Lecture 11

Capacity Management and Planning

Books• Introduction to Materials Management, Sixth Edition, J. R. Tony Arnold, P.E., CFPIM, CIRM, Fleming

College, Emeritus, Stephen N. Chapman, Ph.D., CFPIM, North Carolina State University, Lloyd M. Clive, P.E., CFPIM, Fleming College

• Operations Management for Competitive Advantage, 11th Edition, by Chase, Jacobs, and Aquilano, 2005, N.Y.: McGraw-Hill/Irwin.

• Operations Management, 11/E, Jay Heizer, Texas Lutheran University, Barry Render, Graduate School of Business, Rollins College, Prentice Hall

Objectives

• Capacity• Capacity Management• Matching Capacity and Demand• Capacity Planning process• Resource Planning• Inputs to capacity planning

Capacity

• The 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

• Three time horizons

Capacity Management

• Capacity management is planning and controlling resources needed to meet production objectives– Planning - determining resources needed to meet the

priority plan; selecting methods to make that capacity available

– Controlling - monitoring output, comparing it with the plan, and taking corrective action

Matching Capacity and Demand

• Demand Management– vary prices– change lead times– encourage/discourage business

• Capacity Management– adjust staffing– adjust equipment and processes– change methods to facilitate production– redesign the product to facilitate production

Capacity Planning Process

• Determine the capacity available at each work center.• Translate the released and planned orders into the

capacity required at each work center in each time period.

• Sum up the capacities required for each work center to determine the load on each work center in each time period.

• Resolve differences between available capacity and required capacity.

Modify capacity Use capacity

Planning Over a Time Horizon

Intermediate-range planning

Subcontract Add personnelAdd equipment Build or use inventory Add shifts

Short-range planning

Schedule jobsSchedule personnel Allocate machinery*

Long-range planning

Add facilitiesAdd long lead time equipment *

* Limited options exist

Resource Planning

• RP involves long-range capacity resource requirements and is directly linked to production planning.

• RP involves changes in manpower, capital equipment, product design, or other facilities that take a long time to acquire and eliminate.

• The production plan and RP set the limits and levels for production.

Rough-Cut Capacity Planning

RCCP is the process to check the feasibility of the master production schedule (MPS) (end items), provide warnings of any bottlenecks, ensure utilization of work centers, and advise vendors of capacity requirements.

Capacity Requirements Planning

• CRP is directly linked to the material requirements plan (MRP) (component items).

• CRP is the most detailed, complete, and accurate of the capacity planning techniques and is highly important in the immediate time periods.

Inputs for Capacity Planning

• Inputs needed are:

– open shop orders from open order file– planned order releases from material

requirements plan– routings and time standards from the routing file– lead times and work center capacities from the

work center file

Inputs for Capacity Planning

• Planned order releases are determined by the computer’s MRP logic based upon the gross requirements for a particular part. Used to help assess the total capacity required in future time periods.

Inputs for Capacity Planning

• Routing file is the path that work follows from work center to work center as it is completed. It should contain:– Operations to be performed– Sequence of operations– Work centers to be used– Possible alternate work centers– Tooling needed for each operation– Standard times: setup times and run times per piece

Inputs for Capacity Planning

• Work center file is composed of a number of machines or workers capable of doing the same work. It contains the following information– Move time is the time normally taken to move material from

one workstation to another.– Wait time is the time a job is at a work center after completion

and before being moved.– Queue time is the time a job waits at a work center before

being handled.– Lead time is the sum of queue, setup, run, wait, and move

times.

Determining Capacity Available

• What is Capacity available?– The capability of a system or resource to produce a

quantity of output in a particular time period.

APICS Dictionary

Determining Capacity Available

• How do we calculate Capacity?– To calculate available capacity, we need to know:

• Available time• Utilization• Efficiency

Available Time

• Available time depends on the number of machines, the number of workers, and the hours of operation. The number of hours a work center can be used.

If a work center has three equivalent machines and works eight hours a day for five days a week, what is its weekly available time?

Available time = 3 x 8 x 5 = 120 hours per week

Utilization

• Utilization is the percentage of time that the work center is actually active.

What is the utilization if a work center is available for 120 hours a week, but produces goods for only 100 hours?

Utilization = Hours actually worked

Available hours x 100%

Utilization = 100120

x 100% = 83.3%

Standard Time is the time it would take a qualified operator working at a normal pace to do the job using the proscribed method.

Efficiency

Efficiency

• Efficiency is a measure (as a percentage) of the actual output compared with the standard expected output.

What is the efficiency if a work center is used 100 hours per week and produces 120 standard hours of work?

Efficiency = Standard hours of workHours actually worked

x 100%

Efficiency = 120100

x 100% = 120%

Utilization and Efficiency Problem

A work center produces 90 standard hours of work in one week. The hours available are 80, and 70 are actually worked. Calculate the utilization and efficiency of the work center.

Utilization = 7080

x 100% = 87.5%

128.57% = 100% x 70

90 = Efficiency

Rated Capacity

• Rated capacity is a measure of the output that can be expected for a work center.

Rated Capacity = available time x utilization x efficiency

A work center has 3 machines and is operated 8 hours a day for 5 days/week. Past utilization has been 75% & efficiency has been 110%. What is the rated capacity?

Available time = 3 x 8 x 5 = 120 hours per week

Rated capacity = 120 x 0.75 x 1.10 = 99 standard hours

Rated Capacity Problem

A work center consists of six machines that are available 16 hours per day for five days a week. Utilization is 80%, and efficiency is 120%. What is the rated weekly capacity?

Rated Capacity Problem

Available time = 6 x 16 x 5

= 480 hours per week

Rated capacity = 480 x 0.80 x 1.20

= 460.8 standard hours

Demonstrated (Measured) Capacity

• Demonstrated capacity is proven capacity calculated from actual performance data. The result is average capacity.

Over the previous four weeks, a work center produced 110, 140, 120, and 130 standard hours of work. What is the demonstrated capacity?

Demonstrated capacity = 110 +140 +120 +130

4 125 standard hours

Required Capacity

• Determining required capacity is a two step process:determine the time needed for each

order at each work center sum up the capacity required

for individual orders to obtain

a load

Required Capacity

• Time Needed for Each Order:– The sum of the setup time and the run time

A work center is to process 150 units of gear shaft SG 123 on work order 333. The setup time is 1.5 hours, and the run time is 0.2 hours per piece. What is the standard time needed to run the order?

Total standard time = setup time + run time

= 1.5 + (150 x 0.2) = 31.5 std. hrs.

Scheduling Orders

• Calculate the operation time required at each work center– Operation time = setup time + (run time per piece x number

of pieces)

• Calculate lead time– Lead time = operation time + queue time + wait time +

move time

Scheduling Orders

• Back Scheduling is to start with the due date and, using the lead times, to work back to find the start date for each operation.

Resolving Differences

• Change Capacity• Overtime or undertime• Hiring or layoff• Shift work force• Alternate routings• Subcontract

• Alter Load• Alter lot sizes• Reschedule

Design and Effective Capacity

Design capacity is the maximum theoretical output of a systemNormally expressed as a rate

Effective capacity is the capacity a firm expects to achieve given current operating constraintsOften lower than design capacity

Utilization and Efficiency

Utilization is the percent of design capacity achieved

Efficiency is the percent of effective capacity achieved

Utilization = Actual output/Design capacity

Efficiency = Actual output/Effective capacity

Bakery Example

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Bakery Example

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Bakery Example

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

Bakery Example

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

Bakery Example

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

Efficiency = 148,000/175,000 = 84.6%

Bakery Example

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

Efficiency = 148,000/175,000 = 84.6%

Bakery Example

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shiftsEfficiency = 84.6%Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

= (175,000)(.75) = 131,250 rolls

Bakery Example

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shiftsEfficiency = 84.6%Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

= (175,000)(.75) = 131,250 rolls

Capacity and Strategy

Capacity decisions impact all 10 decisions of operations management as well as other functional areas of the organization

Capacity decisions must be integrated into the organization’s mission and strategy

Capacity Considerations

Forecast demand accurately Understand the technology and capacity

increments Find the optimum

operating level (volume)

Build for change

Economies and Diseconomies of Scale

Economies of scale

Diseconomies of scale

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End of Lecture 11