60
60
180
180
180
180
180
180
360
360
360
360

200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000
200000

30000
45000
60000
75000
90000
105000
120000
135000
150000
165000
180000
225000
270000
315000
360000
405000
450000
540000
630000
720000
810000

TOTAL
COST
Rs
230000
245000
260000
275000
290000
305000
320000
335000
350000
365000
380000
425000
470000
515000
560000
605000
650000
740000
830000
920000
1010000

AVERAGE AVERAGE AVERAGE

FIXED
VARIABLE
TOTAL
COST
COST
COST
Rs /unit
Rs /unit
Rs /unit
400
267
200
160
133
114
100
89
80
73
67
62
57
53
50
47
44
42
40
38
36

60
60
60
60
60
60
60
60
60
60
60
69
77
84
90
95
100
114
126
137
147

460
327
260
220
193
174
160
149
140
133
127
131
134
137
140
142
144
156
166
175
184

ECONOMIES OF SCALE
500
450
400

300

MARGINAL COST Rs /unit

AVERAGE FIXED COST Rs /unit

250

AVERAGE VARIABLE COST Rs /unit

AVERAGE TOTAL COST Rs /unit

200
150
100
50

VOLUME

52
50

47
50

42
50

37
50

32
50

27
50

22
50

17
50

12
50

75
0

UNIT COST

350

CAPACITY-PLANNING DECISIONS
Break-Even Analysis
Present-Value /Future value Analysis
Computer Simulation
Internal Rate of return Analysis
Linear Programming
Decision Tree Analysis

FACTORS
Forecast of future demand
Mature products

New products : Optimistic & pessimistic

MATURE PRODUCTS
DEMAND VS. CAPACITY

2004

2006

2009

2014

10000

12000

15000

20000

FACILITY A
CAPACITY
SLACK

11000
1000

11000
(1000)

11000
(4000)

11000
(9000)

FACILITY B
CAPACITY
SLACK

10000
0

10000
(2000)

10000
(5000)

10000
(10000)

FACILITY C
CAPACITY
SLACK

15000
5000

15000
3000

15000
0

15000
(5000)

DEMAND FORECAST

NEW PRODUCT
PESSIMISTIC FORECAST

2004

2006

2009

2014

10000

11000

12800

16000

FACILITY A
CAPACITY
SLACK

11000
1000

11000
0

11000
(1800)

11000
(5000)

FACILITY B
CAPACITY
SLACK

10000
0

10000
(1000)

10000
(2800)

10000
(6000)

FACILITY C
CAPACITY
SLACK

15000
5000

15000
4000

15000
2200

15000
(1000)

DEMAND FORECAST

NEW PRODUCT
OPTIMISTIC FORECAST

2004

2006

2009

2014

10000

14500

25000

62000

FACILITY A
CAPACITY
SLACK

11000
1000

11000
(3500)

11000
(14000)

11000
(51000)

FACILITY B
CAPACITY
SLACK

10000
0

10000
(4500)

10000
(15000)

10000
(52000)

FACILITY C
CAPACITY
SLACK

15000
5000

15000
500

15000
(10000)

15000
(47000)

DEMAND FORECAST

Break-Even Analysis
BEPx = break-even point in units
BEP$ = break-even point in
dollars
P = price per unit (after all
discounts)

BEP$ = BEPx P
F
=
P
P-V
F
=
(P - V)/P
F
=
1 - V/P

x = number of units produced

TR
F
V
TC

=
=
=
=

total revenue = Px
fixed costs
variable cost per unit
total costs = F + Vx

Profit = TR - TC
= Px - (F + Vx)
= Px - F - Vx
= (P - V)x - F

Break-Even Analysis
BEPx = break-even point in units
BEP$ = break-even point in
dollars
P = price per unit (after all
discounts)

x = number of units produced

TR
F
V
TC

=
=
=
=

total revenue = Px
fixed costs
variable cost per unit
total costs = F + Vx

Break-even point occurs when

TR = TC
or
Px = F + Vx

BEPx =

F
P-V

Break-Even Multiproduct Case

Multiproduct Example
Fixed costs = $3,500 per month
Item
Sandwich
Soft drink
Baked potato
Tea
Salad bar

Price
$2.95
.80
1.55
.75
2.85

Cost
$1.25
.30
.47
.25
1.00

Annual Forecasted
Sales Units
7,000
7,000
5,000
5,000
3,000

Multiproduct Example
Fixed costs = $3,500 per month

Item (i)
Sandwich
Soft drink
Baked
potato
Tea
Salad bar

Selling Variable
Price (P) Cost (V)

(V/P)

Annual
Forecasted
1 - (V/P)
Sales $

% of
Sales

Weighted
Contribution
(col 5 x col 7)

$2.95
.80
1.55

$1.25
.30
.47

.42
.38
.30

.58
.62
.70

$20,650
5,600
7,750

.446
.121
.167

.259
.075
.117

.75
2.85

.25
1.00

.33
.35

.67
.65

3,750
8,550
$46,300

.081
.185
1.000

.054
.120
.625

BREAK EVEN VALUE

DAILY SALES

Item (i )
Sandwich
Soft drink
Baked
potato
Tea
Salad bar

Selling Variable
Price (P) Cost (V) (V/P )

Annual
Weighted
Forecasted % of Contribution
1 - (V/P ) Sales $
Sales (col 5 x col 7)

$2.95
0.8
1.55

$1.25
0.3
0.47

0.42
0.38
0.30

0.58
0.63
0.70

20,650
5,600
7,750

44.6 0.26
12.1 0.08
16.7 0.12

0.75
2.85

0.25
1

0.33
0.35

0.67
0.65

3,750
8,550
46,300

8.1 0.05
18.5 0.12
100

DECISION TREE
OPTIMISTIC

EXPECTED
PROPOSAL 1
PESSIMISTIC
OPTIMISTIC
EXPECTED
PROPOSAL 2

PESSIMISTIC
OPTIMISTIC

PROPOSAL 3
EXPECTED
PESSIMISTIC