Chapter 6

Capacity Planning
1

Capacity Planning
Capacity is the upper limit or ceiling on the load that an operating unit can handle. Capacity is the amount of work that can be done in a period of time It is usually stated in standard hours of work It must be determined at plant, department, and work center levels.

Importance of Capacity Decisions

Impacts ability to meet future demands Affects operating costs Major determinant of initial costs Involves long-term commitment Affects competitiveness Affects ease of management

Various Capacities
Design capacity
Maximum obtainable output

Effective capacity, expected variations

Maximum capacity subject to planned and expected variations such as maintenance, coffee breaks, scheduling conflicts.

Actual output, unexpected variations and demand

Rate of output actually achieved--cannot exceed effective capacity. It is subject to random disruptions: machine break down, absenteeism, material shortages and most importantly the demand.
4

Efficiency and Utilization

Actual output

Efficiency =
Effective capacity

Actual output
Utilization = Design capacity
This definition of efficiency is not used very much. Utilization is more important. 5

Efficiency/Utilization Example for a Trucking Company

Design capacity = 50 trucks/day available Effective capacity = 40 trucks/day, because 20% of truck capacity goes through planned maintenance Actual output = 36 trucks/day, 3 trucks delayed at maintenance, 1 had a flat tire

Actual Output 36 units / day Efficiency 90% EffectiveCapacity 40 units / day Actual Output 36 units / day Utilization 72% Design Capacity 50 units / day
6

Determinants of Effective Capacity/Output

Facilities, layout Products or services, product mixes/setups Processes, quality Human considerations, motivation Operations, scheduling and synchronization problems Supply Chain factors, material shortages External forces, regulations

Capacity planning
Definitions : 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

Capacity planning
In information technology, capacity planning is the science and art of estimating the space, computer hardware, software and connection infrastructure resources that will be needed over some future period of time. A typical capacity concern of many enterprises is whether resources will be in place to handle an increasing number of requests as the number of users or interactions increase. The aim of the capacity planner is to plan so well that new capacity is added just in time to meet the anticipated need but not so early that resources go unused for a long period. The successful capacity planner is one that makes the trade-offs between the present and the future that overall prove to be the most cost-efficient.

Capacity planning
Capacity planning has seen an increased emphasis due to the financial benefits of the efficient use of capacity plans within material requirements planning systems and other information systems. Insufficient capacity can quickly lead to deteriorating delivery performance, unnecessarily increase work-in-process, and frustrate sales personnel and those in manufacturing. However, excess capacity can be costly and unnecessary. The inability to properly manage capacity can be a barrier to the achievement of maximum firm performance. In addition, capacity is an important factor in the organization's choice of technology.

Capacity calculation
Capacity = (number of machines or workers) (number of shifts) (utilization) (efficiency).

Various Strategies
Lead strategy is adding capacity in anticipation of an increase in demand. Lead strategy is an aggressive strategy with the goal of luring customers away from the company's competitors. The possible disadvantage to this strategy is that it often results in excess inventory, which is costly and often wasteful. Lag strategy refers to adding capacity only after the organization is running at full capacity or beyond due to increase in demand . This is a more conservative strategy. It decreases the risk of waste, but it may result in the loss of possible customers. Match strategy is adding capacity in small amounts in response to changing demand in the market. This is a more moderate strategy.

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.

1. Determine Service Level requirements

a. The overall process of establishing service level requirements first demands an understanding of workloads. You can view system performance in business terms rather than technical ones, using workloads. b. Before setting service levels, you need to determine what unit you will use to measure the incoming work. d. Finally, you establish service level requirements, the promised level that will be provided by the IT organization.

**Workloads Explained**
From a capacity planning perspective, a computer system processes workloads (which supply the demand) and delivers service to users. A workload is a logical classification of work performed on a computer system. If you consider all the work performed on your systems as pie, a workload can be thought of as some piece of that pie. If you analyze performance based on workloads corresponding to business departments, then you can establish service level requirements for each of those departments.

2. Analyze Current Capacity

a. First, compare the measurements of any items referenced in service level agreements with their objectives. This provides the basic indication of whether the system has adequate capacity. b. Next, check the usage of the various resources of the system (CPU, memory, and I/O devices). This analysis identifies highly used resources that may prove problematic now or in the future. c. Look at the resource utilization for each workload. Ascertain which workloads are the major users of each resource. This helps narrow your attention to only the workloads that are making the greatest demands on system resources. d. Determine where each workload is spending its time by analyzing the components of response time, allowing you to determine which system resources are responsible for the greatest portion of the response time for each workload

3. Determine Future Processing Requirements

Future processing requirements include: Expected growth in the business Requirements for implementing new applications Planned acquisitions IT budget limitations Requests for consolidation of IT resources

Plan Future System Configuration

After system capacity requirements for the future are identified, a capacity plan should be developed to prepare for it. The first step in doing this is to create a model of the current configuration. From this starting point, the model can be modified to reflect the future capacity requirements. If the results of the model indicate that the current configuration does not provide sufficient capacity for the future requirements, then the model can be used to evaluate configuration alternatives to find the optimal way to provide sufficient capacity.

LONG-TERM CAPACITY PLANNING

Over the long term, capacity planning relates primarily to strategic issues involving the firm's major production facilities. Long-term capacity issues are : Location decisions Technology Transferability of the process to other products May evolve when short-term changes in capacity are insufficient. Example: If the firm's addition of a third shift to its current twoshift plan still does not produce enough output, and subcontracting arrangements cannot be made, one feasible alternative is to add capital equipment and modify the layout of the plant (long-term actions). It may even be desirable to add additional plant space or to construct a new facility (longterm alternatives).

SHORT-TERM CAPACITY PLANNING

It includes issues of Scheduling Labor shifts Balancing resource capacities. The goal of short-term capacity planning is to handle unexpected shifts in demand in an efficient economic manner. The time frame for short-term planning is frequently only a few days but may run as long as six months.

Steps in Capacity Planning

Forecast the demand Convert this into capacity requirement Asses capacity of existing facilities Asses the gap between the needed and available capacity Make alternative plans to fill the gap Compare the alternative plans and choose the best Implement the best plan and check and control its progress

The factors influencing the compromise

Demand forecast, sales accomplished, back orders, demand variation Operations dept. - M/c capacity & utilisation, capital budgeting plans, productivity plans HR dept. - Manpower inventory, inventory policy, storage constraints Marketing dept. - Forecast reliability, new product arrangement, product substitution.

Demand management
Price variation Marketing effort variation Incentive and discounts Buffer stock creation Lead time variation Rationing- reservation and appointment system

Capacity management
Working hours and shift management Scheduling work patterns Part time staff Outsourcing Process adjustment Adjusting equipment and processes Rescheduling maintenance Self service Franchising Subcontracting

Factors favoring overcapacity

The process is uneconomic, when there is an economic capacity size Building capacity is not so costly Buying outside is not feasible Lead time to add capacity is too long Lost sales are viewed very negatively by trading circles.

Capacity cushion
Attempt to prevent a run out positive cushion - Additional capacity than the forecast demand Meet the average forecast Maximise utilisation - Negative cushion capacity build up cost is very high eg. Oil refineries, paper mills. It can harm long term market share.

Capacity planning and control techniques

1. Capacity planning using overall factors (CPOF) 2. Capacity bills 3. Resource profiles 4. Capacity requirements planning (CRP) 5. Input/output control 6. Capacity bath tub

Capacity planning using overall factors (CPOF)

Data requirements are minimal (only accounting system data) Valid only when product mixes or historical divisions of work between work centers remain constant

Capacity planning using overall factors (CPOF)

The CPOF method requires three data inputs The MPS The standard or estimated total time required to produce one "typical" part The proportion of total time required by each resource to produce the part. CPOF calculations can rely heavily on intuition and may be computed on a typical calculator. The estimated cumulative time is multiplied by the MPS quantity to obtain the total time required in the factory to match the MPS. This time is than prorated among all the key work centers by multiplying the total time by the historical proportion of time used at a given resource.

Capacity planning using overall factors (CPOF)

Master production Schedule End product 1 2 A 33 40 B 17 17 (in units) 3 4 30 37 15 13

5 35 16

6 32 15

Total 302 108

Direct labor per unit ( in standard hours) A 0.95 hours B 1.5 hours

Capacity planning using overall factors (CPOF)

Work Historical 1 Centre percentage X 60% 34.11 Y 30% 17.06 Z 10% 5.67 TOTAL 56.85 Calculation example: 2 38.1 19.05 6.35 63.5 3 30.6 15.3 5.10 51.0 4 32.79 16.40 5.66 54.65 5 34.35 17.18 5.73 57.25 6 31.74 15.87 5.29 52.9 Total 201.69 100.85 33.62 336.15

33 * 0.95 + 17* 1.5 = 56.85 60% of 56.85 = 34.11 30% of 56.85 = 17.06 10% of 56.85 = 5.67

Capacity bills
Takes into account any shifts in product mix Required data: Bill of material Routing data Direct labor-hour or machine-hour data for each operation

Capacity bills
Part requirement
A B

D C D

E- 2 F F- 2

Capacity bills
End produ cts A B
Compo nents

Lot Sizes

Operation Work centre

Std. set up hrs.

Std. set up hrs. Per unit 0.025 0.050

Std. run Total time hrs. hrs. per Per unit unit 0.025 1.25 0.05 1.30

40 20

1 of 1 1 of 1

100 100

1.0 1.0

C D E F

40 60 100 100

1 of 2 2 of 2 1 of 1 1 of 1 1 of 1

200 300 200 200 200

1.0 1.0 2.0 2.0 2.0

0.025 0.025 0.033 0.020 0.020

0.575 0.175 0.067 0.080 0.0425

0.6 0.2 0.1 0.1 0.0625

Bill of Capacity

Capacity bills
A Work centre 100 Total time/unit 0.05 B Total time/unit 1.30

200
300 Total time/unit

0.70
0.20 0.95

0.55
0.0 1.85

Calculation Example: Set time/ Lot size = 1/40 = 0.025 Std. set up hrs. per unit = 0.025 + 0.025 = 0.50 For 1 C and 1 D = 0.60 + 0.1 = 0.70 For one D, two Es and four Fs = 0.1 + 2*0.1 +4 * 0.0625 =0.55

Capacity bills
------------------------PERIOD ---------------- Total Hours Work center %

Work center 100 200 300 Total

1 23.75 32.45 6.60 62.80

2 18.90 35.15 8.00 62.05

3 18.90 35.15 8.00 62.05

4 34.00 34.75 6.00 74.75

5 36.95 40.75 7.40 85.10

6 36.95 40.75 7.40 85.10 172.74 215.93 43.19 431.85 40% 50% 10% 100%

Calculation Example: For Work Center- 100 : 33*0.05 + 17 *1.3 = 23.75 For Work Center- 200 : 33*0.7 + 17*0.55 = 32.45

Resource profiles
Takes into account the specific timing of the projected workloads at individual work centers Production set up and lead time data are taken into account MPS is useful.

Resource profiles
Time required during preceding periods for one end product assembled in period 5: .Time period .... 3 4 5 End product A Work center 100 0 0 0.05 Work center 200 0.6 0.1 0 Work center 300 0 0.2 0 End product B Work center 100 Work center 200

0 0.25

0 0.3

1.3 0

Resource profiles
Time phased capacity requirements generated from MPS for 40 As and 13 Bs in time period 5: .Time period .... 3 4 5 40 As Work center 100 0 0 2 Work center 200 24 4 0 Work center 300 0 8 0

13 Bs Work center 100 Work center 200 Work center 300 Total from period 5 MPS Work center 100 Work center 200 Work center 300

0 3.25 0

0 3.9 0

16.9 0 0

0 27.5 0

0 7.9 8

18.9 0 0

Capacity requirements planning (CRP)

Capacity Requirements Planning, also known as CRP, allows business to plan ahead to determine How large their future inventory capacity needs to be in order to meet demand.

How much space they will need to hold these materials.

It verifies that you have the sufficient capacity available to meet the capacity requirement for the MRP plans. It thus helps the planners to make the right decisions on scheduling before the problem develops.

Capacity requirements planning (CRP)

The process of determining short-range capacity requirements. Inputs to capacity requirement planning Planned-order releases for the MRP Current shop loading Routing information Job time Key outputs Load reports for each work center

Capacity Requirements Planning (CRP) Example

The XYZ Company makes sign mounts for commercial customers. One product is the H mount which is made up of a painted surface on both sides of a wooden H frame. The H mount is put together in final assembly. The surfaces are painted in the paint shop, and frame is made in the frame shop. XYZ wants to estimate the H mount capacity needs for next five periods in final assembly, the paint shop, and the frame shop.

Operation Mount assembly Fabricate H frame Paint surfaces

Work Center Final Assembly Frame Shop Paint Shop

Setup Time 2 hours 3 hours 4 hours

Run time 1.0 hours 0.5 hours 0.4 hours

42

Capacity Requirements Planning (CRP) Example (continued)

Item: H frame Gross requirements Scheduled Receipts Projected available balance Planned order release Q = 30, LT = 1, SS = 0 Item: Painted Surface Gross requirements Scheduled Receipts Projected available balance Planned order release Q = 50, LT = 1, SS = 5 Item: H mount Gross requirements Scheduled Receipts Projected available balance Planned order release Q = L4L, LT = 1, SS = 0 1 15 15 10 30 2 20 20 0 Period 3 4 20 20 0 30 10 30 5 20 20 0 6 0 20 0

10

25

1 30 50 45 0

2 40 5 50

Period 3 4 40 40 15 50 25 50

5 40 35 0

6 0 35 0

1 20 25 5 15

2 20 0 20

Period 3 4 20 20 0 20 0 20

5 20 0 20

6 20 0

43

Input/Output control
Planned work input and planned output at a work center will be compared to the actual work input and output Deviations are caused by: Lower-than-expected productivity Breakdowns Absences Random variations Poor product quality Insufficient output from a preceding work center Improper releasing of planned orders Monitors backlogs as the cushion between input and output

Capacity Planning Techniques: Pros and Cons

Pros Easy to use Minimal computational requirements Consider product mix

Capacity Bills Cons Doesnt consider lead times, inventory information, or gross-to-netting
Less accurate Resource Profiles Doesnt consider inventory information or gross-to- netting

Easy to use Minimal computational requirements Considers lead times Less accurate Consider product mix Capacity Requirements Planning Considers: gross-to-netting, Requires MRP system, Time-phased Inventory information, records, Extensive computational lead times requirements More accurate Considers product mix

45

Question Bowl
The objective of Strategic Capacity Planning is to provide an approach for determining the overall capacity level of which of the following?

a. b. c. d. e.

Facilities Equipment Labor force size All of the above None of the above

Answer: (d )

Question Bowl
To improve the Capacity Utilization Rate we can do which of the following?

a. b. c. d. e.

Reduce capacity used Increase capacity used Increase best operating level All of the above None of the above

Answer: ( b )

Question Bowl When we talk about Capacity Flexibility which of the following types of flexibility are included? a. b. c. d. e. Plants Processes Workers All of the above None of the above Answer: (d )

Question Bowl When adding capacity to existing operations which of the following are considerations that should be included in the planning effort? a. b. c. d. e. Maintaining system balance Frequency of additions External sources All of the above None of the above

Answer: (d )

Question Bowl
Which of the following is a term used to describe the difference between projected capacity requirements and the actual capacity requirements? a. b. c. d. e. Capacity cushion Capacity utilization Capacity utilization rate All of the above None of the above

Answer: (a)

Question Bowl
In determining capacity requirements we must do which of the following? a. Address the demands for individual product lines b. Address the demands for individual plants c. Allocate production throughout the plant network d. All of the above e. None of the above

Answer: (d)

Question Bowl In a Decision Tree problem used to evaluate capacity alternatives we need which of the following as prerequisite information?

a. b. c. d. e.

Expect values of payoffs Payoff values A tree All of the above None of the above
Answer: (b)

.
END OF CHAPTER 6