Capacity Planning

Capacity Planning

Capacity The maximum level of output

The amount of resource inputs available relative to output requirements at a particular time

CapacityProductive Capacity, generally

measured in physical units, refers either to the maximum output rate for (products or services) or to the amounts of key resources available in each operating unit.

CapacityThe throughput, or the number of units

a facility can hold, receive, store, or produce in a period of time

Determines fixed costs

Determines if demand will be satisfied

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.

• Capacity is usually purchased in “Chunks”• Strategic issues: how much and when to spend

capital for additional facility and equipment• Tactical Issues: Work force and inventory

levels & day-to-day use of equipment

Capacity Planning Determination of Plant Capacity

First Level Planning

Design CapacityBased on Long Range

Forecast

System capacityOutput produced by workers and equipments

Sys.efficiency = Actual output System Capacity.

Capacity Planning The basic questions in capacity

planning are:What type of capacity is needed?How much is needed?When is it needed?How does productivity relate to capacity?

Dimension of Demand Effect on Capacity Requirement

Quantity How much capacity is needed?

Timing When should capacity be available?

Quality What kind of capacity is needed?

Location Where shoud capacity be installed?

Strategic Capacity Planning

Capacity is the ability to hold receive, store or accommodate raw material, finished products ,customers etc.

Strategic Capacity Planning is an approach for determining the overall capacity level of capital intensive resources ,including facilities, equipment and overall labor force size

Capacity EfficiencyHow well a machine or worker performs

compared to a standard output level.Capacity LoadStandard hours of work assigned to a facilityCapacity Load PercentRatio of load to capacity

Examples of Capacity Measures

Type of Measures of CapacityOrganization Inputs Outputs

Manufacturer Machine hoursper shift

Number of unitsper shift

Hospital Number of beds Number ofpatients treated

Airline Number of planesor seats

Number ofseat-miles flown

Restaurant Number of seats Customers/timeRetailer Area of store Sales dollarsTheater Number of seats Customers/time

Capacity Utilization

Capacity used rate of output actually achieved

Best operating levelcapacity for which the process was designed

(effective or maximum capacity)

Utilization = _______________Capacity Used

Best Operating Level

Utilization--ExampleDuring one week of production , a plant produces 83 units of a product. Its historic best utilization was 120 units per week what is the plant’s capacity utilization rate ?

Solution

Utilization Rate ?

Best Operating LevelExample: Engineers design engine and assembly

lines to operate at an ideal or best operating level to maximize output and minimize wear.

Best Operating Level

Underutilization

Best OperatingLevel

Averageunit costof output

Volume

Over-utilization

Best Operating LevelExample: hotel

How Much Capacity is best??

The Best Operating Level is the output that results in the lowest average unit cost.

Economies of scaleWhere the cost per unit of output drops as volume of output increasesSpread the fixed costs of buildings & equipment over multiple units, allow bulk purchasing & handling of materialsProduction or operating cost do not increase linearly with output levelsQuantity discounts are available for material purchaseOperating efficiency increases as worker gain experience

Diseconomies of scale:

Where the cost per unit rises as volume increases

Often caused by congestion (overwhelming the process with too much work-in-process ) and scheduling complexity.

Diseconomies of Distribution Diseconomies of Bureaucracy Diseconomies of Confusion Diseconomies of Vulnerability

Economies & Diseconomies of Scale

100-unitplant

200-unitplant 300-unit

plant

400-unitplant

Volume

Averageunit costof output

Long Run Average Cost Curve

Economies & Diseconomies of Scale

100-unitplant

200-unitplant 300-unit

plant

400-unitplant

Volume

Averageunit costof output

Why the average unit cost is decreasing when the volume is increasing or when the time is passing by?

The Experience Curve

Total accumulated production of units

Cost orpriceper unit

As plants produce more products, they gain experience in the best production methods and reduce their costs per unit.

Capacity Decisions (Cont..) Capacity increase depends on Volume and certainty of anticipated demand Strategic objectives Cost of expansion and operation Best Operating Level % of capacity utilization that minimizes unit

costs

Capacity Decision..Capacity Cushion % of capacity held in reserve for

unexpected occurrences

Capacity Cushion

Capacity Cushion = level of capacity in excess of the average utilization rate or level of capacity in excess of the expected demand .

Cushion = Best Operating Level Capacity Used

- 1

Large capacity cushionRequired to handle uncertainty in demand

service industries high level of uncertainty in demand (in

terms of both volume and product-mix) to permit allowances for vacations, holidays,

supply of materials delays, equipment breakdowns, etc.

if subcontracting, overtime, or the cost of missed demand is very high

Sources of Uncertainty

Customer Demand•Past performance•Market research•Analytical techniques•Promotions / Incentives

Manufacturing•Process design•Product design•Capacity•Quality

Supplier Performance•Responsiveness•Transportation•Location•Quality•Information

Customer Deliveries•Transportation•Location•Information

Example: Target 5% Cushion

- 1cushion = Best Operating LevelCapacity Used

.05 = (1800/x) - 11.05 = (1800/x) 1714.3/1800 = .95241.05x = 1800x = 1714.3

Three Important considerations in Capacity Planning

Maintaining system balanceFrequency of capacity additionExternal sources of capacity

Determining Capacity Requirements

It is the demand which is going to act as one of the guide lines in taking the decision that whether the capacity needed to be added or not.

When we take a decision regarding capacity requirement these three points to be taken under consideration:

Cont… Forecast sale (within each individual

product line) Calculate equipment and labor

requirements to meet forecasts Project equipment and labor availability

Making Capacity Planning Decisions

There are three-step procedure for making capacity planning decisions is as follows:

Step1: Identify Capacity Requirements Step2: Develop Capacity Alternatives Step3: Evaluate Capacity Alternatives

Example--Capacity Requirements

A manufacturer produces two lines of ketchup, FancyFine and a generic line. Each is sold in small and family-size plastic bottles.

The following table shows forecast demand for the next four years.

Year: 1 2 3 4FancyFine

Small (000s) 50 60 80 100Family (000s) 35 50 70 90Generic

Small (000s) 100 110 120 140Family (000s) 80 90 100 110

Example of Capacity Requirements: Equipment and Labor Requirements

Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200

Three 100,000 units-per-year machines are available for small-bottle production. Two operators required per machine.

Two 120,000 units-per-year machines are available for family-sized-bottle production. Three operators required per machine.

Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6Family-size Mach. Cap. 240,000 Labor 6

Small

Percent capacity used 50.00%Machine requirement 1.50Labor requirement 3.00Family-size

Percent capacity used 47.92%Machine requirement 0.96Labor requirement 2.88

Question: Identify the Year 1 values for capacity, machine, and labor?

150,000/300,000=50% At 1 machine for 100,000, it takes 1.5 machines for 150,000

At 2 operators for 100,000, it takes 3 operators for 150,000

©The McGraw-Hill Companies, Inc., 2001

40

Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6Family-size Mach. Cap. 240,000 Labor 6

Small

Percent capacity used 50.00%Machine requirement 1.50Labor requirement 3.00Family-size

Percent capacity used 47.92%Machine requirement 0.96Labor requirement 2.88

Question: What are the values for columns 2, 3 and 4 in the table below?

56.67%1.703.40

58.33%1.173.50

66.67%2.004.00

70.83%1.424.25

80.00%2.404.80

83.33%1.675.00

41

©The McGraw-Hill Companies, Inc., 2001

Breakeven Analysis

Breakeven quantity = Fixed CostsPrice - Variable Costs

Breakeven exampleThomas Manufacturing intends to increase capacity by overcoming a bottleneck operation through the addition of new equipment. Two vendors have presented proposals as follows:

Proposal Fixed Costs Variable Costs A $ 50,000 $12 B $ 70,000 $10

The revenue for each product is $20 What is the breakeven quantity for each proposal?

Breakeven Solution

BEQ = FC

P- VC

Proposal A

BEQ = = 6250$ 50,000

$20 - 12

Proposal B

BEQ = = 7000$ 70,000

$20 - 10

Breakeven Analysis

In the previous example, at what capacity would both plans incur the same cost?

Solution -consider total cost

Total cost = Fixed cost + Variable Cost (Q)

$50,000 + $12Q = $70,000 + $10 Q

Q = 10,000

Capacity Flexibility: Having the ability to respond rapidly to demand volume changes and product mix changes.

Flexible plantsFlexible processesFlexible workers

Capacity Bottlenecks

Rawmaterial

200/hour 75/hour 200/hour

Operation 1 Operation 2 Operation 3

BottleneckOperation

Determining Capacity Requirements

Forecast sales within each individual product line

Calculate equipment and labor requirements to meet the forecasts

Project equipment and labor availability over the planning horizon

Capacity Example

An automobile equipment supplier wishes to install a sufficient number of ovens to produce 400,000 good castings per year. The baking operation takes 2.0 minutes per casting, and management requires a capacity cushion of 5%. How many ovens will be required if each one is available for 1800 hours (of capacity) per year?

SolutionRequired system capacity =

400,000 good units per yearNumber of oven minutes required = 400,000 x 2 min/unit = 800,000Number of oven minutes available/oven = (1800 hrs/oven) x(60 minutes/hour) (.9524) = 102,859 minutes/oven

Number of ovens required = 800,000 min /102,859 min/oven= 7.8 or 8 ovens

How does Quality affect capacity?

Suppose a three operation process is followed by an inspection. If the average proportion of defectives produced at operations 1, 2, and 3 are .04, .01, and .02 respectively, and if the demand is 200 units, then what is the required capacity for this operation?

Capacity requirements with Yield Loss

Notation:

di = avg. proportion of defective units at operation i

n = number of operations in the production process

M= order quantity (good units only or desired yield)

B = avg. number of units at the start of the

production process

B = M

[(1-d1)(1-d2)….(1-dn)]

SolutionDesired yield = 200

Operation Defective rate1 .042 .013 .02

(1) What is the capacity required?

B = = 215200

(1-.04)(1-.01)(1-.02)

Capacity and Quality

Suppose we have a 6 process assembly line that must produce 1000 good products. Each process produces only 1% defects. How is capacity affected?

Capacity required =

= 1062 units

1000

(.99)6

Decision TreesA glass factory specializing in crystal is experiencing a substantial backlog, and the firm's management is considering three courses of action:

A) Arrange for subcontracting,B) Construct new facilities.C) Do nothing (no change)

The correct choice depends largely upon demand, which may be low, medium, or high. By consensus, management ranks the respective probabilities as .10, .50, and .40. A cost analysis that reveals the effects upon costs is shown in the following table.

Payoff Table

0.1 0.5 0.4Low Medium High

A 10 50 90B -120 25 200C 20 40 60

We start with our decisions...

A

B

C

Subcontracting

Do nothing

Construct new facilities

Then add our possible states of nature, probabilities, and payoffs

A

B

C

High demand (.4)

Medium demand (.5)

Low demand (.1)

$90k$50k

$10k

High demand (.4)

Medium demand (.5)

Low demand (.1)

$200k$25k

-$120k

High demand (.4)

Medium demand (.5)

Low demand (.1)

$60k$40k

$20k

Determine the expected value of each decision

High demand (.4)

Medium demand (.5)

Low demand (.1)

A

$90k$50k

$10k

EVA=.4(90)+.5(50)+.1(10)=$62k

$62k

Solution

High demand (.4)

Medium demand (.5)

Low demand (.1)

High demand (.4)

Medium demand (.5)

Low demand (.1)

A

B

CHigh demand (.4)

Medium demand (.5)

Low demand (.1)

$90k$50k

$10k

$200k$25k

-$120k

$60k$40k

$20k

$62k

$80.5k

$46k

Planning Service CapacityTime

Location

Volatility of Demand

Capacity Utilization & Service Quality

Best operating point is near 70% of capacity

From 70% to 100% of service capacity, what do you think happens to service quality? Why?

Two Capacity Strategies

Time between increments

Forecast of capacity needed

Forecast of capacity needed

Planned unused capacity Planned use of

short-term options

Expansionist Strategy Wait-and-See Strategy

Cap

acit

y

Cap

acit

y

Advantages/Disadvantages of each strategy

Expansionist • ahead of competition • risky if demand • no lost sales changes

Wait-and-See • no unused capacity • rely on short- • easier to adapt to term options new technologies

Advantages Disadvantages

Some Short-Term Capacity Options

lease extra space temporarily authorize overtime staff second or third shift with temporary workers add weekend shifts alternate routings, using different work

stations that may have excess capacity schedule longer runs to minimize

capacity losses

Some Short-Term Capacity Options

level output by building up inventory in slack season

postpone preventive maintenance (risky)use multi-skilled workers to alleviate

bottlenecksallow backorders to increase, extend due

date promises, or have stock-outs. subcontract work