Capacity planning

Capacity
It is the ability to hold, receive , store or
accommodate.

It is viewed as the amount of output that a

system is capable of achieving over a
specific period of time.
 Definitions of capacity
In general, production capacity is the
maximum production rate of an organization
(or maximum conversion rate of a production
system) in any given period.
Sustainable practical capacity is 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
 Importance of Capacity Decisions

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. Impacts long range planning
 Types of Planning Over a Time
Horizon

Long Range Add Facilities

Planning Add long lead time equipment *

Intermediate Sub-Contract Add Personnel

Range Planning Add Equipment Build or Use Inventory
Add Shifts

Schedule Jobs
Short Range * Schedule Personnel
Planning Allocate Machinery

*Limited options exist Modify Capacity Use Capacity

Strategic Capacity Planning
It is to provide an approach for determining
the overall capacity level of capital intensive
resources- facilities, equipment, and overall
labor force size-that best supports the
company’s long range competitive strategy.

Inadequate capacity-lose customers

Excessive capacity-excess inventory, need to

reduce prices to stimulate demand.
Service-sector demand and
capacity management
In the service sector, scheduling customers is
demand management, and scheduling workforce is
capacity management.
Demand Management – when demand and capacity
are fairly well matched, demand management can
often be handled with appointments, reservations,
or a first-come, first-serve rule.
Reservations systems works well in rental car
agencies, hotels, and some restaurants as a means of
minimizing customer waiting time.
In retail shops, post office, or a fast-food restaurant,
a first-Come, first-served rule for serving customers
may suffice.
Each organization can develop their own strategy to
match supply and demand.
Measures of 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.
 Capacity Utilization
Capacity used
Capacity utilization rate 
Best operating level

Capacity used
 rate of output actually achieved

Best operating level

Output level where average unit cost is minimized
Capacity Utilization--Example
Best operating level = 120 units/week

Actual output = 83 units/week

Utilization = ?

Capacity used 83 units/wk

Utilization  =  .692
Best operating level 120 units/wk
Efficiency and Utilization
Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity

Both measures expressed as percentages

 Efficiency/Utilization Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day

Actual output = 36 units/day

Efficiency = =
90%
Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day

=
72% Design capacity 50 units/day
Capacity Cushion

A capacity cushion that will be maintained

between the projected requirements and the
actual capacity.

An amount of capacity in excess of expected

demand.
Economies of Scale
Best operating level - least average unit cost
Economies of scale - average cost per unit
decreases as the volume increases toward
the best operating level
Diseconomies of scale - average cost per
unit increases as the volume increases
beyond the best operating level
 Economies and Diseconomies of
Scale
Average Unit
Cost of Output ($)

Economies Diseconomies
of Scale of Scale

Best Operating Level

Annual Volume (units)

Capacity Focus

The concept of the focused factory holds

that production facilities work best when
they focus on a fairly limited set of
production objectives .

Plants Within Plants (PWP)

 Extend focus concept to operating level
Capacity Flexibility

Flexible plants (zero changeover time)

Flexible processes (Economoies of scope)

Flexible workers (Multiple skills)

 Capacity Analysis: Balance
Unbalanced
Unbalancedstages
stagesof
ofproduction
production
Units
per Stage 1 Stage 2 Stage 3
month
6,000 7,000 5,000
Maintaining System Balance: Output of one stage is the
exact input requirements for the next stage
Balanced
Balancedstages
stagesof
ofproduction
production
Units
per Stage 1 Stage 2 Stage 3
month
6,000 6,000 6,000
Capacity Analysis
Frequency of Capacity Addition (Two types of costs involved
if upgradation of capacity done too frequently or done infrequently)

External Sources of Capacity (Outsourcing & sharing capacity)

Decreasing Capacity (Sale of equipment/ liquidation of entire

facility)
 Bottleneck Analysis

As manager seek to match capacity to demand, decisions must be made,

about the size of specific operations or work areas in the larger system.
Each of the interdependent work areas can be expected to have its own
capacity.
Capacity analysis involves determining the throughput capacity of
workstations in a system and ultimately the capacity of the entire system.

Bottleneck – the bottleneck is an operation that is the limiting factor or the

constraint. It has the lowest effective capacity, or technically speaking, the
machine/workstation, which takes maximum time to do a job/task is termed
as bottleneck.
 Bottleneck time/ Cycle time– the process time of the slowest
workstation/process/machine (or maximum time taken by a workstation) in
the production system. In an assembly line, it is considered for the entire
system not a single workstation or process. Thus, in a parallel assembly line,
the approach to find bottleneck is bit different and discussed in later slides.
Throughput time – is the time it takes a unit to go through the
production/service from start to end, with no waiting. It’s the time of the
longest path through the system

Station Station Station

A B C
2 min/unit 4 min/unit 3 min/unit

Processing
time

Here slowest station is Station B, Thus, it is a bottleneck as it is reducing the

time to produce a unit. So bottleneck time is 4 min.
The throughput time to produce a new completed unit is 9 minutes (2+4+3 =9)
 Capacity analysis with parallel processes

First assembly line

Bread Fill Toaster

15 sec/sandwich 20 sec/sandwich 40 sec/sandwich
Wrap/
Order
deliver
30 sec/sandwich 37.5 sec/sandwich

Bread Fill Toaster

15 sec/sandwich 20 sec/sandwich 40 sec/sandwich

Second assembly line

Howard Kraye’s sandwich shop provides healthy sandwiches for customers. Howard has two
identical sandwich assembly lines. A customer first place and order, which takes 30 sec. The
order is then sent to one of the two assembly lines (because of parallel process, it can handle
two orders at same time). Each assembly line has two workers and three operations (1)
assembly worker 1 retrieves and cuts the bread (15 sec/sandwich), (2) assembly worker 2 adds
ingredients and places the sandwich onto the toaster conveyor belt (20 sec/sand), (3) the
toaster heats the sandwich (40sec/sand). Finally another employee wraps the heated sandwich
coming out of the toaster and delivers it to the customer (37.5 sec/sand). Howards wants to
determine the bottleneck time and the throughput time.
Clearly the toaster is the single-slowest resource in the five-step
process, but is it the bottleneck? Howard should first determine the
bottleneck time of each of the two assembly line separately, then the
bottleneck time of the combined assembly lines, and finally the
bottleneck time of the entire operation.

For throughput time, each assembly line is identical, so Howard

should just sum times for all five operations.
Because each of three assembly line operations uses a separate
resource (worker or machine), different partially completed
sandwiches can be worked parallelly at each station. Thus, the
bottleneck time of each assembly line is the longest time of each of
the three operations.

In this case, 40-seconds toasting time represents the bottleneck time

of each assembly line. Next, the bottleneck time of combined
assembly line operations is 40 seconds per two sandwiches, or 20
seconds/sandwich.
Therefore, wrapping and delivery with a process time of 37.5 sec/sandwich
appears to be bottleneck time of entire operations.
So capacity of the system in an hour = 3600/37.5 = 96 sandwiches
Throughput time = 30+15+20+40+37.5 = 142.5 seconds.
 Capacity analysis with simultaneous processes

Hygienist
cleaning
24 min/unit
Takes X- Develop Check
Check-in Dentist out
ray X-ray
2 min/unit 2 min/unit 4 min/unit 8 min/unit 6 min/unit
X-ray
exam
5 min/unit

Dr. Cynthia Knott’s dentistry practice has been cleaning customer’s teeth for decade.
The process for a basic dental cleaning is relatively straightforward: (1) the customer
checks in (2 min); (2) a lab technician takes and develops X-rays (2 and 4 minutes,
respectively); (3) the dentist processes and examines X-rays (5 min) while the
hygienist cleans the teeth (24 min); (4) the dentist meets the patient to poke a few
teeth, explain the X-ray results, and tell the patient to floss more often (8 min); and (5)
the customer pays and books her next appointment (6 min). A flowchart of the
customer visit is given above. Dr. Knott wants to determine the bottleneck time and
throughput time of this process.
With simultaneous processes, an order or a product is
essentially split into different paths to be rejoined later on. To
find the bottleneck time, each operation is treated separately,
just as though all operations were on a sequential path. To
find the throughput time, the time over all paths must be
computed, and the total time of the longest path is the
throughput time.
The bottleneck in this system is the hygienist cleaning
operations at 24 minutes/patient.
So capacity of the system in an hour = 60/24 = 2.5 patients
There are two paths and their time P1 = 2+2+4+24+8+6 = 46
minutes; P2 = 2+2+4+5+8+6 = 27 minutes.
Thus, throughput time is 46 minutes. Which implies a patient
should be out of the door after 46 minutes.
Practice problems
1. T. Smunt Manufacturing Corp. has the process displayed below. The
drilling operation occurs separately from and simultaneously with the
sawing and sanding operations. The product only needs to go through
one of the three assembly operations (the assembly operations are
parallel.

Assembly
Sawing Sanding 78 min/unit
15 min/unit 15 min/unit
Welding Assembly
8 min/unit
25 min/unit 78 min/unit

Drilling Assembly
27 min/unit 78 min/unit
a) Which operation is the bottleneck?
b) What is the throughput time for
the overall system?
c) If the firm operates 8 hours per
day, 22 days per month, what is
the monthly capacity of the
manufacturing process?
d) Suppose that a second drilling
machine is added, and it takes the
same time as the original drilling
machine, what is the new
bottleneck time and the
throughput time of the system?
Example: Process Mapping
Example
Example: Process Mapping
• What is the throughput time for this manufacturing process?

• Identify the bottleneck for this process?

• What is the cycle time for this process?

• What is the productive capacity of the process?

• What are the assumptions behind this computation?

Determining Capacity Requirements

1. Forecast sales within each individual

product line

2. Calculate equipment and labor

requirements to meet the forecasts

3. Project equipment and labor

availability over the planning horizon
Example of Capacity Requirements
A manufacturer produces two lines of
mustard, Fancy Fine and Generic line. Each is
sold in small and family-size plastic bottles.

The following table shows forecast demand

for the next four years.
Year: 1 2 3 4
FancyFine
Small (000s) 50 60 80 100
Family (000s) 35 50 70 90
Generic
Small (000s) 100 110 120 140
Family (000s) 80 90 100 110
Example of Capacity Requirements
(Continued): Product from a Capacity
Viewpoint
Question:
Question: Are
Are we
we really
really producing
producing twotwo
different
different types
types of
of mustards
mustards from
from the
the standpoint
standpoint
of
of capacity
capacity requirements?
requirements?
Answer:
Answer: No,
No, it’s
it’s the
the same
same product
product just
just
packaged
packaged differently.
differently.
Example of Capacity Requirements
(Continued) : Equipment and Labor
Requirements
Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200
•Three 100,000 units-per-year machines are available
for small-bottle production. Two operators required
per machine.

•Two 120,000 units-per-year machines are available

for family-sized-bottle production. Three operators
required per machine.
 35
Question:
Question:What
Whatare
arethe
theYear
Year11values
valuesfor
forcapacity,
capacity,machine,
machine,
and
andlabor?
labor?
Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6

Family-size Mach. Cap. 240,000 Labor 6
150,000/300,000=50% At 1 machine for 100,000, it
Small takes 1.5 machines for 150,000
Percent capacity used 50.00%
Machine requirement 1.50
Labor requirement 3.00 At 2 operators for
Family-size 100,000, it takes 3
Percent capacity used 47.92% operators for 150,000
Machine requirement 0.96
Labor requirement 2.88 ©
The McGraw-Hill Companies, Inc., 2004
 36
Question:
Question:What
Whatare
arethe
thevalues
valuesfor
forcolumns
columns2,
2,33and
and44in
inthe
thetable
tablebelow?
below?
Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6

Family-size Mach. Cap. 240,000 Labor 6

Small
Percent capacity used 50.00% 56.67% 66.67% 80.00%
Machine requirement 1.50 1.70 2.00 2.40
Labor requirement 3.00 3.40 4.00 4.80
Family-size
Percent capacity used 47.92% 58.33% 70.83% 83.33%
Machine requirement 0.96 1.17 1.42 1.67
Labor requirement 2.88 3.50 4.25 5.00
©The McGraw-Hill Companies, Inc., 2004
Determining capacity requirements-
Example

The Whitening company produces two

varieties of detergents : Sirf and ExSirf.
Each is available in bags and pouches. The
management would like to determine
equipment and labor requirements for the
next 5 yrs?
 The data of forecast demand values are
given-
Year
1 2 3 4 5
SIRF
Bags(000s) 60 100 150 200 250
Pouches 100 200 300 400 500
EXSIRF
Bags 75 85 95 97 98
Pouches 200 400 600 650 680
Three machines that can package up to
150,000 bags per year are available. Each
machine requires two operators and can
produce bags of both sirf and EX-sirf.

Also, five machines that can package up to

250,000 pouches every year are available.
Three operators are required for each
machine, which can produce pouches of
both sirf and EX-sirf.
Decision trees
Using decision trees to evaluate capacity
alternatives.
Decision trees are composed of decision
nodes with branches to and from them.
Usually squares represent decision points
and circles represent chance events.
Branches from decision points show the
choices available to the decision maker
Branches from chance events shows the
probabilities for their occurrence.