Graduate School: Batangas State University

BATANGAS STATE UNIVERSITY
Graduate School
CAPACITY PLANNING
A Narrative Report
Presented to the Faculty of
College of Accountancy, Business, Economics and
International Hospitality Management
Batangas State University
Batangas City
Submitted by:
Dela Cruz, Mary Janille T.
Dela Cruz, Rowena B.
April 2020
Graduate School
Capacity- refers to an upper limit or ceiling on the load that an operating unit can
handle. The load might be in terms of the number of physical units produced (e.g.,
bicycles assembled per hour) or the number of services performed (e.g.,
computers upgraded per hour). The operating unit might be a plant, department,
machine, store, or worker.
Design capacity- maximum designed service capacity or output rate
Effective capacity- design capacity minus allowances such as personal time,
and maintenance.
Input measures of capacity- the measure selected is defined by the key input
into the process. Where the provision of capacity is fixed, it is often easier to
measure capacity by inputs.
Output measures of capacity- the output measures count the finished units from
the process. This measure is best used where there is low variety in the product
mix or limited customization.
MEASURES OF SYSTEM EFFECTIVENESS
Efficiency = Actual output X 100%

Effective capacity
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Utilization = Actual output X 100%
Design capacity
Actual output- the rate of output actually achieved. It cannot exceed effective
capacity.
Example: efficiency and utilization of the vehicle repair department
Design capacity = 50 trucks per day
Effective capacity = 40 trucks per day
Actual output = 36 trucks per day
Answer:
Efficiency = 36 trucks per day x 100% = 90%

40 trucks per day
Utilization = 36 trucks per day x100% = 72%

50 trucks per day
Capacity Planning
• Establishes the overall level of productive resources for a firm.
• Long term capacity planning is a strategic decision that establishes a firm’s
overall level of resources.
• Capacity decisions affect product lead times, customer responsiveness,
operating costs and a firm’s ability to compete.
The key questions in capacity planning:
1. What kind of capacity is needed?
2. How much is needed to match demand?

Graduate School
3. When is it needed?
THREE BASIC STRATEGIES USED FOR THE TIMING OF CAPACITY
EXPANSION IN RELATION TO A STEADY GROWTH IN DEMAND
1. Capacity Lead Strategy
- capacity is expanded in anticipation of demand growth. This aggressive
strategy is used to lure customers from competitors who are capacity
constrained or to gain a foothold in a rapidly expanding market.
2. Average Capacity Strategy
- capacity is increased after an increase in demand has been documented.
This conservative strategy produces a higher return on investment but may
lose customers in the process.
3. Capacity Lag Strategy
- capacity is expanded to coincide with average expected demand. This is
a moderate strategy in which managers are certain they will be able to sell
at least some portion of expanded output and endure some periods of
unmet demand.
Best Operating Level
• The percent of capacity utilization that minimizes average unit costs.
• Rarely it is the best operating level at 100% of capacity at higher levels of
utilization, productivity slows and things start to go wrong.

Graduate School
Capacity Cushion- extra capacity used to offset demand uncertainty.
Capacity cushion = capacity – expected demand
STEPS IN THE CAPACITY PLANNING PROCESS
1. Estimate future capacity requirements.
2. Evaluate existing capacity and facilities and identify gaps.
3. Identify alternatives for meeting requirements.
4. Conduct financial analyses of each alternative.
5. Assess key qualitative issues for each alternative.
6. Select the alternative to pursue that will be best in the long term.
7. Implement the selected alternative.
8. Monitor results.
Economies and Diseconomies of Scale
• Economies of scale occurs when it costs less per unit to produce high
levels of output.
• Diseconomies of scale occur when higher levels of output cost more per
unit to produce.
Graduate School
References:
Stevenson, W. (2012). Operations Management. Eleventh Edition.
McGraw-Hill/Irwin, New York, NY.

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BATANGAS STATE UNIVERSITY

Presented to the Faculty of

College of Accountancy, Business, Economics and

International Hospitality Management

Batangas State University

Dela Cruz, Mary Janille T.

Dela Cruz, Rowena B.

bicycles assembled per hour) or the number of services performed (e.g.,

machine, store, or worker.

Design capacity- maximum designed service capacity or output rate

Effective capacity- design capacity minus allowances such as personal time,

measure capacity by inputs.

mix or limited customization.

MEASURES OF SYSTEM EFFECTIVENESS

Efficiency = Actual output X 100%

Example: efficiency and utilization of the vehicle repair department

Design capacity = 50 trucks per day

Effective capacity = 40 trucks per day

Actual output = 36 trucks per day

Efficiency = 36 trucks per day x 100% = 90%

Utilization = 36 trucks per day x100% = 72%

• Establishes the overall level of productive resources for a firm.

• Long term capacity planning is a strategic decision that establishes a firm’s

overall level of resources.

• Capacity decisions affect product lead times, customer responsiveness,

operating costs and a firm’s ability to compete.

The key questions in capacity planning:

1. What kind of capacity is needed?

2. How much is needed to match demand?

THREE BASIC STRATEGIES USED FOR THE TIMING OF CAPACITY

EXPANSION IN RELATION TO A STEADY GROWTH IN DEMAND

1. Capacity Lead Strategy

- capacity is expanded in anticipation of demand growth. This aggressive

strategy is used to lure customers from competitors who are capacity

constrained or to gain a foothold in a rapidly expanding market.

2. Average Capacity Strategy

- capacity is increased after an increase in demand has been documented.

This conservative strategy produces a higher return on investment but may

lose customers in the process.

3. Capacity Lag Strategy

- capacity is expanded to coincide with average expected demand. This is

at least some portion of expanded output and endure some periods of

Best Operating Level

• The percent of capacity utilization that minimizes average unit costs.

• Rarely it is the best operating level at 100% of capacity at higher levels of

utilization, productivity slows and things start to go wrong.

Capacity cushion = capacity – expected demand

STEPS IN THE CAPACITY PLANNING PROCESS

1. Estimate future capacity requirements.

2. Evaluate existing capacity and facilities and identify gaps.

3. Identify alternatives for meeting requirements.

4. Conduct financial analyses of each alternative.

5. Assess key qualitative issues for each alternative.

7. Implement the selected alternative.

Economies and Diseconomies of Scale

Stevenson, W. (2012). Operations Management. Eleventh Edition.

McGraw-Hill/Irwin, New York, NY.

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