Capacity planning
- 2. 2 Definitions of Capacity In general, production capacity is the maximum production rate of an organization. Capacity indicates the ability of a firm to meet market demand both current & future. Capacity can be difficult to quantify due to … Day-to-day uncertainties such as employee absences, equipment breakdowns, and material- delivery delays Products and services differ in production rates (so product mix is a factor) Different interpretations of maximum capacity
- 3. 3 Definitions of Capacity The Federal Reserve Board defines sustainable practical capacity as the greatest level of output that a plant can maintain … within the framework of a realistic work schedule taking account of normal downtime assuming sufficient availability of inputs to operate the machinery and equipment in place
- 4. 4 Steps in the Capacity Planning Process Estimate the capacity of the present facilities. Forecast the long-range future capacity needs. Identify and analyze sources of capacity to meet these needs. Select from among the alternative sources of capacity.
- 5. 5 Measurements of Capacity Output Rate Capacity For a facility having a single product or a few homogeneous products, the unit of measure is straightforward (barrels of oil per month) For a facility having a diverse mix of products, an aggregate unit of capacity must be established using a common unit of output (sales in Rs. per week)
- 6. 6 Measurements of Capacity Input Rate Capacity Commonly used for service operations where output measures are particularly difficult Hospitals use available beds per month Airlines use available seat-miles per month Movie theatres use available seats per month
- 7. 7 Measurements of Capacity Capacity Utilization Percentage Relates actual output to output capacity Example: Actual automobiles produced in a quarter divided by the quarterly automobile production capacity Relates actual input used to input capacity Example: Actual accountant hours used in a month divided by the monthly account-hours available
- 8. 8 Measurements of Capacity Capacity Cushion an additional amount of capacity added onto the expected demand to allow for: greater than expected demand demand during peak demand seasons lower production costs product and volume flexibility improved quality of products and services
- 9. 9 Forecasting Capacity Demand Consider the life of the input (e.g. facility is 10-30 yr) Understand product life cycle as it impacts capacity Anticipate technological developments Anticipate competitors’ actions Forecast the firm’s demand
- 10. 10 Other Considerations Resource availability Accuracy of the long-range forecast Capacity cushion Changes in competitive environment
- 11. 11 Capacity Planning Capacity is the upper limit or ceiling on the load that an operating unit can handle. Capacity also includes Equipment Space Employee skills The basic questions in capacity handling are: What kind of capacity is needed? How much is needed? When is it needed?
- 12. 12 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 Importance of Capacity Decisions
- 13. 13 Capacity Design capacity maximum output rate or service capacity an operation, process, or facility is designed for Effective capacity Design capacity minus allowances such as personal time, maintenance, and scrap Actual output rate of output actually achieved--cannot exceed effective capacity.
- 14. 14 Efficiency and Utilization Actual output Efficiency = Effective capacity Actual output Utilization = Design capacity Both measures expressed as percentages
- 15. 15 1. Long term capacity : Time horizon of 2 years or more 2. Short term capacity : Focus on work- force size, overtime budgets, inventories etc.
- 16. Economies of Scale Economies of scale If the output rate is less than the optimal level, increasing output rate results in decreasing average unit costs Diseconomies of scale If the output rate is more than the optimal level, increasing the output rate results in increasing average unit costs
- 17. Optimal Rate of Output Minimum cost Averagecostperunit 0 Rate of output Production units have an optimal rate of output for minimal cost. Figure 5.4 Minimum average cost per unit
- 18. Economies of Scale Minimum cost & optimal operating rate are functions of size of production unit.Averagecostperunit 0 Small plant Medium plant Large plant Output rate Figure 5.5
- 19. Evaluating Alternatives Cost-volume analysis Break-even point Financial analysis Cash flow Present value Decision theory Waiting-line analysis
- 20. Cost-Volume Relationships Amount($) 0 Q (volume in units) Fixed cost (FC) Figure 5.6a
- 21. Cost-Volume Relationships Amount($) Q (volume in units) 0 Figure 5.6b
- 22. Cost-Volume Relationships Amount($) Q (volume in units) 0 BEP units Figure 5.6c
- 23. Waiting-Line Analysis Useful for designing or modifying service systems Waiting-lines occur across a wide variety of service systems Waiting-lines are caused by bottlenecks in the process Helps managers plan capacity level that will be cost-effective by balancing the cost of having customers wait in line with the cost of additional capacity
- 24. Types of Queuing systems Single channel single service XXXX Single channel multiple service xxxx Multiple channel single service xxxx Multiple channel multiple service XXXX Server ServerServer Server
- 25. Examples There are two products on the master schedule, X and Y. they are both produced by using 3 work centers, 100, 200 and 300. The following shows the MPS values for the two products for the next 5 periods: The total standard hours to produce item X is 1.557, with 5.331 hours for item Y. Historically, work center 100is used for 20% of the hours required to produce the products, work center200 uses 45%of the hours and work center 300 uses 35% of the hours. Find capacity requirement for each of the three work centers. Week 1 2 3 4 5 X 10 10 15 15 15 Y 25 25 20 20 25
- 26. 5-26 Calculating Processing Requirements Product Annual Demand Standard processing time per unit (hr.) Processing time needed (hr.) #1 #2 #3 400 300 700 5.0 8.0 2.0 2,000 2,400 1,400 5,800 If annual capacity is 2000 hours, then we need three machines to han required volume: 5,800 hours/2,000 hours = 2.90 machines