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CAPACITY PLANNING

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Capacity planning

Amount of output a system is capable of achieving over a

specific period of time.

Capacity

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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 dealwith 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.

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Capacity Planning

The basic questions in capacity planning are:

What type of capacity is needed?

How much is needed?

When is it needed?

How does productivity relate to capacity?

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Types of Capacity

1. Fixed capacity

2. Adjustable capacity

3. Design capacity

4. System capacity

5. Immediate capacity

6. Effective capacity

7. Normal capacity or rated capacity

8. Actual or utilised capacity

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Actual Output

System efficiency is the ratio of the actual measured

output of goods/services to the system capacity

System efficiency =

System capacity

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Capacity Utilisation Rate = Actual output/

Effective capacity

Capacity= ( No. of machine or workers) * (No

of shifts ) * (Utilisation) * (Efficiency)

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Capacity Decisions

Major considerations in capacity decisions are

a. What size of plant? How much capacity to install?

b. When capacity is needed? When to phase-in capacity orphase-out capacity?

c. At what cost? How to budget for the cost?

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Factors Affecting Determination of

Plant Capacity

1. Market demand for a product/service.

2. The amount of capital that can be invested.

3. Human resource considerations.

4. Type of technology selected.5. Flexibility for capacity additions.

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Capacity Planning

Capacity planning involves activities such as:

a. Assessing existing capacity

b. Forecasting future capacity needs

c. Identifying alternative ways to modify capacityd. Evaluating financial, economical and technological

capacity alternatives

e. Selecting a capacity alternative most suited to achievethe strategic mission of the firm. Capacity planning

involves capacity decisions that must merge consumerdemands with human, material and financial resourcesof the organization.

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Capacity Requirement Planning

Capacity Requirement Planning (CRP): A

technique to determine the labour and

equipment capacities needed to meet the

objectives

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Capacity Requirement Planning (CRP)

ProcessCapacity Requirement Planning Process (Flow Chart)

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Aggregate planning involves planning the best quality toproduce in the intermediate-range horizon (3 months toone year)

Objectives of Aggregate Planning

i. The overall objective is to balance conflicting

objectives involving customer service, work forcestability, cost and profit.

ii. To establish company-wide strategic plan forallocating resources.

iii.To develop strategy to meet customer demand.

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Master Production Scheduling

Objectives of Master Production Scheduling

1. To schedule end items to be completed promptlyand when promised to customers.

2. To avoid overloading or underloading the

production facility so that production capacity isefficiently utilized and low production costs result.

Functions of MPS:

Translating aggregate plans

Evaluating alternative master schedules

Generating material and capacity requirements Facilitating information processing

Maintaining priorities

Utilizing the capacity effectively.

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Material requirement planning

MRP serves as a key component in an

information system for planning and

controlling production operation and

procurement of material

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Practical Question

A steel plant has a design capacity of 50,000

tons of steel perday, effective capacity is

40,000tons of steel perday and actual output

is of 36,000 steel perday. Compute theefficency and utilisation of plant

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Practical Question

A work centre operates 5 days a week on a 2

shift perday basis, each shift of 8 hrs duration.

There are 5 machine of the same capacity in

the work centre. If machine are utilised 80% ofthe time at a system efficiency of 90%. What is

the rated output in standard hours per week

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Breakeven Analysis

Breakeven quantity =Fixed Costs

Price - Variable Costs

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Breakeven example

Thomas Manufacturing intends to increase capacityby overcoming a bottleneck operation through theaddition of new equipment. Two vendors havepresented proposals as follows:

Proposal Fixed Costs Variable Costs

A RS 50,000 Rs12

B Rs 70,000 RS10

The revenue for each product is Rs20

What is the breakeven quantity for each proposal?

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Breakeven Solution

BEQ =FC

P- VC

Proposal A

BEQ = = 6250Rs 50,000

Rs20 - 12

Proposal B

BEQ = = 7000Rs 70,000

Rs20 - 10

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Breakeven Analysis

In the previous example, at what capacity wouldboth plans incur the same cost?

Total cost = Fixed cost + Variable Cost (Q)

50,000 + 12Q = 70,000 + 10 Q

Q = 10,000