Capacity Planning and Measurement

Capacity Planning

• Capacity is the level of output an organization can achieve within a specific period.
• Capacity is the upper limit of workload an operating unit can handle.
• Capacity planning answers:
  • What kind of capacity is needed?
  • How much is needed?
  • When is it needed?
• Capacity planning impacts business ability to meet demand and operational cost.
• Capacity decisions directly influence output rate.
• Matching capacity to demand can reduce operational costs.
• Capacity challenges exist at all organizations, at all levels.

Defining and Measuring Capacity

• Capacity is often seen as the upper limit of output rate.
• Defining capacity can be complex due to different interpretations and appropriate metrics.
• Dollar amounts can be a poor measure of capacity due to price changes.
• Utilization is the ratio of actual output to design capacity.
• Efficiency is the ratio of actual output to effective capacity.

Determinants of Effective Capacity

• Key factors include:
  • Facilities: Size, location, transportation costs, market proximity, labor supply, expansion potential.
  • Products/Services: System ability to produce diverse items.
  • Processes: Process capability, influence of output quality.
  • Human Factors: Job tasks, variety, skill, training, and experience.
  • Operations: Inventory stocking, delivery times, material quality, quality inspection.
  • External Factors: Product standards limiting capacity options.

Developing Capacity Alternatives

• Design flexibility into systems to handle uncertain forecasts.
• Take a holistic approach to capacity changes for mature products with limited lifespans.
• Be prepared for capacity increases coming in large chunks instead of gradual increments.
• Identify the optimal operating level to minimize unit cost.
• Smaller or larger output rates can increase unit costs compared to the ideal level.

Evaluating Alternatives

• Cost-volume analysis quantifies relationships between cost, revenue, and output.
• Break-even point (BEP) is the output volume where total cost equals total revenue. Output below BEP results in loss, above BEP results in profit.
• Cost-volume analysis helps compare capacity alternatives.
• Calculating processing requirements involves considering demand projections, processing time, workdays, shifts, and machine availability.
• Linear programming can be used to assess the cost impact of different locations on a production-distribution network.
• The center of gravity method helps locate single facilities, involving existing facilities, distances, and volumes of shipped goods. This is used for locating intermediate or distribution warehouses.

Facility Location

• Facility location is a significant strategic decision for an organization.
• Key factors include: proximity to customers, favorable business climate, total costs, infrastructure.
• Location break-even analysis: Uses cost-volume analysis to compare location alternatives economically.

Locating Service Facilities

• While the focus in manufacturing is cost minimization, service firms prioritize revenue maximization.
• Location choice often influences revenue more than cost for service firms.
• Therefore, determining the volume of business and revenue is crucial for service facility location.