Resource Person: Engineer Zahid Aziz Khan

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CAPACITY PLANNING Designed Capacity: The maximum theoretical output for a facility (whether a work station
or the entire company) in a given period of time ie; hrs, weeks, months, years etc.

Effective Capacity: It is the output that a firm expects to achieve considering all operational
constraints like preventive maintenance, labour absentees, power failures etc. etc. Normally it is lower than the designed capacity because the constraints as mentioned are usually not taken into account while describing the Designed Capacity. More over the machine or facility may be used for a different product mix that it was designed for.

Utilization: When the effective capacity is mentioned as the percentage of the Designed
Capacity, it is termed as the Utilization. Or we can say , It is the percent of Designed Capacity actually achieved. Average actual output Designed Capacity X 100

Efficiency:

It is the percent of the Effective Capacity actually achieved. Average actual output Effective Capacity X 100

Anticipated Production ( for a given period of time ) =

Designed Capacity X Effective Capacity X Efficiency

Capacity Planning is important because if we do not plan the capacity in a way to meet the
future demands, we might miss opportunities of growth and profits. However Capacity planning requires the knowledge of current capacity and its utilization. A. I) Capacity Planning can be done at two levels: Long Term Plans: It requires heavy investments for creating new facilities and adding more equipment in the future. Since this heavy investment once made is irreversible, so such decisions have to be taken very carefully and the Top Management is also involved in such decisions. Short Term Plans: It doesnt have heavy budgetary requirements and the planning is just temporary or to meet some immediate requirements. Such plans normally involve a small increase in the workforce size temporarily, a slight increase in the overtime budget or a little increase in the inventory (whether raw material or finished goods).

II)

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CAPACITY PLANNING
B. Increasing The Capacity When it is required to increase the capacity of a running plant, the first step is to review the whole process thoroughly as the lower level of production may be due to some bottlenecks at some stage/ on some machine during the process. So the first step will be to remove those bottlenecks, bring the capacity of each step at a balance and then expand all operations simultaneously. For example there are three steps or three machines involved in the process and the number of parts passing through these steps is different such as:

S te p 1 S te p 2 In p u ts 2 0 u n its /h r 5 0 u n its /h r

S te p 3 O u t p u ts

5 0 u n its /h r

After we have removed the bottlenecks in the process, we should think and plan the capacity increase. However the capacity planning determines if the demand will be met or the facilities will remain idle. If the plant is too large, a portion of it will remain idle and will add cost to the existing production and if the plant is too small, the customers will be lost. Even with a very good forecast there could be a poor match between the actual demand and the available capacity, in such a case we have to Manage the demand. C. Managing Demand: a) Demand Exceeds Capacity: In such a case either the price of the product is raised to decrease the demand, Long lead time schedules are made to discourage marginally profitable business but the ultimate solution is to increase the capacity. b) Capacity Exceeds Demand: In such a case either the price of the product is reduced or sale promotional schemes are launched to increase its demand in the market or the product is introduced with some improved qualities. c) Adjusting to Seasonal Demands: Capacity can best be utilized by combining products that have complimentary seasonal patterns.

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CAPACITY PLANNING
However in case of small difference in the capacity and the demand, the following tactics can be utilized for matching capacity to demand: i) ii) iii) iv) Increasing or decreasing the number of employees. Adjusting equipment and processes by buying additional machinery or leasing out existing extra equipment. Improving methods to improve productivity, reduce the rejects and re-works. Re-design the product to facilitate/ accommodate/ attract more clients.

Therefore facility size / capacity size selection is critical and should be based upon the objective of achieving high level of utilization.

D.

Economies Of Scale: It is believed that average unit cost of a goods or service can be

reduced by increasing its output rate. It is true to a certain limit after which diseconomies of scale occur. Reduction in cost due to mass scale production or building facility for a larger scale of production is resulted from: Spreading Fixed Cost: It is that the fixed cost is distributed over a larger number of units and therefore its impact per unit decreases. Thus the cost of production per piece will decrease. Reducing Construction Cost: When a larger building is constructed, the net cost of construction will decrease proportionately as compared to if the capacity has to be increased after some time because the architect cost, cost of construction support materials will be shared. Slightly larger facility will increase the volume of space more as compared to the size of building increase and since the capacity is directly proportional to the volume, so the capacity will be increased more than the increase in construction area ( reducing cost ) Reducing Cost Of Purchased Materials: For a larger production, a larger material will be procured, which will reduce the cost of the materials in two ways, 1) Bulk quantities cost less 2) The transportation cost will be less. Finding Process Advantage: Since the worker will be producing more they will gain the experience as well as expertise sooner. They will also get the knowledge of the process soon, will also know its weaknesses and therefore will be able to improve it as well.

Resource Person: Engineer Zahid Aziz Khan

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CAPACITY PLANNING E. Capacity Planning Strategy: It has two dimensions or we can say there are three major decisions to be made before the capacity is planned. They are:

Sizing Capacity Cushion: We must decide what capacity cushion we must keep in our planning. The cushion is 100% of the Utilization rate. This depends on the type of product that is to be made and the type of machinery involved. It can be as high as 50% and as low as 1520%. This cushion is kept to meet the supply and order uncertainty, to cover the unforeseen breakdowns, worker absenteeism, vacations, holidays, overtime and subcontracting problems etc. Timing and Sizing Of Expansion: It is to make a decision as to when and how much to expand? It depends whether the company wants to stay ahead of the demand or just want to have the policy of wait and see that is to follow the leader.

F. Factors Affecting Capacity Planning: The following factors influence your capacity
planning : 1. 2. 3. 4. 5. 6. Technological Options. Competitors Strategies. Building Requirements / Restrictions. Cost Of Capital. Human Resource Options. State and Federal Laws & Regulations.

Most important is to see if the market is going to be favourable or unfavourable and what will be the profit in case of market being favourable and what will be the loss if the market is unfavourable. Considering both the options, one must decide using the Decision Tree Method.

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Decision Tree:

G.

Forecasting Capacity Requirements

Future demand of the goods & services is forecast in a traditional way and on the basis of this demand, the capacity requirements are forecast. Assuming that the management knows the technology and the type of facilities to be employed to meet the future demands, the graphical representation of the capacity will be as follows;

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A
N e w C a p a c ity
Ex m De ed t c pe an d

B
N e w C a p a c ity
Ex m De ed t c pe an d

D em and

T im e Y e a r s

D em and

T im e Y e a r s

C
N e w C a p a c ity
Ex m De ed t c pe an d

D
N e w C a p a c ity
Ex m De ed t c pe an d

D em and

T im e Y e a r s

D em and

T im e Y e a r s

Now if you look at the graphical representation on page 5, you will observe that in Graph A & B, the capacity planning is in a way to stay ahead of the demand. In A the capacity is planned a year advance so that it can meet the demand till the beginning of the next year, whereas in Graph B, the capacity is planned to meet the demand for next two years. Now looking at the Graph C, we note that the capacity is increased after the demand has risen, in this case we lack behind in meeting the orders in time. This is known as follow the demand policy. In Graph D, the capacity is enhanced at the average/ mean rate, that is, the company will be ahead of the demand for the first six months whereas it will be lacking behind for the last six months of the year.

Resource Person: Engineer Zahid Aziz Khan

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CAPACITY PLANNING H. Estimation Of Capacity Requirements

Now while estimating as to how many machines for a particular job are required, it is essential to know, how much is the demand going to be per annum and what is the working capacity of the machine. The estimation is done by the following formulae:

H.

Break-Even Analysis:

Break even is the point in any business where the costs equal revenues, whether in terms of the number of units produced or the cash involved. Let us define different terminologies used. Fixed Cost: Costs that has been invested in building, land, machinery etc. and the cost that continues if even no unit is produced (No Production), such as Cost incurred on administration, security etc.

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Variable Cost: It is the direct cost for production i.e; raw materials, labour cost, electricity bill etc. It keeps increasing with the increase in production. Contribution: (Profit/ Loss) The difference between selling price and the variable cost tells you the profit or loss. Following is the graphical approach of the Break-Even point based upon the assumption that the cost and revenue increase linearly:

Resource Person: Engineer Zahid Aziz Khan

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J.

CAPACITY PLANNING M a th e m a tic a l A p p r o a c h O f B r e a k -E v e n P o in t:

A s w e m e n tio n e d o n th e la s t p a g e , th e B r e a k - E v e n P o in t c a n b e in th e n u m b e r o f u n its p r o d u c e d o r in te rm s o f th e c a sh in v o lv e d . T h e re fo r e th e B re a k -E v e n P o in t in u n its c a n b e d e n o te d a s = B E P ( x ) a n d N o w if: P X TR F V T .C B r e a k - E v e n P o in t in C a s h o r R u p e e s c a n b e d e n o te d a s + B E P ( R s .) = A v e ra g e P r ic e / u n it ( a f te r a ll d is c o u n ts ) = N u m b e r o f U n its p r o d u c e d . = T o ta l R e v e n u e = P X = F ix e d C o s ts / U n it = V a ria b le C o s t / U n it = to ta l C o s t = F + V X TR or PX = = TC F + V X PX - V X = F X ( P - V ) = F F P - V F P - V P

S o a t B r e a k - E v e n P o in t:

S o B re a k -E v e n P o in t in n u m b e r o f u n its X w ill b e T h e re fo re B E P (x ) = F P -V

a n d B re a k - E v e n P o in t in R u p e e s w ill b e : B E P (x ) P = =

P = F 1 - V /P

T h is w a s B r e a k - E v e n fo r a s in g le p r o d u c t, th e r e f o r th e B re a k - E v e n f o r a m u lti p r o d u c t w ill b e : = F ( 1 - V /P ) x W W h e re W = P e rc e n t o f e a c h p ro d u c t o f to ta l s a le s and ( 1 - V /P ) x W is th e w e ig h te d c o n trib u tio n o f th e p ro d u c t.