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Chapter 5: Strategic Capacity Planning for Products
and Services
Assistant Prof. Abed Schokry
Operations and Productions
Management
First Semester 2010 / 2011
Islamic University of Gaza - Palestine
Learning Outcomes: Chapter 5
• After finishing this chapter, You should be able to:
Explain the importance of capacity planning
Discuss the ways of defining and measuring capacity
Describe the determinants of effective capacity
Discuss the major considerations related to developing
capacity alternatives
– Briefly describe approaches that are useful for evaluating
capacity alternatives
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Strategic Capacity Planning
• Capacity can be defined as the ability to hold, receive or store.
• Strategic capacity planning is an approach for determining the
overall capacity level of capital intensive resources, including
facilities, equipment, and overall labor force size
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Capacity Planning
• Capacity
– The upper limit or ceiling on the load that an operating unit can
handle
– Goal
• To achieve a match between the long-term supply
capabilities of an organization and the predicted level of longrun demand
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Capacity Planning Questions
• Key Questions:
– What kind of capacity is needed?
– How much capacity is needed to match demand?
– When is it needed?
• Related Questions:
– How much will it cost?
– What are the potential benefits and risks?
– Are there sustainability issues?
– Should capacity be changed all at once, or through several smaller
changes
– Can the supply chain handle the necessary changes?
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Capacity planning methods
vary by industry or service - similar principles:
• long-term (yrs). Capacity strategy/policy needed (production sites,
hotels/hospital (rooms & beds), warehouse space, lines/machinery,
computer up-grades. Investment in new facilities etc.
• medium-term (mths) - forecast demand, schedule capacity to meet
/balance it. MRP2 and MRP1 planning, machine scheduling, rotas.
Levels of aggregation - plans to assign capacity.
• short-term - "now" responses. Detail revealed in action. Local
staff expertise, flexibility & slack without upsetting aggregate
plan/objectives.
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Capacity Decisions Are Strategic
• Capacity decisions
–
–
–
–
–
–
–
–
impact the ability of the organization to meet future demands
affect operating costs
are a major determinant of initial cost
often involve long-term commitment of resources
can affect competitiveness
affect the ease of management
are more important and complex due to globalization
need to be planned for in advance due to their consumption of
financial and other resources
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Measuring Capacity Examples
• There is no one best way to measure capacity
• Output measures like kegs per day are easier to understand
• With multiple products, inputs measures work better
Type of Business
Input Measures of Output Measures
Capacity
of Capacity
Car manufacturer
Labor hours
Cars per shift
Hospital
Available beds
Patients per month
Pizza parlor
Labor hours
Pizzas per day
Retail store
Floor space in
square feet
Revenue per foot
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Defining and Measuring Capacity
• Measure capacity in units that do not require updating
– Why is measuring capacity in dollars problematic?
• Two useful definitions of capacity
– Design capacity
• The maximum output rate or service capacity an operation, process, or
facility is designed for
– Effective capacity
• Design capacity minus allowances such as personal time and
maintenance
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Measuring System Effectiveness
• Actual output
– The rate of output actually achieved
– It cannot exceed effective capacity
• Efficiency
Efficiency =
actual output
effective capacity
• Utilization
• Measured as percentages
Utilizatio n =
actual output
design capacity
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Example in Computing Efficiency and Utilization
Design Capacity
=
Effective Capacity
=
50 trucks per day
40 trucks per day
Actual Output
=
36 units per day
Efficiency
=
Actual Output
Effective Capacity
=
36 per units per day
40 units per day
=
90%
Utilization
=
Actual Output
Design Capacity
=
36 per units per day
50 units per day
=
72%
Given the information below, compute the efficiency and the
utilization of the vehicle repair department
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Factors that determine effective capacity
A. Facilities
•
•
•
•
Design
Location
Layout
Environment
B. Product/Service
• Design
• Product/Service Mix
C. Process
• Quantity capabilities
• Quality capabilities
D. Human Factors
• Job content
• Job design
• Training and experience
•
•
•
•
Motivation
Compensation
Learning rates
Absenteeism and labor turnover
E. Operational
•
•
•
•
•
Scheduling
Materials management
Quality assurance
Maintenance policies
Equipment breakdowns
F. External Factors
•
•
•
•
Product standards
Safety regulations
Unions
Pollution control standards
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Planning Service Capacity
• Need to be near customers
– Capacity and location are closely tied
• Inability to store services
– Capacity must be matched with timing of demand
• Degree of volatility of demand
– Peak demand periods
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In-House or Outsourcing
Outsource: obtain a good or service from an external
provider
1.
2.
3.
4.
5.
6.
Available capacity
Expertise
Quality considerations
Nature of demand
Cost
Risk
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Developing Capacity Alternatives
1. Design flexibility into systems
2. Take stage of life cycle into account
3.
4.
5.
6.
Take a “big picture” approach to capacity changes
Prepare to deal with capacity “chunks” (mass)!
Try to smooth out capacity requirements
Identify the optimal operating level
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Capacity Flexibility
• Flexible plants
• Flexible processes
• Flexible workers
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Bottleneck Operation
Figure 5.1
Machine #1
Machine #2
10/hr
Bottleneck operation: An operation
in a sequence of operations whose
capacity is lower than that of the
other operations
10/hr
Bottleneck
Operation
Machine #3
30/hr
10/hr
Machine #4
10/hr
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Bottleneck Operation
Bottleneck
Operation 1
20/hr.
Operation 2
10/hr.
Operation 3
15/hr.
10/hr.
Maximum output rate
limited by bottleneck
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Economies and Diseconomies of Scale
• Economies of Scale
– If output rate is less than the optimal level, increasing the
output rate results in decreasing average per unit costs
• Diseconomies of Scale
– If the output rate is more than the optimal level, increasing
the output rate results in increasing average per unit costs
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Economies & Diseconomies of Scale
Economies of Scale and the Learning Curve working
Average
unit cost
of output
100-unit
plant
200-unit
plant
300-unit
plant
400-unit
plant
Diseconomies of Scale start working
Volume
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The Learning Curve
As plants produce more products, they
gain experience in the best production
methods and reduce their costs per unit
Yesterday
Cost or
price
per unit
Today
Tomorrow
Total accumulated production of units
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Unbalanced stages of production
Units
per
month
Stage 1
Stage 2
6,000
7,000
Stage 3
5,000
Maintaining System Balance: Output of one stage is the exact input
requirements for the next stage
Balanced stages of production
Units
per
month
Stage 1
Stage 2
6,000
6,000
Stage 3
6,000
Capacity Planning: Balance
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How Much Capacity Is Best?
•
The Best Operating Level is the output than results in the lowest average
unit cost
• Economies of Scale:
– Where the cost per unit of output drops as volume of output
increases
– Spread the fixed costs of buildings & equipment over multiple
units, allow bulk purchasing & handling of material
•
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
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Capacity Strategies
• Leading
– Build capacity in anticipation of future demand increases
• Following
– Build capacity when demand exceeds current capacity
• Tracking
– Similar to the following strategy, but adds capacity in relatively
small increments to keep speed with increasing demand
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Capacity Cushion
• Capacity Cushion (reduce)
– Extra capacity used to offset demand uncertainty
– Capacity cushion = 100% - Utilization
– Capacity cushion strategy
• Organizations that have greater demand uncertainty typically
have greater capacity cushion
• Organizations that have standard products and services
generally have greater capacity cushion
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Making Capacity Planning Decisions
• The three-step procedure for making capacity planning
decisions is as follows:
– Step 1: Identify Capacity Requirements
– Step 2: Develop Capacity Alternatives
– Step 3: Evaluate Capacity Alternatives
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Steps in Capacity Planning
1.
Estimate future capacity requirements
2.
Evaluate existing capacity and facilities; identify gaps
3.
Identify alternatives for meeting requirements
4.
Conduct financial analyses
5.
Assess key qualitative issues
6.
Select the best alternative for the long term
7.
Implement alternative chosen
8.
Monitor results
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Calculating Processing Requirements
• Calculating processing requirements requires reasonably
accurate demand forecasts, standard processing times, and
available work time
k
NR =
∑
i =1
pi Di
T
where
N R = number of required machines
p i = standard processing time for product i
D i = demand for product i during the planning horizon
T = processing time available during the planning horizon
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Best Operating Level
Example: Engineers design engines and assembly lines to operate at
an ideal or “best operating level” to maximize output and minimize ware
Average
unit cost
of output
Overutilization
Underutilization
Best Operating
Level
Volume
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Best Operating Level and Size
• Alternative 1: Purchase one large facility, requiring one large
initial investment
• Alternative 2: Add capacity incrementally in smaller chunks as
needed
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Optimal Operating Level
Optimal
Output
Rate
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Cost-Volume Relationships
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Operations Strategy
•
Capacity planning impacts all areas of the organization
– It determines the conditions under which operations will have to function
– Flexibility allows an organization to be agile
•
•
It reduces the organization’s dependence on forecast accuracy and reliability
Many organizations utilize capacity cushions to achieve flexibility
– Bottleneck management is one way by which organizations can enhance
their effective capacities
– Capacity expansion strategies are important organizational considerations
•
•
Expand-early strategy
Wait-and-see strategy
– Capacity contraction is sometimes necessary
•
Capacity disposal strategies become important under these
conditions
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End of Chapter 5
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