PRODUCTION AND
OPERATIONS
MANAGEMENT
Ch. 8: Capacity Planning
POM - J. Galván
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Definition and Measures of Capacity
Capacity:
The maximum output of a system in a
given period
Designed
Capacity:
The maximum capacity that can be
achieved under ideal conditions
Effective capacity The percent of design capacity actually
expected
or utilization:
Rated Capacity:
Maximum usable capacity of a
particular facility
RC = (Capacity)(Utilization)(Efficiency)
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Utilization

Measure of planned or actual
capacity usage of a facility, work
center, or machine
Expected capacity
Utilization =
Capacity
Planned hours to be used
=
Total hours available
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Efficiency

Measure of how well a facility or
machine is performing when used
Actual output
Efficiency =
Effective capacity
Actual output in units
=
Standard output in units
Average actual time
=
Standard time
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Capacity Planning Process
Forecast
Demand
Develop
Alternative
Plans
Quantitative
Factors
(e.g., Cost)
Compute
Rated
Capacity
Evaluate
Capacity
Plans
Qualitative
Factors
(e.g., Skills)
Compute
Needed
Capacity
Select Best
Capacity
Plan
POM - J. Galván
Implement
Best Plan
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WHY PLANNING CAPACITY?
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TYPICAL QUESTIONS







How many machines should be purchased?
How many workers should be hired?
Consequences of a 20% increase in demand?
How many counters should be opened to
maintain customer wait below 10 minutes?
How many assembly stations are needed to
maintain backorders below 20?
How often will all 6 operating rooms be full?
How will congestion at Logan change if a 5th
runway is built?
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CAPACITY ALTERNATIVES
Long Range
Planning
Intermediate
Range Planning
Add Facilities
Add long lead time equipment
Subcontract
Add Equipment
Add Shifts
*Limited options exist
Add Personnel
Build or Use Inventory
*
Short Range
Planning
*
Modify Capacity
POM - J. Galván
Schedule Jobs
Schedule Personnel
Allocate Machinery
Use Capacity
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Theory of Constraints
1. Identify the system
bottleneck(s)
2. Exploit the bottleneck(s)
3. Subordinate all other
decisions to step 2
4. Elevate the bottleneck(s)
5. Do not let inertia set in
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4-9
Capacity Bottlenecks
Inputs
1
2
3
200/hr
50/hr
200/hr
To
customers
(a) Operation 2 a bottleneck
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4-10
Capacity Bottlenecks
Inputs
1
2
3
200/hr
200/hr
200/hr
To
customers
(b) All operations bottlenecks
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4-11
Capacity Cushion

Reserve capacity used to deal with
sudden increases in demand


(100% - Average Utilization %)
Primary Disadvantage

unused capacity costs money
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Average unit cost
(dollars per patient)
Economies & Diseconomies of
Scale
250-bed
hospital
500-bed
hospital
Economies
of scale
750-bed
hospital
Diseconomies
of scale
Output rate (patients per week)
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Capacity Strategy

Planned Capacity

Expected Demand
Time

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Expansionist
Strategy
Looking to
capture strong
economies of
scale
Positive learning
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Capacity Strategy

Planned Capacity

Build-to-Forecast
Strategy
Trying to match
capacity and
demand
Expected Demand
Time
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Capacity Strategy

Expected Demand

The Maximize
Utilization
Strategy
Maintains little or
no capacity
cushion
Planned Capacity
Time
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Systematic Approach to Capacity
Decisions
1.
Estimate Capacity Requirements
2.
Identify Gaps
3.
Develop Alternatives
4.
Evaluate Alternatives
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Capacity Decisions
Estimate Capacity Requirements
Example 4.1
Item
Client X
Client Y
Annual demand forecast (copies) (D) 2000.00
Standard processing time (hour/copy)(p) 0.50
Average lot size (copies per report)(Q)
20.00
Standard setup time (hours)(s)
0.25
6000.00
0.70
30.00
0.40
M=
[Dp + (D/Q)s]product 1 + ... + [Dp + (D/Q)s]product n
N[1 – (C/100)]
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4-18
Capacity Decisions
Estimate Capacity Requirements
Example 4.1
Item
Client X
Client Y
Annual demand forecast (copies)
2000.00
Standard processing time (hour/copy)
0.50
Average lot size (copies per report)
20.00
Standard setup time (hours)
0.25
6000.00
0.70
30.00
0.40
M=
[2000(0.5) + (2000/20)(0.25)]client X + [6000(0.7) + (6000/30)(0.4)]client Y
(250 days/year)(1 shift/day)(8 hours/shift)(1.0 – 15/100)
Used capacity: 85%
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4-19
Capacity Decisions
Estimate Capacity Requirements
Example 4.1
Item
Client X
Client Y
Annual demand forecast (copies)
2000.00
Standard processing time (hour/copy)
0.50
Average lot size (copies per report)
20.00
Standard setup time (hours)
0.25
6000.00
0.70
30.00
0.40
5305
M=
= 3.12  4 machines
1700
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4-20
Waiting-Line Models

Often used in Capacity
Planning
• Balances customer service & the cost of
extra capacity

Use probability distributions
to estimate:

Avg.Customer Delay

Avg. Length of Waiting Lines

Work Center Utilization
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Simulation

A tool that helps identify:
• Process Bottlenecks
• Capacity Cushions

More effective for
complex waiting-line
problems
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Capacity Decisions
Simulation
Figure 6.5(a)
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Capacity Decisions
Simulation
Figure 4.8
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4-24
Managing Existing Capacity
Demand Management
Capacity Management
¨ Vary prices

¨ Vary promotion

¨ Change lead times
(e.g., backorders)

¨ Offer complementary
products

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Vary staffing
Change equipment
& processes
Change methods
Redesign the product
for faster processing
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Complementary Products
Sales (Units)
5,000
4,000
3,000
2,000
1,000
0
Total
Heavy
clothes
Light clothes
J M M J S N J M M J S N J
Time (Months)
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Matching Capacity to 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
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