Capacity After deciding what products/services should be offered and how they should be made, management must plan the capacity of its processes. Capacity.

CapacityCapacityAfter deciding what products/services should be offered and how they should be made, management must plan the capacity of its processes.

Capacity is the maximum rate of output for a process. Must have capacity to meet current and future demands. Long-term capacity plans deal with investments in new facilities and equipment. Short-term capacity plans focus on workforce size, overtime budgets, and inventories.

Capacity Planning

This activity is central to the long-term success of an organization.

Too much capacity can be as problematic as too little

Capacity planning considers questions such as: How much of a cushion is needed? Should we expand capacity before the demand is

there or wait until demand is more certain?

Capacity Planning

Capacity can be defined as the ability to hold, receive, store, or accommodate.

Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size.

Measuring capacity

No single capacity measure is universally applicable. Capacity can be expressed in terms of outputs or inputs. Output measures—the usual choice for line flow processes,

usually high-volume Low amount of customization Product mix becomes an issue when the output is not

uniform in work content. Input measures—used for flexible flow, low-volume

processes High amount of customization Output varies in work content; a measure of total units

produced is meaningless. Output is converted to some critical homogeneous input,

such as labor hours or machine hours.

UtilizationUtilization

Fabrication can make 100 engines/dayManagement wants 45 engines/dayCurrently producing 50 engines/day

Utilizationpeak = Average output rate

Peak capacity

Utilizationeffective = Average output rate

Effective capacityx 100%

x 100%


Fabrication can make 100 engines/dayManagement wants 45 engines/dayCurrently producing 50 engines/day

Utilizationpeak = x 100% = 50%50

100

Utilizationeffective = x 100% = 111%50

45

The average output rate and the capacity must be measured in the same terms.

Types of Capacity

Peak capacity Calling for extraordinary effort under ideal

conditions that are not sustainable Allows for downtime for maintenance and repair. Engineering assessment of maximum annual

output

Effective capacity Economically sustainable under normal conditions


What does it mean? Even through the department falls well short of peak capacity, it is well beyond the output rate judged to be most economical. It’s operations could be sustained at that level only through the use of considerable overtime; capacity expansion should be evaluated.


Capacity cushionpeak = 100% – 50% = 50%

Capacity cushioneffective = 100% – 111% = – 11%

Utilizationpeak = 50%

Utilizationeffective = 111%

Capacity cushion – amount of reserve capacity that a firm maintains to handle sudden increases in demand or temporary loss of production capacity.

Best Operating Level

Underutilization

Best OperatingLevel

Averageunit costof output

Volume

Overutilization

Capacity BottlenecksCapacity Bottlenecks

Inputs To customers

(a) Operation 2 a bottleneck

50/hr

1 2 3

200/hr 200/hr

“A bottleneck is an operation that has the lowest effective capacity of any operation in the facility and thus limits the system’s output.”

(b) All operations bottlenecks

2 31Inputs To customers

200/hr 200/hr 200/hr

Capacity BottlenecksCapacity Bottlenecks

In effect, the process can produce only as fast as the slowest operation. True expansion of a process’s capacity occurs only when bottleneck capacity is increased. In the first slide, adding capacity at Operation 1 or 3 will not impact system capacity. However, when adding capacity to Operation 2, must then increase capacity at all 3 operations to increase capacity further.

To increase capacity: new equipment, new facilities, expanded operating hours, increased shifts, increased work hours, or redesign the process

Theory of Constraints

Focus is on whatever impedes, (i.e., bottlenecks) progress toward the goal of maximizing flow of total value-added funds (sales less discounts and variable costs)

The focus on bottlenecks is the means to increase throughput and, consequently, the flow of value added funds.

The performance of the overall system is a function of how bottleneck operations or processes are scheduled.

Theory of Constraints

Short-term: overtime, temporary employees, outsource

Increase effective capacity utilization at bottlenecks without experiencing the higher costs and poor customer service usually associated with maintaining output rates at peak capacity.

Carefully monitor short-term schedules, minimize idle time, setups (changes from one product to another).

Theory of ConstraintsTheory of Constraints

1. Identify the system bottleneck(s)

2. Exploit the bottleneck(s)3. Subordinate all other

decisions to step 24. Elevate the bottleneck(s)5. Do not let inertia

set in

Economies of ScaleEconomies of Scale

Increasing output rate decreases the average unit costFixed costs are spread over more unitsConstruction costs are reducedCosts of purchased materials are cutProcess advantages are found

Diseconomies of Scale

When the average costs per unit increases as the facility’s size increases. Excessive size can bring complexity, loss of focus,

and inefficiencies, which raise the average unit cost.

Characterized by loss of agility, less innovation, risk avoidance, and excessive analysis and planning at the expense of action.

Nonlinear growth of overhead leads to employee ceilings.

Economies and Economies and Diseconomies of ScaleDiseconomies of Scale

Av

era

ge

un

it c

os

t (d

olla

rs p

er

pat

ien

t)

Output rate (patients per week)

250-bed hospital

750-bed hospital 500-bed

hospital

Diseconomies of scale

Economies of scale

Best operating level is 500-beds; optimal depends on number of patients per week.

Capacity strategy

Sizing capacity cushions Average utilization rates near 100%

indicate:Need to increase capacityPoor customer service or declining

productivityUtilization rates tend to be higher in capital-

intensive industries.

Capacity Strategy

Factors Leading to Large Capacity Cushions When demand is variable, uncertain, or product mix changes When finished goods inventory cannot be stored When customer service is important When capacity comes in large increments When supply of material or human resources is uncertain

Factors leading to small capacity cushions Unused capacity costs money. Large cushions hide inefficiencies, absenteeism, unreliable

material supply. When subcontractors are available to handle demand peaks

Capacity Strategy

Timing and sizing of expansion Expansionist strategy

Keeps ahead of demand, maintains a capacity cushion Large, infrequent jumps in capacity Higher financial risk Lower risk of losing market share Economies of scale may reduce fixed cost per unit May increase learning and help compete on price Preemptive marketing

Capacity Strategy

Wait-and-see strategy Lags behind demand, relying on short-term peak capacity

options (overtime, subcontractors) to meet demand Lower financial risk associated with overly optimistic demand

forecast Lower risk of a technological advancement making a new

facility obsolete Higher risk of losing market share Follow-the-leader strategy An intermediate strategy of copying competitors’ actions Tends to prevent anyone from gaining a competitive

advantage

Capacity StrategiesCapacity Strategies

Time between increments

Capacity increment

Planned unused capacity

Time

(a) Expansionist strategy

Forecast of capacity required

Ca

pac

ity

Capacity StrategiesCapacity Strategies

Time between increments

Capacity increment

Time

Forecast of capacity required

Ca

pac

ity

Planned use of short-term options

(b) Wait-and-see strategy

Linking Capacity and Other Decisions

• Competitive Priorities• Quality Management• Capital Intensity• Resource Flexibility• Inventory• Scheduling

Capacity DecisionsCapacity Decisions

Estimate Capacity RequirementsEstimate Capacity Requirements

Item Client X Client Y

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

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

N[1 – (C/100)]M =





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

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





M = = 3.12 4 machines5305

1700

Example 8.2


Kitchen capacity = 80,000 mealsDining room capacity = 105,000 meals

Demand

Year 1: 90,000 mealsYear 2: 100,000 mealsYear 3: 110,000 mealsYear 4: 120,000 mealsYear 5: 130,000 meals

Kitchen Capacity Gaps

Year 1: 90,000 – 80,000 = 10,000Year 2: 100,000 – 80,000 = 20,000Year 3: 110,000 – 80,000 = 30,000Year 4: 120,000 – 80,000 = 40,000Year 5: 130,000 – 80,000 = 50,000

Identify Capacity GapsIdentify Capacity Gaps


Kitchen capacity = 80,000 mealsDining room capacity = 105,000 meals

Demand

Year 1: 90,000 mealsYear 2: 100,000 mealsYear 3: 110,000 mealsYear 4: 120,000 mealsYear 5: 130,000 meals

Dining Room Capacity Gaps

Year 1: no gaps Year 2: no gaps Year 3: 110,000 – 105,000 = 5,000Year 4: 120,000 – 105,000 = 15,000Year 5: 130,000 – 105,000 = 25,000

Identify Capacity GapsIdentify Capacity Gaps


Evaluate AlternativesEvaluate Alternatives

Expand capacity to meet expected demand through Year 5

Year Demand Cash Flow

1 90,000 (90,000 – 80,000)2 = $20,0002 100,000 (100,000 – 80,000)2 = $40,0003 110,000 (110,000 – 80,000)2 = $60,0004 120,000 (120,000 – 80,000)2 = $80,0005 130,000 (130,000 – 80,000)2 = $100,000


Evaluate AlternativesEvaluate Alternatives


SimulationSimulationTIME TO PERFORM (SECONDS)

StandardOPERATION Average Deviation

1. Review renewal application for correctness 153

2. Check file for violations and restrictions 6015

3. Process and record payment 256

4. Conduct eye test 3510

5. Photograph applicant 205

6. Issue temporary license 305

AVERAGE CUSTOMER ARRIVALTIME (PEOPLE PER MINUTE)

8:00 A.M. — 9:00 A.M. 1.259:00 A.M. — 12:00 P.M. 0.7512:00 P.M. — 1:00 P.M. 2.001:00 P.M. — 4:00 P.M. 0.75


BottleneckBottleneck


BottleneckBottleneck

Capacity After deciding what products/services should be offered and how they should be made, management must plan the capacity of its processes. Capacity.

Documents

capacity planning capacity

bottleneck capacity

system capacity

processs capacity

measuring capacity

reserve capacity

capacity cushion effective

capacity bottlenecks