capacity plann9ing

1. 1
Capacity Planning

2. 2
Definitions of Capacity
 In general, production capacity is the maximum
production rate of an organization.
 Capacity indicates the ability of a firm to meet market
demand both current & future.
 Capacity can be difficult to quantify due to …
 Day-to-day uncertainties such as employee
absences, equipment breakdowns, and material-
delivery delays
 Products and services differ in production rates (so
product mix is a factor)
 Different interpretations of maximum capacity

3. 3
Definitions of Capacity
 The Federal Reserve Board defines sustainable
practical capacity as the greatest level of output that a
plant can maintain …
 within the framework of a realistic work schedule
 taking account of normal downtime
 assuming sufficient availability of inputs to operate
the machinery and equipment in place

4. 4
Steps in the Capacity Planning Process
 Estimate the capacity of the present facilities.
 Forecast the long-range future capacity needs.
 Identify and analyze sources of capacity to meet these
needs.
 Select from among the alternative sources of
capacity.

5. 5
Measurements of Capacity
Output Rate Capacity
 For a facility having a single product or a few
homogeneous products, the unit of measure is
straightforward (barrels of oil per month)
 For a facility having a diverse mix of products, an
aggregate unit of capacity must be established
using a common unit of output (sales in Rs. per
week)

6. 6
Measurements of Capacity
Input Rate Capacity
 Commonly used for service operations where
output measures are particularly difficult
 Hospitals use available beds per month
 Airlines use available seat-miles per month
 Movie theatres use available seats per month

7. 7
Measurements of Capacity
Capacity Utilization Percentage
 Relates actual output to output capacity
 Example: Actual automobiles produced in a
quarter divided by the quarterly automobile
production capacity
 Relates actual input used to input capacity
 Example: Actual accountant hours used in a
month divided by the monthly account-hours
available

8. 8
Measurements of Capacity
Capacity Cushion
 an additional amount of capacity added onto the
expected demand to allow for:
 greater than expected demand
 demand during peak demand seasons
 lower production costs
 product and volume flexibility
 improved quality of products and services

9. 9
Forecasting Capacity Demand
 Consider the life of the input (e.g. facility is 10-30 yr)
 Understand product life cycle as it impacts capacity
 Anticipate technological developments
 Anticipate competitors’ actions
 Forecast the firm’s demand

10. 10
Other Considerations
 Resource availability
 Accuracy of the long-range forecast
 Capacity cushion
 Changes in competitive environment

11. 11
Capacity Planning
 Capacity is the upper limit or ceiling on the load that
an operating unit can handle.
 Capacity also includes
 Equipment
 Space
 Employee skills
 The basic questions in capacity handling are:
 What kind of capacity is needed?
 How much is needed?
 When is it needed?

12. 12
1. Impacts ability to meet future demands
2. Affects operating costs
3. Major determinant of initial costs
4. Involves long-term commitment
5. Affects competitiveness
6. Affects ease of management
7. Globalization adds complexity
8. Impacts long range planning
Importance of Capacity Decisions

13. 13
Capacity
 Design capacity
 maximum output rate or service capacity an
operation, process, or facility is designed for
 Effective capacity
 Design capacity minus allowances such as
personal time, maintenance, and scrap
 Actual output
 rate of output actually achieved--cannot
exceed effective capacity.

14. 14
Efficiency and Utilization
Actual output
Efficiency =
Effective capacity
Actual output
Utilization =
Design capacity
Both measures expressed as percentages

15. 15
1. Long term capacity : Time horizon of 2 years or
more
2. Short term capacity : Focus on work- force size,
overtime budgets, inventories etc.

16. 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

17. Optimal Rate of Output
Minimum
cost
Averagecostperunit
0 Rate of output
Production units have an optimal rate of output for minimal cost.
Figure 5.4
Minimum average cost per unit

18. Economies of Scale
Minimum cost & optimal operating rate are
functions of size of production unit.Averagecostperunit
0
Small
plant Medium
plant Large
plant
Output rate
Figure 5.5

19. Evaluating Alternatives
 Cost-volume analysis
 Break-even point
 Financial analysis
 Cash flow
 Present value
 Decision theory
 Waiting-line analysis

20. Cost-Volume Relationships
Amount($)
0
Q (volume in units)
Fixed cost (FC)
Figure 5.6a

21. Cost-Volume Relationships
Amount($)
Q (volume in units)
0
Figure 5.6b

22. Cost-Volume Relationships
Amount($)
Q (volume in units)
0 BEP units
Figure 5.6c

23. Waiting-Line Analysis
 Useful for designing or modifying service
systems
 Waiting-lines occur across a wide variety of
service systems
 Waiting-lines are caused by bottlenecks in
the process
 Helps managers plan capacity level that will
be cost-effective by balancing the cost of
having customers wait in line with the cost of
additional capacity

24. Types of Queuing systems
 Single channel single service XXXX
 Single channel multiple service xxxx
 Multiple channel single service
xxxx
 Multiple channel multiple service
XXXX
Server
ServerServer Server

25. Examples
 There are two products on the master schedule, X and Y.
they are both produced by using 3 work centers, 100, 200
and 300. The following shows the MPS values for the two
products for the next 5 periods:
The total standard hours to produce item X is 1.557, with 5.331
hours for item Y. Historically, work center 100is used for
20% of the hours required to produce the products, work
center200 uses 45%of the hours and work center 300 uses
35% of the hours. Find capacity requirement for each of the
three work centers.
Week 1 2 3 4 5
X 10 10 15 15 15
Y 25 25 20 20 25

26. 5-26
Calculating Processing
Requirements
Product
Annual
Demand
Standard
processing time
per unit (hr.)
Processing time
needed (hr.)
#1
#2
#3
400
300
700
5.0
8.0
2.0
2,000
2,400
1,400
5,800
If annual capacity is 2000 hours, then we need three machines to han
required volume: 5,800 hours/2,000 hours = 2.90 machines