Capacity Planning
Capacity




Capacity (A): is the upper limit on the load that an operating
unit can handle.
Capacity (B): the upper limit of the quantity of a product (or
product group) that an operating unit can produce (= the
maximum level of output)
Capacity (C): the amount of resource inputs available relative
to output requirements at a particular time
The basic questions in capacity handling are:




What kind of capacity is needed?
How much is needed?
When is it needed?
How does productivity relate to capacity?
Importance of Capacity
Decisions
1.
2.
3.
4.
5.
6.
7.
Impacts ability to meet future demands
Affects operating costs
Major determinant of initial costs
Involves long-term commitment
Affects competitiveness
Affects ease of management
Impacts long range planning
Examples of Capacity Measures
Type of
Organization
Manufacturer
Hospital
Airline
Restaurant
Retailer
Theater
Measures of Capacity
Inputs
Outputs
Machine hours
Number of units
per shift
per shift
Number of beds Number of
patients treated
Number of planes Number of
or seats
seat-miles flown
Number of seats Customers/time
Area of store
Sales dollars
Number of seats Customers/time
Capacity

Designed capacity
maximum output rate or service capacity an
operation, process, or facility is designed for
 = maximum obtainable output
 = best operating level


Effective capacity


Design capacity minus allowances such as personal
time, maintenance, and scrap
Actual output = Capacity used

rate of output actually achieved. It cannot
exceed effective capacity.
Capacity Efficiency and
Capacity Utilization
Actual output
Efficiency =
Effective capacity
Actual output
Utilization =
Design capacity
Numeric Example
Design capacity = 10 tons/week
Effective capacity = 8 tons/week
Actual output = 6 tons/week
Efficiency
Utilization
Actual output
=
=
Effective capacity
Actual output
Design capacity
6 tons/week
=
=
8 tons/week
6 tons/week
10 tons/week
= 75%
= 60%
Determinants of Effective
Capacity







Facilities
Product and service factors
Process factors
Human factors
Operational factors
Supply chain factors
External factors
Key Decisions of Capacity
Planning
1.
2.
3.
4.
Amount of capacity needed
Timing of changes
Need to maintain balance
Extent of flexibility of facilities
Capacity Cushion




level of capacity in excess of the average utilization rate or
level of capacity in excess of the expected demand.
extra demand intended to offset uncertainty
Cushion = (designed capacity / capacity used) - 1
High cushion is needed:




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
Steps for Capacity Planning
1.
2.
3.
4.
5.
6.
7.
8.
Estimate future capacity requirements
Evaluate existing capacity
Identify alternatives
Conduct financial analysis
Assess key qualitative issues
Select one alternative
Implement alternative chosen
Monitor results (feedback)
Sources of Uncertainty




Manufacturing
Customer delivery
Supplier performance
Changes in demand
The „Make or Buy” problem
1.
2.
3.
4.
5.
6.
Available capacity
Expertise
Quality considerations
Nature of demand
Cost
Risk
Developing Capacity Alternatives
1.
2.
3.
4.
5.
6.
Design flexibility into systems
Take stage of life cycle into account
(complementary product)
Take a “big picture” approach to capacity
changes
Prepare to deal with capacity “chunks”
Attempt to smooth out capacity requirements
Identify the optimal operating level
Economies of Scale

Economies of scale


If the output rate is less than the optimal level,
increasing output rate results in decreasing average
unit costs
Diseconomies of scale

If the output rate is more than the optimal level,
increasing the output rate results in increasing
average unit costs
Evaluating Alternatives
Average cost per unit
Production units have an optimal rate of output for minimal cost.
Minimum average cost per unit
Minimum cost
0
Rate of output
Evaluating Alternatives II.
Average cost per unit
Minimum cost & optimal operating rate are
functions of size of production unit.
Small
plant
Medium
plant
0
Output rate
Large
plant
Planning Service Capacity

Need to be near customers


Inability to store services


Capacity and location are closely tied
Capacity must be matched with timing of demand
Degree of volatility of demand

Peak demand periods
Some examples of
demand / capacity
Adapting capacity to demand
through changes in workforce
DEMAND
PRODUCTION RATE (CAPACITY)
Adaptation with inventory
DEMAND
Inventory
accumulation
CAPACITY
Inventory
reduction
Adaptation with subcontracting
DEMAND
SUBCONTRACTING
PRODUCTION
(CAPACITY)
Adaptation with complementary
product
DEMAND
DEMAND
PRODUCTION (CAPACITY)
PRODUCTION (CAPACITY)
Seminar exercises
Homogeneous Machine
Designed capacity in calendar time
CD= N ∙ sn ∙ sh ∙ mn ∙ 60 (mins / planning period)





CD= designed capacity (mins / planning period)
N = number of calendar days in the planning period
(≈ 250 wdays/yr)
sn= maximum number of shifts in a day (= 3 if dayshift +
swing shift + nightshift)
sh= number of hours in a shift (in a 3 shifts system, it is 8)
mn= number of homogenous machine groups
Designed capacity in working minutes
(machine minutes), with given work schedule
CD= N ∙ sn ∙ sh ∙ mn ∙ 60 (mins / planning period)





CD= designed capacity (mins / planning period)
N = number of working days in the planning period
(≈ 250 wdays/yr)
sn= number of shifts in a day (= 3 if dayshift + swing shift +
nightshift)
sh= number of hours in a shift (in a 3 shifts system, it is 8)
mn= number of homogenous machine groups
Effective capacity in working minutes
CE = CD - tallowances (mins / planning period)
CD= designed capacity
tallowances = allowances such as personal time,
maintenance, and scrap (mins / planning period)
The resources we can count with in
product mix decisions
b =  ∙ CE
b = expected capacity
CE = effective capacity
 = performance
Produktumok
Product types
T1
percentage
T
i
Tn
Resources
Erőforrások
E1
E2
a11
a21
a1i
a2i
a1n
a2n
Ei
a
a
a
Em
am1
i1
i i
am i
erőforrás
Resource
utilization
felhasználási
coefficients
koeficiensek
i n
amn
Erőforrások
Expected
nagysága
(kapacitás)
Capacities
óra/időszak
b1
b2
bi
bm
Exercise 1.1
Set up the product-resource matrix using the following data!
RU coefficients: a11: 10, a22: 20, a23: 30, a34: 10
 The planning period is 4 weeks (there are no holidays in it, and no work on
weekends)
Work schedule:



E1 and E2: 2 shifts, each is 8 hour long
E3: 3 shifts
Homogenous



machines:
1 for E1
2 for E2
1 for E3
Maintenance
time: only for E3: 5 hrs/week
Performance rate:


90% for E1 and E3
80% for E2
Solution (bi)

Ei = N ∙ sn ∙ sh ∙ mn ∙ 60 ∙ 




N=(number of weeks) ∙ (working days per week)
E1 = 4 weeks ∙ 5 working days ∙ 2 shifts ∙ 8 hours per shift ∙ 60 minutes
per hour ∙ 1 homogenous machine ∙ 0,9 performance =
= 4 ∙ 5 ∙ 2 ∙ 8 ∙ 60 ∙ 1 ∙ 0,9 = 17 280 minutes per planning period
E2 = 4 ∙ 5 ∙ 2 ∙ 8 ∙ 60 ∙ 2 ∙ 0,8 = 38 720 mins
E3 = (4 ∙ 5 ∙ 3 ∙ 8 ∙ 60 ∙ 1 ∙ 0,9) – (5 hrs per week maintenance ∙
60 minutes per hour ∙ 4 weeks) = 25 920 – 1200 = 24 720 mins
Solution (RP matrix)
T1
E1
E2
E3
T2
T3
T4
10
b (mins/y)
17 280
20
30
30 720
10
24 720
Exercise 1.2

Complete the corporate system matrix with the following
marketing data:

There are long term contract to produce at least:





Forecasts says the upper limit of the market is:






50 T1
100 T2
120 T3
50 T4
10 000 units for T1
1 500 for T2
1 000 for T3
3 000 for T4
Unit prices: T1=100, T2=200, T3=330, T4=100
Variable costs: E1=5/min, E2=8/min, E3=11/min
Solution (CS matrix)
T1
E1
T2
T3
T4
10
17 280
20
E2
b (mins/y)
30
30 720
10
E3
MIN (pcs/y)
50
100
120
50
MAX (pcs/y)
10 000
1 500
1 000
3 000
p
100
200
330
100
f
50
40
90
-10
24 720
What is the optimal product mix to
maximize revenues?

T1= 17 280 / 10 = 1728 < 10 000


T2: 200/20=10
T3: 330/30=11

T4=24 720/10=2472<3000


T2= 100
T3= (30 720-100∙20-120∙30)/30= 837<MAX
What if we want to maximize profit?


The only difference is in T4 because of its
negative contribution margin.
T4=50
Exercise 2
T1
E1
T2
T3
T4
T5
T6
6
b (hrs/y)
2 000
3
E2
2
3 000
4
E3
1 000
6
1
E4
E5
3
4
MIN (pcs/y)
0
200
100
250
400
100
MAX (pcs/y)
20000
500
400
1000
2000
200
p (HUF/pcs)
200
100
400
100
50
100
f (HUF/pcs)
50
80
40
30
20
-10
6 000
5 000
Solution
Revenue max.
 T1=333
 T2=500
 T3=400
 T4=250
 T5=900
 T6=200
Contribution max.
 T1=333
 T2=500
 T3=400
 T4=250
 T5=966
 T6=100