MBA 570 Summer 2011

Capacity Management

Facility Planning

How much long-range capacity is needed When more capacity is needed Where facilities should be located

(location) How facilities should be arranged (layout)

Facility planning answers:

Capacity Maximum output of a system in a given

period (general definition)◦ May be units, hours, dollars, sq. ft. etc.◦ Example: Tons of steel per month

Effective capacity: Maximum output given standards, product mix, etc.

Rated capacity: Maximum usable output given utilization & efficiency◦ RC = (Capacity)(Utilization)(Efficiency)

Capacity Definition Thinking Challenge

How would you define capacity for the following firms (e.g., steel mill, tons of steel per day):◦ Beer brewery◦ Auto plant◦ Restaurant◦ Warehouse◦ Grocery store

Capacity Definition Solution*

Beer brewery: Barrels of beer per year (output)

Auto plant: Cars per week (output) Restaurant: Customers per hour (output) or

number of seats (input) Warehouse: Square feet of space (input) Grocery store: Square inches of shelf space

(input)

ForecastDemand

ComputeNeededCapacity

ComputeRated

Capacity

EvaluateCapacity

Plans

ImplementBest Plan

QualitativeFactors

(e.g., Skills)

Select BestCapacity

Plan

DevelopAlternative

Plans

QuantitativeFactors

(e.g., Cost)

Capacity Planning Process

Types of Planning Over a Time Horizon

Add FacilitiesAdd long lead time equipment

Schedule Jobs Schedule Personnel Allocate Machinery

Sub-ContractAdd EquipmentAdd Shifts

Add PersonnelBuild or Use Inventory

Long Range Planning

Intermediate Range Planning

Short Range Planning

Modify Capacity Use Capacity

*

*

*Limited options exist

Definition and Measures of CapacityCapacity:

The “throughput,” or number of units a facility can hold, receive, store, or produce in a period of time.

Utilization: Actual output as a percent of design capacity.

Effective capacity:

Capacity a firm can expect to receive given its product mix, methods of scheduling, maintenance, and standards of quality.

Efficiency: Actual output as a percent of effective capacity.

Actual or Expected Output

Actual (or Expected) Output =

(Effective Capacity)(Efficiency)

Utilization Measure of planned or actual capacity

usage of a facility, work center, or machine

Utilization Measure of planned or actual capacity

usage of a facility, work center, or machine

Utilization Expected capacityCapacity

Planned hours to be usedTotal hours available

Efficiency Measure of how well a facility or machine is

performing when used

Efficiency Measure of how well a facility or machine is

performing when used

Efficiency Actual outputEffective capacity

Actual output in unitsStandard output in unitsAverage actual time

Standard time

Special Requirements for Making Good Capacity Decisions Forecast demand accurately Understanding the technology and capacity

increments Finding the optimal operating level (volume) Build for change

Strategies for Matching Capacity to Demand

1. Making staffing changes (increasing or decreasing the number of employees)

2. Adjusting equipment and processes – which might include purchasing additional machinery or selling or leasing out existing equipment

3. Improving methods to increase throughput; and/or

4. Redesigning the product to facilitate more throughput

Approaches to Capacity Expansion

Expected Demand Expected Demand

Expected Demand Expected Demand

Time in Years Time in Years

Time in YearsTime in Years

Dem

and

Dem

and

Dem

and

Dem

and

New Capacity

New Capacity New Capacity

New Capacity

Capacity leads demand with an incremental expansion Capacity leads demand with a one-step expansion

Capacity lags demand with an incremental expansion Attempts to have an average capacity, with an incremental expansion

Approaches to Capacity Expansion

Expected Demand

Time in Years

Dem

and

New Capacity

Capacity leads demand with an incremental expansion

Approaches to Capacity Expansion

Expected Demand

Time in Years

Dem

and

New Capacity

Capacity leads demand with a one-step expansion

Approaches to Capacity Expansion

Expected Demand

Time in Years

Dem

and

New Capacity

Capacity lags demand with an incremental expansion

Approaches to Capacity Expansion

Expected Demand

Time in Years

Dem

and

New Capacity

Attempts to have an average capacity, with an incremental expansion

Vary prices Vary promotion Change lead times

(e.g., backorders) Offer

complementary products

Managing Existing Capacity

Demand Management

Complementary Products

Complementary Products

Time (Months)

Sales (Units)

Snow-mobiles

01,0002,0003,0004,0005,000

J M M J S N J M M J S N J

Complementary Products

Time (Months)

Sales (Units)

Jet Skis

Snow-mobiles

01,0002,0003,0004,0005,000

J M M J S N J M M J S N J

Complementary Products

Time (Months)

Sales (Units)

Jet Skis

Snow-mobiles

Total

01,0002,0003,0004,0005,000

J M M J S N J M M J S N J

Complementary Products

01,0002,0003,0004,0005,000

Time (Months)

Sales (Units)

Jet Skis

Snow-mobiles

Variation is reduced by combining demands

Total

Vary staffing Change equipment

& processes Change methods Redesign the

product for faster processing

Managing Existing Capacity

Capacity Management Vary prices Vary promotion Change lead times

(e.g., backorders) Offer complementary

products

Demand Management