CAPACITY
PLANNING
Capacity
is important to:
CAPAC ITY
maximum rate of output the firm can reasonably
sustain by using realistic employee work schedules
and the equipment currently in place.
Two levels:
Long-term Capacity Plans
deal with investments in new
facilities and equipment. These
plans cover at least two years
into the future.
Short-term Capacity Plans
focus on work-force size, overtime
budgets, inventories, and other
types of decisions.
central to the long-term
success of an organization
Measures of capacity:
“How should the maximum rate of output be measured?”
Output measures
• are the usual choice for line flow processes
• become less useful as the amount of customization and
variety in the product mix becomes excessive
• are best utilized when the firm provides a relatively small
number of standardized products
• are complicated by product mix
Input measures
• are the usual choice for flexible flow processes
• are complicated by demand
UTILIZATION
• indicates the need for adding extra
capacity or eliminating unneeded
capacity.
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒐𝒖𝒕𝒑𝒖𝒕 𝒓𝒂𝒕𝒆
𝑼𝒕𝒊𝒍𝒊𝒛𝒂𝒕𝒊𝒐𝒏 =
× 100%
𝑴𝒂𝒙𝒊𝒎𝒖𝒎 𝒄𝒂𝒑𝒂𝒄𝒊𝒕𝒚
The average output rate and the capacity
must be measured in the same terms (time,
customers, units, dollars).
Peak Capacity
the maximum output that a process or facility
can achieve under ideal conditions; can be
sustained for only a short time.
Effective Capacity
the maximum output that a process or firm
can economically sustain under normal
conditions.
2 essential definitions of
maximum capacity
• the degree to which the equipment, space,
or labor is currently being used
(expressed as a percentage)
Rated Capacity
• the appropriate measure when capacity is measured
relative to equipment alone.
• an engineering assessment of maximum annual output,
assuming continuous operation except for an allowance
for normal maintenance and repair downtime.
Bottleneck
is an operation that has the lowest effective capacity of any
operation in the facility and thus limits the system’s output.
If operated around the clock under ideal conditions, the fabrication department of
an engine manufacturer can make 100 engines per day. Management believes that a
maximum output rate of only 45 engines per day can be sustained economically over a
long period of time. Currently the department is producing an average of 50 engines
per day. What is the utilization department, relative to peak capacity? Effective
capacity?
Solution:
The two utilization measures are
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒐𝒖𝒕𝒑𝒖𝒕 𝒓𝒂𝒕𝒆
𝟓𝟎
𝑼𝒕𝒊𝒍𝒊𝒛𝒂𝒕𝒊𝒐𝒏𝒑𝒆𝒂𝒌 =
× 𝟏𝟎𝟎% =
× 𝟏𝟎𝟎% = 𝟓𝟎%
𝑷𝒆𝒂𝒌 𝒄𝒂𝒑𝒂𝒄𝒊𝒕𝒚
𝟏𝟎𝟎
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒐𝒖𝒕𝒑𝒖𝒕 𝒓𝒂𝒕𝒆
𝟓𝟎
𝑼𝒕𝒊𝒍𝒊𝒛𝒂𝒕𝒊𝒐𝒏𝒆𝒇𝒇𝒆𝒄𝒕𝒊𝒗𝒆 =
× 𝟏𝟎𝟎% =
× 𝟏𝟎𝟎% = 𝟏𝟏𝟏%
𝑬𝒇𝒇𝒆𝒄𝒕𝒊𝒗𝒆 𝒄𝒂𝒑𝒂𝒄𝒊𝒕𝒚
𝟒𝟓
“What is the maximum reasonable size for a facility?”
states that average unit cost of a good or service can be reduced by
increasing its output rate.
4 principal reasons why economies of scale can drive costs down when
output increases:
1.
2.
3.
4.
Spreading fixed costs
Reducing construction costs
Cutting costs of purchased materials
Finding process advantages
states that average cost per unit increases as the facility’s size
increases.
Excessive size can bring:
• complexity;
• loss of focus; and
• inefficiencies that raise the average unit cost of a product or
service.
Capacity Strategies:
Three Dimensions of Capacity Strategy
“How much capacity cushion is best for various processes?”
Sizing capacity cushions
Capacity cushion - the amount of reserve capacity that a firm maintains to handle sudden
increases in demand or temporary losses of production capacity
- it measures the amount by which the average utilization (in terms of
effective capacity), 100% - utilization rate (%) Effective
Timing and sizing expansion: “When should we expand and by how much?”
(a) EXPANSIONIST STRATEGY – involves large, infrequent jumps in capacity
(b) WAIT-AND-SEE STRATEGY – involves smaller, more frequent jumps
(c) FOLLOW-THE-LEADER STRATEGY – expand when others do; nobody gains competitive
advantage.
Linking capacity and other decisions
Examples of links with capacity:
(a) COMPETITIVE PRIORITIES
(b) QUALITY MANAGEMENT
(c) CAPITAL INTENSITY
(d) RESOURCE FLEXIBILITY
(e) INVENTORY
(f) SCHEDULING
A SYSTEMATIC APPROACH TO CAPACITY
DECISIONS:
Estimate future capacity
requirements.
• the foundation for estimating long-term
capacity needs is forecasts of demand,
productivity, competition, and
technological changes that extend well
into the future.
• the demand forecast has to be converted
to a number that can be compared
directly with the capacity measure
being used.
Identify gaps.
Capacity gap – is any difference
(positive or negative) between projected
demand and current capacity.
where:
𝑫𝒑
𝑴=
D = number of units
𝑪
𝑵 𝟏 − 𝟏𝟎𝟎
(customer) forecast per
year
p = processing time (in hours per unit or customer)
N = total number of hours per year during which the
process operates
C = desired capacity cushion
Setup time – time required to change a machine from making
one product or service to making another.
Total setup time is computed by dividing the number of units
forecast per year, D, by the number of units made in each lot,
which gives the number of setups per year, and then multiplying
by the time per setup.
A SYSTEMATIC APPROACH TO CAPACITY
DECISIONS:
Develop Alternatives.
• develop alternative plans to cope with
projected gaps.
Base case – one alternative, which is to do
nothing and simply lose orders from any
demand that exceeds current capacity.
• other alternatives are various timing and
sizing options for adding new capacity,
including the expansionist and wait-andsee strategies.
• additional possibilities include expanding
different location and using short-term
options such as overtime, temporary
workers, and subcontracting.
Evaluate the Alternatives.
Qualitative concerns – the manager has to
look at how each alternative fits the overall
capacity strategy and other aspects of the
business no covered by financial analysis.
Quantitative concerns – estimates the change
in cash flows for each alternative over the
forecast time horizon, compared to the base
case.
Cash flow – difference between the flows of
funds into and out of an organization over a
period of time, including revenues, costs and
changes in assets and liabilities.
Penelope and Peter Legume own a small accounting service and one personal computer.
If their customers keep organizing records, either of the owners can use the
computer to prepare one tax return per hour, on average. Both Legumes work two 12hour shifts. There are seven working days in a week.
a. What is the peak capacity, measured in tax returns per week?
b. The Legumes normally operate from 9 a.m. to 7 p.m., five days per week.
What is their effective capacity, measured in tax returns per week? Without
considering the number of shifts.
c. During the third week of January, the Legumes processed 40 tax returns.
What is their utilization, as a percentage of effective capacity?
d. Determine the capacity cushion, expressed as a percentage.
Product
Annual Demand
Standard processing
time per unit
(hr.)
1
400
5
2000
2
300
8
2400
3
700
2
1400
Processing time
needed (hr.)
If the department works one eight hour shift, 250 days a year,
calculate the number of machines that would be needed to handle
the required volume.