MODULE 4. STRATEGIC CAPACITY PLANNING
Capacity planning- key strategic component in designing
the system. It encompasses many basic decisions with
long-term consequences
Capacity- refers to an upper limit or ceiling on the load
that an operating unit can handle
– Goal is to achieve a match between supply and
demand
– Key questions: what? How much? When?
Capacity decisions are strategic:
– ability to meet future demands for products and
services, limits the rate of output
– affect operating costs
– major determinant of initial cost
– involve long-term commitment of resources
– can affect competitiveness
– affects the ease of management
– Globalization has increased the importance and the
complexity of capacity decisions
– capacity decisions often involve substantial financial
and other resources, it is necessary to plan for them
far in advance
▪ Capacity often refers to an upper limit on the rate of
output
▪ The preferred alternative in such cases is to use a
measure of capacity that refers to availability of
inputs
1. Design capacity: The maximum output rate or
service capacity an operation, process, or facility is
designed for.
2. Effective capacity: Design capacity minus
allowances such as personal time, and
maintenance.
– Effective capacity is always less than design capacity
– Actual output cannot exceed effective capacity and
is often less
2 measures of system effectiveness:
1. Efficiency is the ratio of actual output to effective
capacity. (Actual output/Effective capacity) x 100%
2. Utilization is the ratio of actual output to design
capacity. (Actual output/Design capacity) x 100%
▪ increasing utilization depends on being able to
increase effective capacity
DETERMINANTS OF EFFECTIVE CAPACITY:
Facilities, Product and service factors, Process factors,
Human factors, Policy, Operational, Supply chain,
External factors
STRATEGY FORMULATION:
The three primary strategies are leading, following, and
tracking
▪ Leading capacity strategy builds capacity in
anticipation of future demand increases. If capacity
increases involve a long lead time, this strategy may
be the best option.
▪ Following strategy builds capacity when demand
exceeds current capacity.
▪ Tracking strategy is similar to a following strategy,
but it adds capacity in relatively small increments to
keep pace with increasing demand.
Capacity cushion– an amount of capacity in excess of
expected demand when there is some uncertainty
about demand. (Capacity – Expected demand)
▪ the greater the degree of demand uncertainty, the
greater the amount of cushion used.
FORECASTING CAPACITY REQUIREMENTS:
Capacity planning decisions involve both long-term
and short-term considerations
▪ Long-term relate to overall level of capacity
– needs require forecasting demand over a time
horizon and then converting those forecasts into
capacity requirements
▪ Short-term relate to probable variations
– less concerned with cycles or trends than with
seasonal variations and other variations from
average
CALCULATING PROCESSING REQUIREMENTS:
Units of capacity needed= Processing time needed/
Processing time capacity per unit
DEVELOPING CAPACITY STRATEGIES:
1. Design flexibility into systems
2. Take stage of life cycle into account
3. Take a “big–picture” (i.e., systems) approach to
capacity changes
– The risk in not taking a big-picture approach is that
the system will be unbalanced
– Bottleneck operation- Evidence of an unbalanced
system
– A bottleneck operation is an operation in a sequence
of operations whose capacity is lower than the
capacities of other operations in the sequence. As a
consequence, the capacity of the bottleneck
operation limits the system capacity; the capacity of
the system is reduced to the capacity of the
bottleneck operation
4. Prepare to deal with capacity “chunks.”
5. Attempt to smooth out capacity requirements
6. Identify the optimal operating level
▪ Economies of scale- the output rate is less than
the optimal level, increasing the output rate
results in decreasing average unit costs.
▪ Diseconomies of scale- output rate is more than
the optimal level, increasing the output rate
results in increasing average unit costs.
7. Choose a strategy if expansion is involved
CONSTRAINT MANAGEMENT
Constraint- limits the performance of a process or
MODULE 6. PROCESS SELECTION AND FACILITY LAYOUT
Process selection refers to deciding on the way
production of goods or services will be organized
Forecasts, product and service design, and technological
considerations all influence capacity planning and
process selection which affect facility and equipment
choices, layout, and work design.
Key aspects include
• Capital intensity: the mix of equipment and labor that
will be used by the organization.
• Process flexibility: the degree to which the system can
be adjusted to changes in processing requirements due
to such factors
PROCESS SELECTION
– volume and variety are inversely related
– the need for flexibility of personnel and equipment is
directly related to the level of variety the process will
need to handle
PROCESS TYPES
