Capacity planning

Capacity is the maximum output rate of a production or service facility.

Capacity planning is the process of establishing the output rate that may be needed at a facility.

Measuring Capacity Examples

Type of BusinessInput Measures of

CapacityOutput Measures

of Capacity

Car manufacturer Labor hours Cars per shift

Hospital Available beds Patients per month

Pizza parlor Labor hours Pizzas per day

Retail storeFloor space in square feet

Revenue per foot

Capacity Information NeededDesign capacity:

Maximum output rate under ideal conditionsA bakery can make 30 custom cakes per day when

pushed at holiday time

Effective capacity:Maximum output rate under normal (realistic) conditionsOn the average this bakery can make 20 custom cakes

per day

Calculating Capacity Utilization

Measures how much of the available capacity is actually being used:

Measures effectiveness Use either effective or design capacity in denominator

100%capacity

rateoutput actualnUtilizatio

Example of Computing Capacity Utilization: In the bakery example, the design capacity is 30 custom cakes per day. Currently the bakery is

producing 28 cakes per day. What is the bakery’s capacity utilization relative to both design and effective capacity?

93%(100%)30

28(100%)

capacitydesign

output actualn Utilizatio

140%(100%)20

28(100%)

capacity effective

output actualn Utilizatio

design

effective

The current utilization is only slightly below its design capacity and considerably above its effective capacity

Making Capacity Planning Decisions

The three-step procedure for making capacity planning decisions are as follows:Step 1: Identify Capacity RequirementsStep 2: Develop Capacity AlternativesStep 3: Evaluate Capacity Alternatives

Facility Location

Facility location is the process of identifying the best geographic location for a service or

production facility

Factors That Affect Location DecisionsGeneral factors.

Global Region or Country decision.

Sub-region or state decision.

Community/site decision.

General FactorsGlobalization.

Market (customer) proximity

Suppliers proximity

Labor proximity and productivity

Competitor proximity

Global Region or CountryKey International Locations

North America, Europe, Pacific Rim.Key Considerations

Political/legal concerns.Cultural issues (including business).Infrastructure: supplies, communication, utilities.International trade issues.

Exchange rates.Market access issues.Labor availability, attitudes, productivity, costs.Quality-of-life issues.

Sub-region or State

Key factors:Government incentives.Corporate desiresProximity to raw materials and customersAttractiveness of region (culture, taxes, climate, etc.)Environmental regulations of state and town.Economic conditions.Costs of key inputs and advertising media.Cost and availability of utilities.Labor availability, costs.

Community/Site Factors:

Financial incentives. Site size and cost. Transportation options and costs. Utility options and costs. Nearness of services/supplies needed. Legal climate and community receptiveness.

Zoning restrictions Environmental concerns.

Significant trends: Moving to the suburbs

Chapter HighlightsCapacity planning is deciding on the maximum output

rate of a facility.Capacity planning and location decisions are often

made at the same time because they are inter-related.To choose between capacity planning alternatives

managers may use a modeling tool like decision trees Key factors in location analysis include proximity to

customers, transportation, source of labor, community attitude, and proximity to supplies.