Strategic Capacity Planning for

Products and Services

Report Outline:
Capacity Decisions
Defining and Measuring Capacity
Determinants of Effective Capacity
Strategy Formulation
Forecasting Capacity Requirements
Additional Challenges of Planning Service Capacity
Developing Capacity Strategies
Constraint Management
Evaluation of Alternatives
Introduction
Capacity
refers to an upper limit or ceiling on the load that an operating unit can handle.

The number of physical units produced

The number of services performed

Determined by many factors
▪ Equipment
▪ Space
▪ Employees Skill

Strategic Capacity Planning

The goal of is to achieve a match between the long-term
supply capabilities of an organization and the predicted level of long-term demand.
Capacity Planning Questions
Key Questions:
▪What kind of capacity is needed?
▪How much is needed to match demand?
▪When is it needed?

Related Questions:
▪How much will it cost?
▪What are the potential benefits and risks?
▪Should capacity be changed all at once, or through several smaller changes
▪Can the supply chain handle the necessary changes?
Importance of Capacity Decisions
▪Capacity decisions have a real impact on the ability of the
organization to meet future demands for products and services.
▪Capacity decisions affect operating costs.
▪Capacity is usually a major determinant of initial cost. Typically, the
greater the capacity of a productive unit, the greater its cost.
▪Capacity decisions often involve long-term commitment of
resources and the fact that, once they are implemented, those
decisions may be difficult or impossible to modify without incurring
major costs.
•Capacity decisions can affect competitiveness.
•Capacity affects the ease of management.
Defining and Measuring Capacity
Design capacity: The maximum output rate or service capacity an operation, process, or facility
is designed for.
Effective capacity: Design capacity minus allowances such as personal time, maintenance, and
scrap.
Actual output : The rate of output actually achieved
It cannot exceed effective capacity
Measuring System Effectiveness
Given the following information, compute the efficiency and the utilization of the vehicle repair
department:
Design capacity = 50 trucks per day
Effective capacity = 40 trucks per day
Actual output = 36 trucks per day
Determinants of Effective Capacity
▪Facilities
The design of production facilities is the most important determinant of effective
capacity.
Design includes the size and also the provision for expansion of the facilities. Design
facilities should be such that the employees should feel comfortable at their work
place.
Location factors such as distance from the market, supply of labor, transport costs,
energy sources are also important. Layout of the work area determines how smoothly
the work can be performed. Environmental factors such as lighting, ventilation, etc.,
influence the effectiveness with which employees can perform the assigned work.
▪Products or Services
Design of the company’s products or services exerts a significant influence on capacity
utilization. When more uniform is the output, greater can be the standardization of materials
and methods and greater can be the utilization of capacity. For instance, a restaurant that
offers a limited menu, can prepare and serve meals at a faster rate. Product mix should also
be considered because different products have different rates of output.

▪Process
Quantity capacity of a process is the obvious determinant of effective capacity. But if
quantity of output does not meet the quality standards, the rate of output is reduced due to
the need for inspection and rework activities.

▪Human factors
Job design (tasks that comprise a job), nature of the job (variety of activities involved),
training and experience required to perform the job, employee motivation, manager’s
leadership style, rate of absenteeism and labor turnover are the main human factors
influencing the rate of output.
▪Operational Factors
Materials management, scheduling, quality assurance, maintenance policies and
equipment breakdowns are important determinants of effective capacity. Late
delivery and low acceptability of materials will reduce effective capacity.
Inventory problems are a major hurdle in a capacity utilization. Similarly, when
the alternative equipment have different capabilities there may be scheduling
problems.

▪External Factors
Product standards (minimum quality and performance standards), pollution
control regulations, safety requirements and trade union attributes exercise
tremendous influence on effective capacity. Generally, the external factors act as
constraints in capacity utilization.
Strategy Formulation
Strategies are typically based on assumptions and predictions about:
⮚Long-term demand patterns
⮚Technological change
⮚Competitor behavior
Forecasting Capacity Requirements
Long-term capacity needs require forecasting demand over a time
horizon and then converting those forecasts into capacity requirements.
Short-term capacity needs are less concerned with cycles or trends than
with seasonal variations and irregular fluctuations in demand.
Additional Challenges of Planning Service Capacity
Important factors in planning service capacity:
The need to be near customers
▪ Convenience
The inability to store services
▪ Cannot store services for consumption later
The degree of demand volatility
▪ Speed of delivery or customer waiting time
Developing Capacity Strategies
Leading
▪Build Capacity in anticipation of future demand increases

Following
▪Build Capacity when demand exceeds current capacity

Tracking
▪Similar in the following strategy, but adds capacity in relatively small increments to
keep pace with increasing demand
Constraint Management
⮚Capacity constraint is factor that prevents a business from achieving more output.
⮚Categories
▪ Space
▪ Equipment
▪ Material
▪ Financial
▪ Policy
Evaluation of Alternatives
⮚ Cost volume relationships
▪ Break-even point

The owner of Old-Fashioned Berry Pies, S. Simon, is contemplating adding a new line of pies,
which will require leasing new equipment for a monthly payment of $6,000. Variable costs
would be $2.00 per pie, and pies would retail for $7.00 each.

1. How many pies must be sold in order to break even?

2. What would the profit (loss) be if 1,000 pies are made and sold in a month?
3. How many pies must be sold to realize a profit of $4,000?
4. If 2,000 can be sold, and a profit target is $5,000, what price should be charged per pie?
Cost-Volume Analysis

FC = Fixed cost
VC = Total variable cost v = Variable cost per unit
TC = Total cost
TR = Total revenue
R = Revenue per unit
Q = Quantity or volume of output
QBEP = Break-even quantity
P = Profit

TC = FC + VC
VC = Q x v
Financial Analysis Cash flow Present value
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 flow of an investment proposal
Waiting-Line Analysis
Useful for designing or modifying service systems
Waiting-lines occur across a wide variety of service systems
Waiting-lines are caused by bottlenecks in the process
Helps managers plan capacity level that will be cost-effective by balancing the cost of having
customers wait in line with the cost of additional capacity