Operation management

TOPIC - CAPACITY MANAGEMENT

GROUP MEMBERS

ABHISHEK SHIVDAS - 46

VISHWADEEP PAWAR – 36

AFROZ - 58

MOHAMMED ADIL- 31

SAVITA BODKE - 08
 TABLE OF CONTENTS

SR.No Contents Pg. no.

1. INTRODUCTION (CAPACITY MANAGEMENT)

2. TYPES OF CAPACITY MANAGEMENT

3. CAPACITY PLANNING PROCESS

4. PRODUCTION SCHEDULING

5. LONG-TERM & SHORT TERM CAPACITY

STRATEGIES
6. PROBLEMS

7. CASE STUDY

8. BIBLOGRAPHY

9. CONCLUSION

INTRODUCTION
Capacity is the capability of a manufacturing or service resource such as a facility, process,
workstation, or piece of equipment to accomplish its purpose over a specified time period.
Capacity planning is the process of determining the production capacity needed by an
organization to meet changing demands for its products. In the context of capacity planning,
"capacity" is the maximum amount of work that an organization is capable of completing in a
given period of time. The phrase is also used in business computing as a synonym for Capacity
Management

In any manufacturing or service operations, a manager is confronted with the key questions like,
whether they can meet the projected demand or not? Whether the necessary resources will be available
at required time or not? What shall be the associated cost? How can be varying product mix with
fluctuating demand met? These questions arise because the capacity is ‘finite’. On one hand, the
different orders are to be delivered at committed time with specified quantity. At the same time one
cannot enhance resources outright. These finite resources are decided with long range (term) planning
and are to be operated on medium range and short range time intervals.

Understanding Capacity

The resources available to the organization—facilities, equipment, and labor—how they are
organized, and their efficiency as determined by specific work methods and procedures
determine capacity.

Capacity can be viewed in one of two ways:

1. As the maximum rate of output per unit of time, or

2. As units of resource availability.

E.G .M/s EIMCO ELECON (I) Limited manufactures different type of mining equipment and
supplies to government mining corporations through tenders. A mining equipment is an
assembly of varieties of electric, mechanical and hydraulic systems and involves welding,
machining of cast and forged components with complex geometries. The company has produced
206 equipments in year 2008-09. The projected demand for next year is ~350 units. Naturally,
the manager has to think that how he can manage the demand, how much with the existing
facilities? How much of the demand has to be met by subcontracting/ overtime or cannot be met?
As the orders may comprise of product mix of their product range (3 types of mining equipment
comprising more than 15 different models with different specifications) and are to be delivered
within average of 8-16 weeks. The company has state of art machine-shop equipped with CNC
machines. The varieties of component parts or sub-assemblies like front frame, rear end support,
main frame, etc. are routed through machine-shop.

The company management feels that their machine-shop is capable to meet the requirement.
However, an assessment of capacity utilization is necessary, as the available hours are not
efficiently used for production. The aim is to the enhance rate of production from existing
Capacity by improving the utilization and efficiency

The present work is an attempt to determine the capacity utilization and its effectiveness of the
machine-shop so as to work out the rated capacity. To measure the capacity the available hours
of the relevant machines and hours used for production are required. Apparently it looks simple
to get data of available hours and the production hours from the records. However there are
many deceptions like available hours for which machines are to be counted, for the entire
machine-shop or typical one? How the production hours to be found out? Another difficulty is to
define capacity in numbers for such a product mix. The present work addresses these questions.
A methodology has been devised to determine available hours and production hours based on
rough cut capacity evaluation. It is also felt that the data collected from the route sheet to
determine production hours is not reflecting the true capacity. Hence a sample study of recording
production hours is devised and carried out. Such studies are very useful to the company in
capacity evaluation, capacity planning and capacity management.
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. Globalization adds complexity

8. Impacts long range planning

TYPES OF CAPACITY MANAGEMENT

 Fixed capacity: This refers to the capital assets (buildings and equipments) a firm
possesses at a particular time. It cannot be easily changed in a short period of time.
 Variable capacity (or adjustable capacity): This refers to the size of the workforce, the
number hours per day or per week the equipment and labour work and the extent of
overtime work and subcontracting of work.

 Immediate capacity is that which can be made available within the current budgeted
period.

 Potential capacity is that which can be made available within the decision horizon of the
top management (i.e., strategic or long-term planning period).

 Design capacity (or installed capacity). It is the planned rate of output of goods or
services under normal working conditions. It sets the upper limit to capacity assuming
that there are no capacity losses due to absenteeism, poor planning, non-availability of
materials, power out, equipment breakdown etc. it is the theoretical maximum capacity
which cannot be realised in actual working conditions. It is the maximum output that can
possibly be attained.

 Effective or practical or operating capacity: It is the capacity which can be utilised

after taking into account the capacity losses due to inefficiencies, bad planning, rejections
and scrap rate etc. It could be 75% to 85% of the design or installed capacity.

 System capacity is the maximum output of a specific product or product mix, a

production system can produce. It is less than the design or installed capacity because of
the limitation on the system due to 1. Changes in the product mix, 2. quality
specifications and 3. the balance (matching) of equipment and labour. It is also known as
effective capacity of the total plant.
 Normal or Rated capacity: It is the estimated quantity of output or production that
should be normally achieved taking into consideration the overall efficiency of
equipment and labour (estimated by Industrial engineering department). The actual
capacity which is available for utilization is less than the rated capacity and is expressed
 as a percentage of rated capacity.

 Utilized capacity : This is the actual output achieved during a particular time period. The
actual output is less than the rated capacity because of limitations due to the factors such
as actual demand being less than the rated capacity, employee absenteeism, labour
inefficiency, machine capability etc. The actual output will be less than the system
capacity which in turn will be less than the design capacity due to various constraints on
capacity utilization and also due to capacity losses which are difficult to avoid.

 Peak capacity : It is the maximum output that a process or facility can achieve under
ideal conditions. peak capacity can be sustained only for a few hours in day or a few days
in a month. Peak capacity can be reached by using excessive overtime, extra shifts,
overstaffing and subcontracting.

 Excess capacity or surplus capacity : it is the excess or unutilized capacity which is

available as surplus to be utilized for any new customer order or any increase in
forecasted demand for a
1) future time period. The excess capacity occurs because of: Seasonal or cyclical
fluctuations in demand.
2) Willful higher installed capacity which is more than the required capacity, taking
into consideration anticipated increase in demand.
3) Changes in market conditions (shift in consumers tastes and habits, change in
product life cycle stage, product obsolence etc.)

Excess capacity may be utilized to produce current products in excess of demand and
building up finished products inventory to be made use of at times of higher demand (more than
supply or rated output).

 Bottleneck capacity: Most facilities have multiple operations and often their effective
capacities are not identical. A bottleneck is an operation which has the lowest effective
capacity of any operation in lowest effective capacity exists is known as the bottleneck
 centre and the capacity of the bottleneck centre which puts a limits on the system
capacity is referred to as bottleneck capacity of the bottleneck centre or machine.

THREE STEPS FOR CAPACITY PLANNING

1. Determine Service Level Requirements

The first step in the capacity planning process is to categorize the work done by systems
and to quantify users’ expectations for how that work gets done.

2. Analyze Current Capacity

Next, the current capacity of the system must be analyzed to determine how it is meeting
the needs of the users.

3. Planning for the future

Finally, using forecasts of future business activity, future system requirements are
determined. Implementing the required changes in system configuration will ensure that
sufficient capacity will be available to maintain service levels, even as circumstances
change in the future.

Efficiency and Utilization

Actual output
Efficiency =
Effective capacity

Actual output

Utilization =

Design capacity

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

Measuring capacity
 (A) In case of tangible goods
Here capacity is easy to calculate and is measured in terms of inputs or outputs of
the conversion process.
Organizations Measure of capacity
Automobile factory No. of vehicles manufactured
Sugar mill in tones
Steel plant in tones of steel
Electricity in mega watts

(B) In case of intangible goods

Here capacity is measured in terms of service capacity

Organizations Measure of capacity
Hospitals no of beds
Airlines no of seats
Cinema halls no of seats
University no of students
Insurance company no of policies sold
Banks no of accounts holders

Capacity, being the ability to produce work in a given time, must be measured in the unit of
work.

For example, consider a factory that has a capacity of 10,000 " machine hours" in each 40 hour
week. This factory should be capable of producing 10,000 "standard hours of work" during a 40-
hour week. The actual volume of product that the factory can produce will depend on:
 Capacity Planning Process

In summary, we have shown these basic steps toward developing a capacity plan:

1. DETERMINE SERVICE LEVEL REQUIREMENTS

a. Define workloads
b. Determine the unit of work
c. Identify service levels for each workload

2. ANALYZE CURRENT SYSTEM CAPACITY

a. Measure service levels and compare to objectives
b. Measure overall resource usage
c. Measure resource usage by workload
d. Identify components of response time

3. PLAN FOR THE FUTURE

a. Determine future processing requirements
b. Plan future system configuration

By following these steps, you can help to ensure that your organization will be prepared for the
future, ensuring that service level requirements will be met using an optimal configuration. You
will have the information necessary to purchase only what you need, avoiding over-provisioning
while at the same time assuring adequate service.
PROCESS SUPERVISION

Capacity Management is a continuous and iterative process that monitors, analyses and evaluates
the performance and capacity of the IT infrastructure and, with the data obtained, it optimises the
service or submits an RFC to Change Management.

All the information obtained in these activities, and that generated by Capacity Management
using that information, is stored and recorded in the Capacity Database (CDB).

Monitoring

The main objective is to ensure that the performance of the IT infrastructure matches the
requirements of the SLAs.

As well as technical aspects, monitoring needs to include details of licences and other
administrative information.

Analysis and Evaluation

The data collected needs to be analysed to assess whether corrective action needs to be taken,
such as requesting an increase in capacity or better Demand Management.

Optimisation and changes

If it is decided that capacity needs to be increased, an RFC will be raised and sent to Change
Management to set in train the whole process involved in implementing the change. Capacity
Management will lend its support throughout the process and it will be jointly responsible,
together with Change Management and Release Management for ensuring that the change
requested meets the envisaged objectives.

In the case where a simple rationalisation of demand will be enough to resolve the deficiencies or
noncompliances with SLAs, Capacity Management itself will be responsible for managing this
sub-process.

Capacity Database

The CDB must cover all the business, financial, technical and service information received and
generated by Capacity Management in relation to the capacity of the infrastructure and its
elements.

Ideally, the CDB must be interrelated with the CMDB so that the CMDB is able to give a
complete image of the systems and applications and includes all the information about their
capacity. However, this does not mean that the two databases cannot be "physically
independent".

CONSTRAINTS ON CAPACITY

In capacity management there are usually two potential constraints - TIME and CAPACITY

Time may be a constraint where a customer has a particular required delivery date. In this
situation, capacity managers often "plan backwards". In other words, they allocate the final stage
(operation) of the production tasks to the period where delivery is required; the penultimate task
one period earlier and so on. This process helps identify whether there is sufficient time to meet
the production demands and whether capacity needs to be increased, albeit temporarily.

PRODUCTION SCHEDULING
A schedule is a representation of the time necessary to carry out a particular task.

A job schedule shows the plan for the manufacture of a particular job. It is created through
"work / study" reviews which determine the method and times required.

Most businesses carry out several production tasks at one time - which entails amalgamating
several job schedules. This process is called "scheduling". The result is known as the production
schedule or factory schedule for the factory/plant as a whole.

In preparing a production schedule, attention needs to be paid to:

 Delivery dates (when are finished products due?

 Job schedules for each relevant production task
 Capacities of production sections or departments involved
 Efficiency of these production sections or departments
 Planned holidays
 Anticipated sickness / absenteeism / training
 Availability of raw materials, components and packaging

There are two key problems with production scheduling:

(1) Measurement of performance (e.g. should financial performance be most important (e.g.
minimise the amount of stock), or are marketing objectives more important - e.g. always produce
enough to meet customer demand).

(2) The large number of possible schedules - often caused by too much complexity or variety in
the production needs of the business.

SOLVED PROBLEM
An automobile transmission-assembly factory normally operates two shifts per day, five days per
week. During each shift, 400 transmissions can be completed under ideal conditions. What is
the capacity of this factory?

Capacity = (2 shifts/day)(5 days/week)(400tranmissions/shift)(4 weeks/month)

= 16,000 transmissions/month

CALCULATING PROCESSING REQUIREMENTS

Standard
Standard
Annual processing
processingtime Processing
Annual time Processingtime
time
Product Demand per unit (hr.) needed (hr.)
Product Demand per unit (hr.) needed (hr.)

#1
#1 400
400 5.0
5.0 2,000
2,000
#2
#2 300
300 8.0
8.0 2,400
2,400
#3
#3 700
700 2.0
2.0 1,400
1,400
5,800
5,800

Q: How many machines are needed? A machine operates 10 hours per day and 250 days a year.

One machine has total processing time per year:

10 X 250 = 2500.
Number of machines needed is 5800/2500 = 2. 35
THREE machines!
• During one week of production, a plant produced 83 units of a product. Its
historic highest or best utilization recorded was 120 units per week. What is
this plant’s capacity utilization rate?

Answer:

Capacity utilization rate = Capacity used

Best operating level

= 83/120

=0.69 or 69%
 LONG-TERM CAPACITY STRATEGIES
• In developing a long-range capacity plan, a firm must make the basic economic trade-off
between the cost of capacity and the opportunity cost of not having adequate capacity.

• Long-term capacity planning must be closely tied to the strategic direction of the
organization—what products and services it offers.

• Complementary goods and services can be produced or delivered using the same
resources available to the firm, but whose seasonal demand patterns are out of phase
with each other.

• Complementary goods or services balance seasonal demand cycles and therefore use the
excess capacity available, as illustrated in Exhibit 10.5.
 SHORT-TERM CAPACITY STRATEGIES

• Add or share equipment: lease equipment as needed or set up a partnership

arrangement with capacity sharing. Examples: mainframe computers, CAT scanner, farm
equipment.

• Sell unused capacity: sell idle capacity to outside buyers and even competitors.
Examples: computing capacity, perishable hotel rooms.

• Change labor capacity and schedules: short term changes in work force levels.
Examples: overtime, extra shifts, temporary employees, outsourcing.

• Change labor skill mix: hiring the right people.

• Shift work to slack periods

FACTORS AFFECTING DETERMINATION OF PLANT CAPACITY

1) Market demand for the product,

2) Capital investment required,
3) Level of automation desired,
4) Type of technology selected,
5) Changes in product design, process design, market conditions and product life cycles,
6) Product obsolence and technology obsolescence and
7) Flexibility for capacity additions.
 CASE STUDY

HEATHROW AIRPORT
Decisions about capacity often have expensive consequences. This is particularly noticeable
with airports, where any expansion is expensive in its direct costs, environmental impact, effect
on local communities, and so on. Heathrow is London’s main airport and is one of the busiest in
the world. Demand for air travel around London continues to grow, but Heathrow’s limited
capacity means that much of this has been transferred to other airports. Gatwick, Stansted and
Luton have all had major expansions, and all have plans for yet more capacity in the future.

For a long time Heathrow’s capacity has been limited by the bottleneck at its passenger
terminals. The fifth terminal will remove (at least for some time) this limit and increase overall
capacity.

 How can BAA measure the capacity of Heathrow? What factors affect this capacity?
The capacity of an airport is usually stated in terms of the number of passengers that can use it in
a year. This, in turn, depends on the number of other measures, particularly:

o Air-side operations – largely the number of passengers that planes can deliver and
take away, determined by the number of runways, time slots available for planes to
land and take-off, size of planes, occupancy, etc
o Land-side operations – largely the number of passengers that the terminal buildings
can handle, dealing with all aspects of arrivals, departures and associated services.
For each of these, BAA can use many related measures for specific aspects of capacity. As usual
with capacity, the actual limits are largely a matter of agreement than physical limits. For
example, the separation of planes is an agreed distance that is considered safe, and the number of
check-in desks is set by agreed levels of customer service.
Larger planes, greater occupancy, more time slots for take-off and landing, and new systems
have already increased capacity of the Heathrow. For a long time the bottleneck has been
identified as terminal capacity. The fifth terminal will remove this (or more accurately move it
to another part of operations). The new terminal improves both air-side and land-side operations,
removing current bottlenecks and significantly increasing overall capacity.

 For years, Heathrow has been operating beyond its designed capacity. What effects
does this have?
The planned capacity is a theoretical limit, so when this is exceeded it means that the limit has
somehow been raised. Saying that the airport is working beyond its designed capacity really
means that it is working more efficiently than expected and is finding ways of dealing with more
passengers than expected. But the capacity is largely an agreed measure, and obviously does not
reflect the maximum number of people that could fit into the space. It would really be fairer to
say that the airport is working beyond its agreed effective capacity. This presumably means that
some facilities – those at the bottlenecks – are stretched beyond their limits. This can raise many
related problems and inevitably means that customer service declines.

 Airports like Heathrow continue to expand. What will eventually limit their capacity?
This is difficult to answer. It seems that the current growth in demand for air travel is likely to
continue for the foreseeable future, in the way that road travel has been expanding for well over a
century. But there must ultimately be some limits, and these might come from several sources.
Air travel might become less popular, perhaps because of changing social habits, costs,
population levels, attitudes towards the environment, options for alternative types of transport,
etc. In the shorter term, airports might increase the capacity of current facilities by using them
more efficiently, installing better systems, and generally improving operations. For example,
introducing automation (as described in the case for IATA) can dramatically increase the number
of passengers who can check-in through current facilities; improving control systems can
increase the number of plane movements; new planes can increase passenger density.
BIBLOGRAPHY
CONCLUSION