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CAPACITY PLANNING
XLRI, Jamshedpur
Production&OperationsManagement
CapacityPlanning:whyitisimportant
Ensurethatsupplyanddemandmatchascloselyaspossible,
tominimizelostopportunities/wastedproduction.
Economiesvs.diseconomiesofscale.
Stayingcompetitive(marketshare)/stayingalive.
Capacitycanraiseindustryentrybarriers;capacityexpansion
announcementscanbesignalstonewentrants&preempt
competition.
XLRI, Jamshedpur
Production&OperationsManagement
Capacity
Maximumrateofoutputofaresource,aprocessora
system.
Assumingrealisticworkschedules&machineusage,thatis
sustainablelongterm.
MeasuresofCapacity
Outputmeasures
Inputmeasures
XLRI, Jamshedpur
Production&OperationsManagement
MeasuresofCapacity
Outputmeasures
Fewproducts,highvolumes,standardizationishigh,flexibilitylow.
RIL,JamnagarPlant:197,000m3 ofcrudeoilperday.
MarutiSuzuki:14,50,000vehicleunitsperyear.
Anairline:25,000seatmilesperdayor,2millionpassengers
peryear.
Theevaluationofcapacityavailabletakesinto
accountscheduleddowntimesandbreakssuchas
holidayshutdowns.Itmayormaynotinclude
unforeseenbreakdowns&otherinterruptions.
XLRI, Jamshedpur
Production&OperationsManagement
MeasuresofCapacity
Inputmeasures
Manyproducts,lowvolumes,standardizationislow,flexibilityhigh.
Amachineshop:10lathes,3millingmachines,1CNCmachine.
Anoffsetprinter:3singlecolourm/c,1fourcolourm/c.
IndigoAirlines:fleetof98A320s.
Theairlineflies~630flightsconnecting~40destinationseachday.Thinkofeach
sourcedestinationpairasauniqueproduct(service).Hence,largevariety.
ProblemwithInputmeasures
Mustconverttoanoutputrate,inordertocompareitwith
demand,computeutilizationetc
XLRI, Jamshedpur
Production&OperationsManagement
Utilization
Thedegreetowhichaparticularmachine,space,workforce,or
eventheentireprocess/system,isbeingused.
Generallymeasuredasanaverageoveratimeperiod(%):
Utilization=
XLRI, Jamshedpur
Averageoutputrateinagiventimeperiod
Capacityavailableinthattimeperiod
X100
Production&OperationsManagement
UtilizationExample
Asteelmakingplantcanproduce200tonsperhour,operating24
hoursandisscheduledtooperate315daysayear.Demandina
givenyear=1,120,000tonsandassumethatallofitismet.
Capacity=200x24x315=1,512,000tons/yr
Actualoutput=1,120,000tons/yr
Utilization=1,120,000/1,512,000=74.07%
XLRI, Jamshedpur
Production&OperationsManagement
UtilizationExample
Asmallairlineonaparticularday
AIRCRAFT
# seats
available
#
passengers
traveled
Distance
covered
(km)
Seat-km
Passenger
km
280
176
421
117880
74096
160
127
640
102400
81280
72
70
250
18000
17500
410
291
520
213200
151320
280
252
680
190400
171360
410
128
520
213200
66560
Total
855080
562116
Passengerloadfactor=Totalpassengerkm/Totalseatkm
=562116/855080
=65.74%
XLRI, Jamshedpur
Production&OperationsManagement
Canutilizationexceed100%?
Yes,cansometimesexceed100%owingtotemporary
useofmarginalmethodsofproductionsuchas:
Overtime.
Reducedmaintenancedowntimes.
Reducedplannedshutdowns.
Overstaffing.
Thesecannotbesustainedoveralongtime.
Note:Sincetheseareshortterm&temporaryinterventions,the
maximumcapacityisnotchanged&thedenominatorremains
thesame.
XLRI, Jamshedpur
Production&OperationsManagement
Whyisutilizationgenerally<100%?
Breakdownsofmachines,labourstrikes,unforeseen
interruptions.
Insufficientsupplyofinputssuchasrawmaterials,
labourandelectricity.
Demand<capacity.
Capacitycanbeincreasedonlydiscretely.
XLRI, Jamshedpur
10
Production&OperationsManagement
Capacitycushion
Theamountofreservecapacityaprocesshas,to
handlesuddenincreasesindemandortemporary
lossesofproductioncapacity
Capacitycushion=100% averageutilizationrate
Largecushionsdesirable
Smallcushionsdesirable
Variabilityishighe.g.aretail
outlet~40%cushion,hotel
industry~40%cushion.
Industryiscapitalintensive.
Candetectinternal
inefficienciesbetter.
Papermanufacturing<10%,
cruiseshipabout5%.
HW: Searchtheinternetforaverageutilizationsindifferent
industries.Whatfactorsdrivethatlevelofutilization?
XLRI, Jamshedpur
11
Production&OperationsManagement
Longtermcapacityplanning
1.Estimatefuturecapacityrequirements
2.Assessgapbycomparingwithavailablecapacity
3.Identifyalternatives.
4.Evaluatealternativestopickthebestone.
XLRI, Jamshedpur
12
Production&OperationsManagement
Evaluatingfuturecapacityrequirement
FourproductsA,B,CandDaretobeproduced.Thetable
givestheirestimatedannualdemand,productionlotsizes,
setuptimes,unitprocessingtimesanddesiredcapacity
cushion.AparticularCNCmachinecanbeoperated312days
ayear,16hoursaday.Acapacitycushionof12%isdesirable
toaccountforvariationandunforeseeninterruptions.How
manyCNCmachinesareneeded?
Product
Avg proc
time/unit (min)
Avg set up
time (min)
Lot Size
Estimated
demand (/yr)
72
300
80000
2.5
181
500
45000
147
450
90000
195
350
28000
XLRI, Jamshedpur
13
Production&OperationsManagement
Evaluatingfuturecapacityrequirement
Avg proc Avg set
Product time / unit up time
(min)
(min)
A
B
C
D
8
2.5
4
2
72
181
147
195
Estimated
Lot Size demand
(/yr)
300
500
450
350
Capacity
demanded (min)
8000
4500
9000
2800
659200
128790
389400
71600
1248990
Capacitypermachine=312*16*0.88=4393hrs
M=1248990/60*4393=4.7~5machines.
XLRI, Jamshedpur
14
Production&OperationsManagement
Evaluatingfuturecapacityrequirement
Wecannothaveexactly4.7machines.
eitherroundoffto5machines.
or,have4machines&usetemporarymeasuresto
increasecapacity.
Ifwehave5machinesthen,
actualcapacityachieved=(5*312*16*60)=1497600min
actualcapacitycushion=(1497600 124,8990)/1497600
=16.6%
XLRI, Jamshedpur
15
Production&OperationsManagement
Decidingbetweenalternatives
Arestaurantisplanningan
expansionatthebeginningofa
givenyear itcanchoose
betweenalargeandasmall
expansion.
Source: http://www.veggieplaces.co.uk/images
Thedemandintheimmediatelyfollowingyearcanbebighigh
orlowwithlikelihoodsof0.6and0.4respectively.Ifthe
demandishighafterasmallexpansion,thecompanycan
choosetoexpandafter6monthsandexploitit.Thedecision
treeshowstheprojectreturnsforeachpath.Whatshouldthe
restaurantchoose?
XLRI, Jamshedpur
16
Production&OperationsManagement
Decidingbetweenalternatives
Low demand [0.40]
Rs. 15 lakhs
Do not expand
Small
expansion
Rs. 27 lakhs
2
Expand further
Rs. 62 lakhs
1
Large
expansion
XLRI, Jamshedpur
Rs. 8 lakhs
Rs. 90 lakhs
17
Production&OperationsManagement
Decidingbetweenalternatives
Low demand [0.40]
Rs. 15 lakhs
Do not expand
Small
expansion
Rs.
57.2
lakhs
1
Large
expansion
XLRI, Jamshedpur
Rs. 27 lakhs
Expand further
Rs. 62 lakhs
Rs. 8 lakhs
Rs. 90 lakhs
18