CAPACITY PLANNING AND CONTROL

Capacity planning and Control: Capacity planning is the process of determining the necessary people, machines and physical resources to meet the production objectives of the firm. Capacity :
It is the maximum rate at which a system can accomplish work under ideal conditions. It is determined by bottleneck.

Capacity control :
Defined as the process of monitoring output, composing it with the capacity plan, determining if variations exceed pre- established limits, and taking corrective actions. For e.g.: washer can wash 80 dishes/hr and a dryer can dry 100/hr. then the system capacity is 80 per hr, determined by bottleneck(in this case the washer).

EFFECTIVE CAPACITY OR UTILIZATION

It is the percent capacity expected. It is the capacity a firm can expect to achieve given its product mix, methods of scheduling, maintenance, standard of quality. It can be completed from the formula

Effective capacity = expected capacity/capacity.

Depending on how facilities are used and managed, it may be difficult or impossible to react 100% efficiency. Efficiency is a measure of actual output over effective capacity.

Efficiency = Actual output/Effective capacity

RATED CAPACITY
It is the measure of the maximum usable capacity of a particular facility.
Rated capacity Capacity (always)

Rated Capacity = (capacity) * (utilization) * (efficiency)

For e.g. A drinking work centre has three drills, three operators per shift, one shift per day, five days worked per week and eight hours work per shift. Machine utilization is 95% and operator efficiency 85%. What is the rated capacity. Sol: capacity = 3*8*5 = 120 hr/week and rated capacity = 0.95*0.85*120 = 96.9 hr/week.

PREDICTING FUTURE CAPACITY REQUIREMENTS

Long- range forecast of demand are difficult to make. There are always contingencies that can have important effects such as the competitive situations, recessions, wars, oil embargos or sweeping technological innovations. Therefore, predicting demand also requires an assessment of contingencies.
Case 1 Mature products with stable demand growth Many products and services enjoy mature, stable markets In long term trend demand is relatively stable compared to other situations Examples of mature products and commodities are steel, fertilizers, cement etc, and services are airlines and health care. Capacity of various subunits should be balanced. Eg. The existing receiving and shipping operations and factory warehouse area may accommodate 50% increase in output but the assembly line may already be operating at full capacity and machine shop at 90% of capacity. These capacity gaps can then be related to future capacity requirements Identifying size and timing of projected capacity gaps provides an input for the generation of alternative plans

Case 2- New products and risky situations

It is difficult to predict capacity requirement for new products initially or in the rapid development phase of product life cycle The prediction of capacity requirement these kind of situation must place greater emphasis on the distribution of the expected demand Optimistic and pessimistic prediction can have a profound effect on capacity requirement. There is a considerable uncertainty about the future markets because of economic factors and developing competition. In these situations these predictions affect capacity requirements drastically.

GENERATION OF ALTERNATIVE CAPACITY PLANS

When the capacity gaps have been identified, alternative plans can be considered. These may involve the size and timing of added capacity, the use of overtime and multiple shifts, the use of overtime and multiple shifts, the use of outside capacity sources, the absorption of lost sales, or the location of new capacity.

(i) Large or small capacity increments

When an enterprise enjoys stable demand growth, the issue is centered on how and when to provide the capacity rather than if capacity should be added. One issue is whether capacity should be added more often in smaller increments to keep up with demand or less often in larger increments

The figures assumes that demand will be met through production, so there will be slack capacity immediately after an addition. The slack capacity declines as the requirement increases and falls to zero just before the next increment whether smaller or larger increments will be more economical depends upon the balance of incremental capital and the operating cost whether or not economies of scale exists.

(ii) Alternative Sources of Capacity Another issue in generating capacity plans is whether or not alternative capacity sources can be used near a capacity limit. The cost effects of using alternative sources such as overtime, multiple shifts and subcontracting are the trade off some of some of the cost of carrying slack capacity against these sources. Again whether or not these alternative sources be used depends on the balance of incremental capital and operating costs. (iii) Lost sales Another alternative to meet demand through regular productive capacity or alternative capacity sources is to absorb some lost sales. This is a risky strategy because it is possible that market share could be lost permanently. On the other hand, near capacity limits, contribution decline because of overtime and multiple shifts premiums and productivity loses. Thus, absorbing lost sales could be moved economical in some situations. (iv) Cost behavior in relation to volume Near capacity limits variable costs increases as a result of increased use of overtime and subcontracting and because of congestion when facilities are maximum utilized. On the other hand, when new capacity is first installed, it is not fully utilized unless the expansion is long overdue. So, variable cost for new capacity are likely to be relatively high, reflecting poor utilization of labor and other resources.

 Fig.3 shows a general picture of what happens to costs as volume increases.

(v) Economics of sales The nature of cost structures suggests that for a given facility there should be an optimum output that minimizes fixed plus variable cost. Fig 4 shows unit variable and fixed cost data for a simulated manufacturing enterprise that was driven through an operating range that included the use of a second shift

ECONOMIC EVALUATION CAPACITY PLANS

To evaluate the capacity plans economic advantages, a discounted cash flow analysis is appropriate for comparing alternatives. Mature products with stable Demands Example: The four basic alternatives are a) Capacity added January 1, 1987 and January 1, 1989 in increments of 2000 units. b) Capacity of 4000 units added January 1, 1987. c) Capacity added July 1,1987 and July 1, 1989, in increments of 2000 units, depending on overtime and multiple shifts to meet requirements during the six months of 1987 and 1989. d) Capacity of 4000 units added January 1.1988, depending upon overtime and multiple shifts to meet requirements during 1987. Capacity increment is 1000 units/ yr. Discount rate is 15%. The investments and operating costs are summarized in the table:-

Plant size unit/year

Original ($)

investment Operating per unit

costs Operating costs ($) per $unit using Alternative sources of capacity ($) 11

2000

1,000,000

10

4000

1,800,000

10

Solution:For all the alternatives the net present value method is used where the cost of capital is 15%. The figure summarizes the structure of cash flows that must be considered.

Results:
The cost structure in the example favor the use of alternative capacity sources in order to delay capital investment for either the smaller large plants. Delaying the investment has the better utilization of new capacity when it is installed. Alternative 4 involving the larger plant with economics of scale has minimum NPU. Alternative 4 also has the strategic advantage over 3 of providing greater slack capacity during the 4 years. This can be used in case the demand should be greater than expected. In alternative 1 and 2 without the use of alternative capacity resources economy of scale effect is not great enough to counter balance the large initial investment. Another aspect is also there and that is there is poor utilization of larger plant.

NEW PRODUCTS AND RISKY SOLUTION

Capacity planning in the situations of new products requires an assessment of the risks. The effect of the probability that risky events will occur must be accounted for. If the market is uncertain a probabilistic prediction of market provides basic data

Examples: present annual capacity of a plant is 2000 units. The predictions of capacity
requirements are as follows
1987 (current) Optimistic (p=0.25) Expected (p=0.50) Pessimistic (p=0.25) 17,000 17,000 17,000 1988 24,000 20,000 19,000 1989 34,000 24,000 21,000 1990 48,000 29,000 23,000 1991 66,000 35,000 25,000

Alternatives: 1) Install new capacity in 1989, 1990, 1991 in increments of 1500 units. 2) Install new capacity in 1989, 1990, 1991 in increment of 5000 units. 3) Make no capacity additions. 1500 unit capacity addition requires investment of $ 800000 and 5000 unit requires $ 300000. The operating costs per unit are the same for both sizes of capacity addition. For lost sales $50 per unit must be taken into account.

Solution:
The present values for each of the three outcomes are evaluated for all the three alternatives with the opportunity cost of capital = 15% Alternative-1 (A)
Optimistic requirements Proposed addition to capacity Proposed capacity Lost sales 1987 20000 1988 24000 20000 4000 1989 34000 15000 35000 0 1990 48000 15000 50000 0 1991 66000 15000 65000 1000

Present value:
New Capacity, 1989 = 800,000 0.756 = $604,800 New Capacity, 1990 = 800,000 0.658 = $526,400 New Capacity, 1991 = 800,000 0.572 = $475,600 Lost Sales, 1988 = 4000 500.813 = $162,600 Lost Sales, 1991 = 1000 500.535 = $26,750 Total = $1,778,150

(B)
Expected requirements Proposed addition to capacity Proposed capacity

1987 20000

1988 20000
20000

1989 24000
15000 35000

1990 29000
15000 50000

1991 35000
15000 65000

Lost sales

Present value: New Capacity, 1989 = 800,000 0.756 = $604,800 New Capacity, 1990 = 800,000 0.658 = $526,400 New Capacity, 1991 = 800,000 0.572 = $475,600 Total = $1,588,800 (C)
Pessimistic requirements Proposed addition to capacity Proposed capacity 1987 20000 1988 19000 20000

1989 21000 15000 35000

1990 23000 15000 50000

1991 25000 15000 65000

Lost sales

Present value:
Same as for expected

Similarly, making the calculations for the alternatives 2 & 3. The decision tree will be as follows:-

From the decision tree the three alternative gives the expected values as follows: Alternative 1 : 0.25*1778150 + 0.50*158880+ 0.25*1588800= $1,636,137 Alternative 2 : 0.25*2459300+ 0.50*595800+ 0.25*595800= $1,061,675 Alternative 3 : 0.25*2749000+ 0.50*819400+ 0.25*261350=$1,162,288 This example is a simple one in terms of alternatives selected. With large future cost involved, a more complex structure is selected with more alternatives but methodology is same.

LONG RANGE CAPACITY PLANNING

The production plan gives production rates that raise or lower inventories or backlogs. This plan is exploded through the bill of labour (bill of capacity) to give requirements on the resources. Resource requirements planning is performed on macro level, using rough estimations of loads, and a precise fit is not required. The resource requirements are then compared with resource capacities and attempts are made to match the two. Generally it is an iterative process and these reviews lead to changes in the production plan and/or the capacities. The terms rough cut planning, resource planning, long range capacity planning are used interchangeably for this type of approximation.

ROUGH-CUT CAPACITY PLANNING

1) Bill of Labour
The model convert five- year production plan into required capacities which can then be compared with available capacities. What is needed is a bill of labour or resources to indicate the work- centre person hour requirement generated, not only by the end product but also by all its subassemblies and components. Three main simplifications estimate roughly the capacity needed for the products, thus facilitate the use of model termed as bill of labour : Product family: Collection of parts that share a major setup. The use of key works centers A typical product in product group is chosen and it bill of materials, route sheets and standard hours are used to determine capacity requirements for the planned production for the entire product group.

Example: Two product groups A & B. Process sheet is given. In addition, inventory records sheet is
given. In addition, inventory records shows EOQ for these items as A : 15 , B : 10 , C : 25 , D : 20 , E : 30

Process Sheet:
Item A B C Operation Number 0010 0010 0010 0020 0030 0040 0010 0020 0030 0010 0020 0030 0040 Work Centre 1030 1030 1012 1020 1012 1018 1012 1020 1018 1012 1020 1012 1018 Operation Description Assembly Assembly Milling Drilling Milling Grinding Milling Drilling Grinding Milling Drilling Milling Grinding Set-up hours 0 0 0.3 2.4 2.7 1.0 0.4 2.8 2.2 0.3 2.1 2.5 1.3 Run hours 2.00 3.00 0.14 0.40 0.23 0.21 0.15 0.35 0.24 0.18 0.39 0.26 0.23

Standard Run hours = Setup + Run time EOQ Let item C in milling work centre =
.3+2.7 + 25

0.14 + 0.23

= 0.49 hours Intermediate Run time table

Item C(Q=25) Work Centre Milling Drilling Grinding Milling Drilling Grinding Milling Drilling Grinding Assembly Assembly Std. Run hrs. per unit 0.49 0.50 0.25 0.17 0.49 0.35 0.53 0.46 0.27 2 3

D(Q=20)

E(Q=30)

A(Q=15) B(Q=10)

So, Bill of labour will be made as follows: Like product A requires C & D, giving total milling requirement of 0.17+ 0.49 = 0.66 Bill of Labour :Std. Run hrs. per unit
Work Centre Product Group A

Product Group B
1012 Milling 1.02 1020 Drilling 0.96 1018 Grinding 0.52 1030 Assembly 2.00 0.60 0.99 0.66

3.00

Now, From the Production plant given below the resource requirement plan can be generated Production Plan:Unit/Year Item 1998 A 3000 B 3500 1995 1999 3000 3000 2000 4000 1996 4000 2000 1997 3000 3000

Given that the presently available capacity of 5000 standard run hours.

To calculate, producing 3000 units of A and 2000 units of B require =3000*0.66+2000*1.02 =4020 hours of milling time. Rough-cut requirement Plan for milling centre (Rough-Cut Capacities) will be:

RESOURCE PLANNING PROCESS

It consists of the following three steps :
Compute the load profile for each product group. The load profile is based upon one unit on average product Determine the total load needs on each Resource for the proposed master schedule known as Resource profile Simulate the effect of an alternative Master schedule on resource requirement and finalise on an acceptable Master schedule.

COMPUTING THE LOAD PROFILE

The product load profile displays the time- phased requirements of machine load report to produce one unit of typical product.
Example: Continuing with the previous example

If schedule and load the planned order release (POR) can be done, it could be determined where and when per unit workload would fall. POR table is as follows (Given)
1 End Item A(LT=1) Gross Requirements(GR) Planned Order Release(POR) Item C (LT=2) GR POR Item D (LT=3) GR POR 2 3 4 Weeks 5 6 7 8 9 10

1
1 1 1 1 1

Item A:- The end item has one- week lead time & POR=9 So it requires a load of two hours during ninth week. Item C:- LT=2 & POR in week 7. Assuming that 0010 milling & 0020 drilling performed in week 7 & 0030 milling & 0040 grinding in week 8. Load=
2.7 + 25

0.23 = 0.338 hr/unit for 0030 milling.

Item D:- LT=3 & POR in week 6. Assuming 0010 milling performed in week 6, 0020 drilling during week 7 & 0030 grinding in week 8. The load profile computation can be shown as
Weeks M/C Centre Assembly Load in hrs. Milling Load for C Load for D Total Drilling Load for C Load for D Total Grinding Load for C Load for D Total 1 2 3 4 5 6 7 8 9 2:00 10

0.152 0.170 0.170 0.152

0.338 0.338

.500 .490 .990

0.250 0.350 0.600

THE RESOURCE PROFILE

A resource profile gives a rough estimate of expected loads on key resources. To generate a resource profile load profile for each product group is extended in GMPS.

Example :- The GMPS (Gross Master Production Schedule) is given for the milling m/c
centre for the product A & B. Assuming 150 standard hour of existing capacity and data of the previous example generate a resource profile.

Computation for lot 5 is as follows Period 8: 200*0.338= 67.6hrs Period 7: 200*0.152= 30.4hrs Period 6: 200*0.170= 34.0hrs

 Resource Profile for all the requirement can be done as above to get the summarized table:
Period 1 2 3 4 Lot 1 GroupA 5 Lot 2 GroupB 6 Lot 3 GroupA 7 Lot 4 GroupB 8 Lot 5 GroupA 9 10

200 Lot1,A Lot2,B 34.00 30.40 67.60 64.80

150

200

150

200

102.15

Lot3,A Lot4,B

34.00

30.40

67.60 64.80 102.15

Lot5,A Total 34.00 30.40 166.40 132.55

34.00 166.40

30.40 132.55

67.60 67.60

180 160 140 120 Lot 5 100 80 60 40 20 0 1 2 Lot 4 Lot 3 Lot 2 Lot 1

Available Capacity

Resource Profile Milling m/c centre

10

The resource profile indicates clearly that in the period 4th and 6th the available capacity is increased. Note : Resource profiles are prepared especially for critical m/c centers and are compared with the available capacities to gain insight into potential capacity problems.

Medium Range Capacity Planning & Control

In medium range capacity planning, it is generally accepted that the physical facilities and location as they are and add capacity by arranging alternative routings, additional tooling, subcontracting overtime and so on. The capacity requirement plan is developed from the MPS for specific end items. No longer gross estimates and product groups are used. To give planned orders a detailed MPS is tried out. These planned orders are added to released orders to construct a work centre load report for each work centre much the same way as resource requirement profile. This capacity requirement is then compared with available capacity.
The resource requirement planning done in the long range planning when exploded through Material Requirement Planning gives the load at individual work centre. In calculating the loads on the work centre the technique of backward scheduling is explicitly used. From the due date of the end item, we back off by lead times through planned order release to estimate the timing of requirements on the work centres. If the capacity requirement plans show overloaded workcentres, the load should be leveled. To do this a closer look at the lead time is needed to see whether standard lead times can be compressed or not. There are certain strategies to do this

Capacity Requirement Planning

 Strategies for leveling loads Strategies for leveling loads

Strategies for leveling load depend heavily on lead time. Also, backward scheduling sometimes yields a start due date in the past; i.e. there is not enough time to meet the due date. There are three popular tactics to change lead time :-

Overlapping, which reduces the lead time, entails sending pieces to second operation before the entire lot is completed on the first operation. Operation splitting sends the lot to two different m/cs for the same operation. This involves an additional setup but reduces the run time. Lot splitting involves breaking up the order and running part of it ahead of schedule on an expedited basis. It involves extra setup but allows to expedite a few items. This can be counted as a part of short term capacity planning

Finite Capacity Loading for Leveling the Load at a Work Centre : Here simulation procedures are used to schedule and load orders automatically within the given capacity constraints at each work centre. The basic feature of this is that, it has the ability to forward schedule. Starting with the earliest possible start date for an operation, forward loading routines project the load for future periods and indicate the completion time for entire job.

Short Term Capacity Planning & Control In short term most of the options has been exhausted. The available capacity adjustments are overtime, work force reallocation and to some extent, alternative routings, operation splitting etc. The next step is to ensure that the output measured is equal to the required capacity

Input / Output concepts at work centres It is taken into consideration that the input rate is correctly matched with the output rate. If a company suffering from poor due date problem and increases lead times, it will only aggravates the situation, because orders are released earlier and this put a larger load on plant. This can be explained with a duck model which consists of a tub with one input for water and a pipe connected to release a water. Duck has to face problem in both the cases i.e. water input greater than output, load on tub increases and if output greater than input water level will after some time reduce to zero.

 Finite Loading for smoothing the load at Work Centres

Finite loading means simulating the factory operations to determine exactly when orders should be released, how orders will move through the plant, and what the order completion dates will result. The goal here is to reproduce actual job conditions in the face of orders for the next few weeks. Priorities determine the time on individual order will spend in queue. The order due date, the size of order and managements feeling about the customer contributes to order priorities. Higher priority order is released first in the shop. Priority index is calculated to decide which job should go on the m/c next

Priority Index=

Priority index is low for higher priority & high for lower priority. To achieve the higher effectiveness i.e. the smoothness of input rates at work centres, and how close the predicted completion date to the due dates, several decision alternatives are available

1)

Order Release Systems :-

The order release planning module of a finite loading program or system might be run every few
days. Order priorities are calculated for released and planned order. Then orders are released according to the priority and at the latest possible start dates. When an order runs up against a capacity constraints at a work centre, the order release planning system tries some alternatives

The previous & following week are checked to see whether the operation could be handled there Work centre routing might be possible. Some orders might be released earlier to take advantage of underload situations.
As a last resort, if no alternative allows the completion on due date the master schedule will have to be changed.

2) Operation Sequencing System:This system uses the work sequence concept, and such options such as operation splitting, overlapping and lot splitting are used in simulating the performance of this simulation is to generate feasible, not optimal, work sequence lists for the foreman.