Capacity Planning

Once Product/services and

corresponding process/procedures
are decided.

. Next step is to:

Plan systems
CAPACITY
(Informally) How much ???
 Capacity (defined)
Maximum rate of output for a facility
Greatest level of output the firm can
reasonably sustain by using realistic employee
work schedules & the equipment currently in
place
 Why (focus on) Capacity ?

The Operations Manager must provide the

CAPACITY to meet current & future demands;
otherwise.
 Why (focus on) Capacity ?

The Operations Manager must provide the

CAPACITY to meet current & future demands;
otherwise.

..the organization will miss opportunities for

growth & profits
Examples of Capacity Measures
( Are examples based on o/p or i/p???)

Variety of situation Variety of Capacity

Measures

Hospitals - Patients treated/day

Retailer - Annual sales dollar

generated/ sq. ft.

Theatre- No. of seats

Job shop - No. of machine hours

1a.MEASURES OF CAPACITY
No single capacity measure is applicable to all types of
situations.
OUTPUT(o/p) measures INPUT(i/p) measures

LINE FLOW PROCESSES FLEXIBLE FLOW PROCESSES

(Less variety & mass (More variety & mid-sized
production) volume)
Eg: Eg:
Firm making only one type of Copying center with
car customized o/p

If amount of customization & If amount of customization &

variety in product mix variety in product mix
increases o/p based CAPACITY increases i/p based CAPACITY
measure is less useful. measure is useful.

i.e. Product mix complicates But, Demand complicates I/P

O/P measure measure, as demand is o/p
based.
Changing Demand in terms of
i/p:
(Demand O/P rate I/P
 Utilization (%)

Degree to which equipment,

space or labor is currently
being used (so as to add or remove)

Avg. o/p rate (time,

cust.,units, $)
Utilization=----------------------------------------------
---x100%
Maximum Capacity (time,
 Maximum Capacity

Effective Capacity Peak Capacity

 Effective Capacity

The max. output that a process or

firm can

economically sustain under normal

conditions.

(Definition of Capacity makes more sense when defined

based on Effective Capacity Refer next slide for Second
definition of Capacity)
 Capacity (definition)

Maximum rate of output for a facility

Greatest level of output the firm can
reasonably sustain by using realistic employee
work schedules & the equipment currently in
place
 Peak Capacity

The max. output that a process or

firm can achieve under ideal
conditions.
(Peak Capacity cannot be sustained; may be possible
only few hours a day, few days a week, etc.)

Rated Capacity:
In case of equipment alone(instead of
entire firm/process) Peak Capacity
Rated Capacity
 Utilization (%)
Degree to which equipment, space or
labor is currently being used (so as to add or
remove)
PBLM 1. : If operated around the clock under
ideal conditions, an engine manufacturer
can make 100 engines per day. Management
believes that a max. o/p rate of only 45
engines per day can be sustained
economically over long time. On an average
50 engines are produced a day. Find
Utilization relative to Peak & Effective
capacity respectively.
Avg. o/p rate (time, cust.,units, $)
Utilization=-------------------------------------------------x100%
Maximum Capacity (time, cust.,units, $
 Increasing Maximum
Capacity

BOTTLE NECK OPERATION WITH

LOWEST EFFECTIVE CAPACITY & LIMITS
SYSTEMS O/P
Increasing max. capacity means increasing bottleneck
capacity.

As the facility can produce only as fast as the slowest

operation.
 Capacity Bottlenecks
1, 2, 3 are Operations taking processing time 200/hr, 50/hr, 200/hr
respectively

To
Inputs 1 2 3
customers
200/hr 50/hr 200/hr

(a) Operation 2 a bottleneck

4-15
 Capacity Bottlenecks

To
Inputs 1 2 3
customers
200/hr 200/hr 200/hr

(b) All operations bottlenecks

4-16
Result of floating bottleneck
Floating bottleneck are calculated
due to variable work loads, changing
product mix as demand may vary
from time-time (even in a days time)
Floating bottlenecks complicate
determining Effective Capacity
 Capacity Strategies
Sizing Capacity Cushions
Capacity Cushion - Amount of reserve
capacity that a firm maintains to handle demand/
temporary loss of Production capacity.

i.e. Reserve capacity used to deal with sudden

increase (surge) in demand
Capacity Cushion = 100% - Utilization Rate Eff. Cap. (%)

Primary Disadvantage :
Unused capacity costs money
 Capacity Strategies
Timing & sizing expansion:

o Expansionist strategy
o Wait-and-see strategy
o Follow-the-leader
strategy
Timing & Sizing Expansion

When to expand and by how

much ???

Timing Sizing of expansion are

related:

If demand is increasing & time

between increments increases, size
of increments must also increase.
Timing & Sizing Expansion
(Third Dimension)

When to expand and by how

much ???
Three strategies could give a better understanding:

Expansionist
Two extreme strategies
Wait-and see

Follow-the-leader (intermediate) : expanding when

others do
 (contd) Timing and Sizing
Expansionist Strategies

Planned unused Forecast of capacity

capacity required
Capacity

Capacity
increment

Time between
increments

Time
 Expansionist Strategies

It stays ahead of demand, minimizes

the chance of sales lost to
insufficient capacity.
Favours,
Market share-(other firms must sacrifice
some of their market share or risk burdening the industry
with overcapacity)

Fast rate of learning.

 Capacity Timing and Sizing
Wait-and-see Strategy

Planned use of Forecast of capacity

short-term options required
Capacity

Capacity
increment
Time between
increments

Time
 Wait and See Strategy
The wait-and-see strategy lags
behind demand.
how?
Use of overtime
Temporary workers
Subcontractors
Postponement of preventive maintenance.
b)Systematic
approach
to Capacity
 b) Systematic Approach to Capacity
Decisions:
(Steps 1-4)
1. Estimate Capacity Requirements
(Compute No. of machines required)

2. Identify Gaps
(Compute Capacity Gap = [Projected demand - Current
capacity])
Base case?
3. Develop Alternatives Expansionist?
Wait-and-see?
(Develop alternative plans to cope with projected gaps
Follow-the-
) leader?
What if analysis (Qualitative Cash flow(Quantitative
4. Evaluate Alternatives
concerns): (Based on)
concerns):
Uncertainties about demand The difference between
Competitive reaction the flows of funds into and
Technological change out of the organization over
Cost estimates a period of time
(Four factors cannot be quantified
but assessed on judgment and
Base case Do nothing (not
experience)
changing capacity)
 Capacity Decisions
Example (Step 1 only)
Estimate Capacity Requirements for two
clients, given : requirements, process time,
etc.
Item Client X Client Y
Annual demand forecast (copies) (D) 2000.00 6000.00
Standard processing time (hour/copy)(p) 0.50 0.70
Average lot size (copies per report)(Q) 20.00 30.00
Standard setup time (hours)(s) 0.25 0.40

[Dp + (D/Q)s]product 1 + ... + [Dp + (D/Q)s]product n

M=
N[1 (C/100)]

M - No. of machines required

 Capacity Decisions
Estimate Capacity Requirements

Item Client X Client Y

Annual demand forecast (copies) 2000.00 6000.00
Standard processing time (hour/copy) 0.50 0.70
Average lot size (copies per report) 20.00 30.00
Standard setup time (hours) 0.25 0.40

[2000(0.5) + (2000/20)(0.25)]client X + [6000(0.7) + (6000/30)(0.4)]client Y

M=
(250 days/year)(1 shift/day)(8 hours/shift)(1.0 15/100)

Used capacity: 85%

 Capacity Decisions
Estimate Capacity Requirements

Item Client X Client Y

Annual demand forecast (copies) 2000.00 6000.00
Standard processing time (hour/copy) 0.50 0.70
Average lot size (copies per report) 20.00 30.00
Standard setup time (hours) 0.25 0.40

5305
M= = 3.12 4 machines
1700