Capacity
After deciding what products/services should be
offered and how they should be made,
management must plan the capacity of its
processes.
Capacity is the maximum rate of output for a
process. Must have capacity to meet current and
future demands. Long-term capacity plans deal
with investments in new facilities and equipment.
Short-term capacity plans focus on workforce size,
overtime budgets, and inventories.
Capacity Planning

This activity is central to the long-term success
of an organization.
 Too much capacity can be as problematic as
too little
 Capacity planning considers questions such
as:


How much of a cushion is needed?
Should we expand capacity before the demand is
there or wait until demand is more certain?
Capacity Planning

Capacity can be defined as the ability to hold,
receive, store, or accommodate.

Strategic capacity planning is an approach
for determining the overall capacity level of
capital intensive resources, including facilities,
equipment, and overall labor force size.
Measuring capacity



No single capacity measure is universally applicable.
Capacity can be expressed in terms of outputs or inputs.
Output measures—the usual choice for line flow processes,
usually high-volume
 Low amount of customization
 Product mix becomes an issue when the output is not
uniform in work content.
 Input measures—used for flexible flow, low-volume
processes
 High amount of customization
 Output varies in work content; a measure of total units
produced is meaningless.
 Output is converted to some critical homogeneous input,
such as labor hours or machine hours.
Utilization
Fabrication can make 100 engines/day
Management wants 45 engines/day
Currently producing 50 engines/day
Utilizationpeak =
Average output rate
Peak capacity
x 100%
Average output rate
x 100%
Utilizationeffective =
Effective capacity
Utilization
Fabrication can make 100 engines/day
Management wants 45 engines/day
Currently producing 50 engines/day
Utilizationpeak =
Utilizationeffective =
50
x 100% = 50%
100
50
45
x 100% = 111%
The average output rate and the capacity must be measured in the same terms.
Types of Capacity

Peak capacity




Calling for extraordinary effort under ideal
conditions that are not sustainable
Allows for downtime for maintenance and repair.
Engineering assessment of maximum annual
output
Effective capacity

Economically sustainable under normal conditions
Utilization
What does it mean? Even through the department falls well short of
peak capacity, it is well beyond the output rate judged to be most
economical. It’s operations could be sustained at that level only
through the use of considerable overtime; capacity expansion should
be evaluated.
Utilization
Utilizationpeak
= 50%
Utilizationeffective = 111%
Capacity cushionpeak
Capacity cushion – amount
of reserve capacity that a
firm maintains to handle
sudden increases in
demand or temporary loss
of production capacity.
= 100% – 50% = 50%
Capacity cushioneffective = 100% – 111% = – 11%
Best Operating Level
Average
unit cost
of output
Underutilization
Overutilization
Best Operating
Level
Volume
Capacity Bottlenecks
“A bottleneck is an operation that has the
lowest effective capacity of any operation in the
facility and thus limits the system’s output.”
Inputs
1
2
3
200/hr
50/hr
200/hr
(a) Operation 2 a bottleneck
To
customers
Capacity Bottlenecks
Inputs
1
2
3
200/hr
200/hr
200/hr
To
customers
(b) All operations bottlenecks
In effect, the process can produce only as fast as the slowest operation.
True expansion of a process’s capacity occurs only when bottleneck
capacity is increased. In the first slide, adding capacity at Operation 1
or 3 will not impact system capacity. However, when adding capacity to
Operation 2, must then increase capacity at all 3 operations to increase
capacity further.
To increase capacity: new equipment, new facilities, expanded operating
hours, increased shifts, increased work hours, or redesign the process
Theory of Constraints

Focus is on whatever impedes, (i.e.,
bottlenecks) progress toward the goal of
maximizing flow of total value-added funds
(sales less discounts and variable costs)
 The focus on bottlenecks is the means to
increase throughput and, consequently, the
flow of value added funds.
 The performance of the overall system is a
function of how bottleneck operations or
processes are scheduled.
Theory of Constraints

Short-term: overtime, temporary employees,
outsource
 Increase effective capacity utilization at
bottlenecks without experiencing the higher
costs and poor customer service usually
associated with maintaining output rates at
peak capacity.
 Carefully monitor short-term schedules,
minimize idle time, setups (changes from one
product to another).
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
Economies of Scale

Increasing output rate decreases the
average unit cost
Fixed costs are spread over more units
 Construction costs are reduced
 Costs of purchased materials are cut
 Process advantages are found

Diseconomies of Scale

When the average costs per unit increases as
the facility’s size increases.



Excessive size can bring complexity, loss of focus,
and inefficiencies, which raise the average unit
cost.
Characterized by loss of agility, less innovation, risk
avoidance, and excessive analysis and planning at
the expense of action.
Nonlinear growth of overhead leads to employee
ceilings.
Economies and
Diseconomies of Scale
Average unit cost
(dollars per patient)
Best operating level is 500-beds; optimal depends on number of
patients per week.
250-bed
hospital
Economies
of scale
500-bed
hospital
750-bed
hospital
Diseconomies
of scale
Output rate (patients per week)
Capacity strategy
Sizing capacity cushions
 Average utilization rates near 100%
indicate:

Need to increase capacity
 Poor customer service or declining
productivity
 Utilization rates tend to be higher in capitalintensive industries.

Capacity Strategy

Factors Leading to Large Capacity Cushions






When demand is variable, uncertain, or product mix changes
When finished goods inventory cannot be stored
When customer service is important
When capacity comes in large increments
When supply of material or human resources is uncertain
Factors leading to small capacity cushions



Unused capacity costs money.
Large cushions hide inefficiencies, absenteeism, unreliable
material supply.
When subcontractors are available to handle demand peaks
Capacity Strategy

Timing and sizing of expansion

Expansionist strategy







Keeps ahead of demand, maintains a capacity cushion
Large, infrequent jumps in capacity
Higher financial risk
Lower risk of losing market share
Economies of scale may reduce fixed cost per unit
May increase learning and help compete on price
Preemptive marketing
Capacity Strategy

Wait-and-see strategy







Lags behind demand, relying on short-term peak capacity
options (overtime, subcontractors) to meet demand
Lower financial risk associated with overly optimistic demand
forecast
Lower risk of a technological advancement making a new
facility obsolete
Higher risk of losing market share
Follow-the-leader strategy
An intermediate strategy of copying competitors’ actions
Tends to prevent anyone from gaining a competitive
advantage
Capacity Strategies
Capacity
Planned unused
capacity
Forecast of
capacity required
Capacity
increment
Time between
increments
Time
(a) Expansionist strategy
Capacity Strategies
Capacity
Planned use of
short-term options
Forecast of
capacity required
Capacity
increment
Time between
increments
Time
(b) Wait-and-see strategy
Linking Capacity and Other
Decisions
•
•
•
•
•
•
Competitive Priorities
Quality Management
Capital Intensity
Resource Flexibility
Inventory
Scheduling
Capacity Decisions
Estimate Capacity Requirements
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=
[Dp + (D/Q)s]product 1 + ... + [Dp + (D/Q)s]product n
N[1 – (C/100)]
Capacity Decisions
Estimate Capacity Requirements
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)
Capacity Decisions
Estimate Capacity Requirements
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
Example 8.2
Capacity Decisions
Identify Capacity Gaps
Kitchen capacity = 80,000 meals
Dining room capacity = 105,000 meals
Demand
Year 1:
Year 2:
Year 3:
Year 4:
Year 5:
90,000 meals
100,000 meals
110,000 meals
120,000 meals
130,000 meals
Kitchen Capacity Gaps
Year 1:
Year 2:
Year 3:
Year 4:
Year 5:
90,000 – 80,000 = 10,000
100,000 – 80,000 = 20,000
110,000 – 80,000 = 30,000
120,000 – 80,000 = 40,000
130,000 – 80,000 = 50,000
Capacity Decisions
Identify Capacity Gaps
Kitchen capacity = 80,000 meals
Dining room capacity = 105,000 meals
Demand
Year 1:
Year 2:
Year 3:
Year 4:
Year 5:
90,000 meals
100,000 meals
110,000 meals
120,000 meals
130,000 meals
Dining Room Capacity Gaps
Year 1:
no gaps
Year 2:
no gaps
Year 3: 110,000 – 105,000 = 5,000
Year 4: 120,000 – 105,000 = 15,000
Year 5: 130,000 – 105,000 = 25,000
Capacity Decisions
Evaluate Alternatives
Expand capacity to meet expected
demand through Year 5
Year
Demand
1
2
3
4
5
90,000
100,000
110,000
120,000
130,000
Cash Flow
(90,000 – 80,000)2 = $20,000
(100,000 – 80,000)2 = $40,000
(110,000 – 80,000)2 = $60,000
(120,000 – 80,000)2 = $80,000
(130,000 – 80,000)2 = $100,000
Capacity Decisions
Evaluate Alternatives
Capacity Decisions
Simulation
TIME TO PERFORM (SECONDS)
OPERATION
1.
2.
3.
4.
5.
6.
Average
Standard
Deviation
15
60
25
35
20
30
3
15
6
10
5
5
Review renewal application for correctness
Check file for violations and restrictions
Process and record payment
Conduct eye test
Photograph applicant
Issue temporary license
TIME
AVERAGE CUSTOMER ARRIVAL
(PEOPLE PER MINUTE)
8:00 A.M. — 9:00 A.M.
9:00 A.M. — 12:00 P.M.
12:00 P.M. — 1:00 P.M.
1:00 P.M. — 4:00 P.M.
1.25
0.75
2.00
0.75
Capacity Decisions
Bottleneck
Capacity Decisions
Bottleneck