CAPACITY PLANNING What is Capacity is the maximum

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CAPACITY PLANNING

CAPACITY PLANNING

What is Capacity is the maximum rate of output from an operating system over

What is Capacity is the maximum rate of output from an operating system over a specific period of time. For example, a cement plant is capable of producing 4000 tones per day of cement.

Thus , Capacity refers to a system’s potential for producing goods or delivering services

Thus , Capacity refers to a system’s potential for producing goods or delivering services over a specified time interval. Capacity is the rate of productive capability of a facility.

Meaning of Capacity Planning Capacity planning is the long term strategic decision which determines

Meaning of Capacity Planning Capacity planning is the long term strategic decision which determines a company’s capability to supply products or services. It is the study of overall level of capacity the organization would provide at each stage of the production process or service delivery system to meet its defined objectives.

Capacity planning is the process of determining the production capacity needed by the organization

Capacity planning is the process of determining the production capacity needed by the organization to meet changing demands for its products. Thus , in context of capacity planning , capacity is the maximum amount of work that an organization is capable of completing in a given period of time.

Factors That Effect Level of Capacity • • Availability of workers No. of machine

Factors That Effect Level of Capacity • • Availability of workers No. of machine Any waste , defects , errors Government regulations , etc.

CAPACITY

CAPACITY

Definitions Of Capacity Planning As defined by APICS Dictionary , “Capacity planning is function

Definitions Of Capacity Planning As defined by APICS Dictionary , “Capacity planning is function of establishing , measuring and adjusting limits or levels of capacity. ” According to Professors F. Robert Jacobs and Richard B. Chase “Strategic capacity planning is a method which determines the total levels of capacity for resources. ”

Measurement of capacity Different measures of capacity are applicable in different situations. In general

Measurement of capacity Different measures of capacity are applicable in different situations. In general , the measures of capacity can be expressed in either of the two ways – • Output measures- are those measures which produces the standard products in large volumes, using production processes with a non flexible flow system. • Input measures are those measures which produce the standard products in low volumes, with a production process of a flexible flow system.

Capacity being the ability to produce work in a given time must be measured

Capacity being the ability to produce work in a given time must be measured in the unit of work or can also be measured on the basis of resources available. Following are the examples of capacity in terms of its measurement • Capacity in terms of input Ø No. of beds in a hospital Ø No. of hours the law firm work on a case • Capacity in terms of output Ø Customer calls attended per hour in call centre Ø No. of guests served per hour in a hotel room service

The following table shows the degree of measurement and capacity of the products-

The following table shows the degree of measurement and capacity of the products-

Major capacity decisions taken by top level management areØ How much capacity should be

Major capacity decisions taken by top level management areØ How much capacity should be installed Ø How much capacity to be increased Ø When and at what level should the capacity be increased

Purpose of Capacity Planning 1. 2. 3. 4. To achieve anticipated and consistent work

Purpose of Capacity Planning 1. 2. 3. 4. To achieve anticipated and consistent work To regulate scalability features To analyze the current capacity To evaluate the excess capacity required to support increased demand

Importance of Capacity Decisions 1. 2. 3. 4. 5. 6. Ability to meet future

Importance of Capacity Decisions 1. 2. 3. 4. 5. 6. Ability to meet future demand Monitoring the operating cost Main element in preparing budget Involves long range continuous commitment Capacity decisions affect competitiveness Impact on long range planning

Types of capacity plan 1. PRODUCTION CAPACITY 2. DESIGN CAPACITY 3. EFFECTIVE CAPACITY 4.

Types of capacity plan 1. PRODUCTION CAPACITY 2. DESIGN CAPACITY 3. EFFECTIVE CAPACITY 4. MAXIMUM CAPACITY

PRODUCTION CAPACITY Production capacity- is the volume of products and services that can be

PRODUCTION CAPACITY Production capacity- is the volume of products and services that can be produced by an organization using current resources. It is the maximum rate of production or output of an organization. For example, 100 cars a day , etc.

DESIGN CAPACITY Design capacity-refers to maximum output that can be possibly achieved under ideal

DESIGN CAPACITY Design capacity-refers to maximum output that can be possibly achieved under ideal situations.

EFFECTIVE CAPACITY Effective capacity- is the capacity a firm expects to achieve given its

EFFECTIVE CAPACITY Effective capacity- is the capacity a firm expects to achieve given its current operating constraints.

EFFECTIVE CAPACITY IS LESSER THAN DESIGN CAPACITY It is design capacity minus personal and

EFFECTIVE CAPACITY IS LESSER THAN DESIGN CAPACITY It is design capacity minus personal and other allowances. It is the highest level of output that a production process can handle under economical conditions.

MAXIMUM CAPACITY Maximum capacity/Peak capacity-is the highest level of output that can be achieved

MAXIMUM CAPACITY Maximum capacity/Peak capacity-is the highest level of output that can be achieved by a process or a system under normal situations.

System effectiveness • System effectiveness is the capacity utilization rate which states the firms

System effectiveness • System effectiveness is the capacity utilization rate which states the firms design capacity i. e. how close a firm is to its best operating point. Two important measures of-EFFECIENCY and UTILIZATION. • Best operating point –is the level of capacity which is designed for the product /facility and it is at that level of output where the average unit cost is minimum.

 • Capacity utilization rate = actual output design capacity It is the percentage

• Capacity utilization rate = actual output design capacity It is the percentage of design capacity achieved. It is the degree to which equipment , space or labour is currently being used. • Efficiency is the ratio of actual output to effective capacity Efficiency = actual output effective capacity

Determinants of Effective Capacity �Competence Aspect �Product/Service Aspect �Process Aspect �Human Aspect �Operational Aspect

Determinants of Effective Capacity �Competence Aspect �Product/Service Aspect �Process Aspect �Human Aspect �Operational Aspect �External Aspect

Capacity Planning Strategies �Long -term capacity strategies - one to two years - participation

Capacity Planning Strategies �Long -term capacity strategies - one to two years - participation & approval of top mgt. - interlinked with many factors - take into consideration external environment

�Short-term Capacity Strategies -manage sudden shifts in the r requirements of customer : �

�Short-term Capacity Strategies -manage sudden shifts in the r requirements of customer : � working overtime � Transfer of personnel � Hiring labour for short period �Changes in inventory

Steps in Capacity Planning �Estimate future capacity requirement �Evaluate existing capacity �Identify alternatives �Conduct

Steps in Capacity Planning �Estimate future capacity requirement �Evaluate existing capacity �Identify alternatives �Conduct financial analysis �Assess qualitative issues �Implement alternative chosen �Monitor results

Developing Capacity Alternatives � Design flexibility into systems �Take stage of life cycle into

Developing Capacity Alternatives � Design flexibility into systems �Take stage of life cycle into account �Take a “BIG PICTURE” approach to capacity changes �Prepare to deal with capacity “CHUNKS” �Attempt to smooth out capacity requirements �Identify the optimal operating level

Evaluation of Capacity Alternatives 1. Break even Analysis Fixed cost: cost which remains constant

Evaluation of Capacity Alternatives 1. Break even Analysis Fixed cost: cost which remains constant irrespective of the number of output. Variable cost : changes with the number of output. BEP: no profit –no loss , TR=TC

2. Financial Analysis �Cash flow method = cash inflows – cash outflows �Present value

2. Financial Analysis �Cash flow method = cash inflows – cash outflows �Present value method (a) Payback period method (b) Net Present value method (c) Internal rate of return method 3. Waiting line Analysis