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12/12/2006Measuring Capacity1 Measuring Capacity: The Basics By: Cameron Tidwell December 12, 2006 Marriott School of Business - Brigham Young University

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12/12/2006Measuring Capacity2 So…What is Capacity? What do YOU think Capacity is? Google the term Measuring Capacity what comes up?

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12/12/2006Measuring Capacity3 Google search results… Possible finds: Math activities Units of measurements: –C–Cups, Gallons, Ounces etc. Ideas for teachers Measuring Capacity fisheries and Web Servers

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12/12/2006Measuring Capacity4 What is going to be covered What is Capacity? Difference Between Measuring and Calculating Efficiency Utilization Real World Examples Applications

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12/12/2006Measuring Capacity5 Capacity Defined: Capacity is the capability of a worker, machine, plant, organization to provide goods and services (output) per period of time.

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12/12/2006Measuring Capacity6 An easy way to remember… Capacity is like a Funnel. Wrights Funnel was developed by Oliver Wright demonstrate the idea of capacity. (Blackstone, 1989)

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12/12/2006Measuring Capacity7 However… The Funnel only focuses on OUTPUTS. Capacity can also be measured by an organizations INPUTS. (Blackstone, 1989)

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12/12/2006Measuring Capacity8 Units of Measurements INPUTS Number of Labor Hours available in a time period Number of Machines Hours available in a time period Seats on an airplane Beds in a Hospital OUTPUTS Number of units produced in a time period… –Cars washed per hour –Beds assembled per day –Oil changes per hour

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12/12/2006Measuring Capacity9 What are Possible units of measure of Capacity for the following? A Bottling Company? –W–Work Hours, Bottles Filled… An Car Dealership? –C–Cars sold, Cars serviced… What about your Organization? –?–?

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12/12/2006Measuring Capacity10 Lets Think… What is the benefit of knowing capacity? How could it help an organization? How could knowing how to measure capacity benefit this organization?

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12/12/2006Measuring Capacity11 Measuring/Calculating Capacity John H. Blackstones Capacity Management, distinguishes between the two… Measuring Capacity: One averages some set of historical data. Calculating Capacity: One sets capacity equal to the product of time available (T), efficiency (E), and utilization (U). C = T x E x U (Blackstone, 1989)

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12/12/2006Measuring Capacity12 Measuring Capacity: This part is easy… 1. Take historical outputs from equal time periods and add them together. (output 1 + output 2 +…output N) 2. Divide the total output by the number of periods. (output 1 + output 2 + …output N)/ # periods

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12/12/2006Measuring Capacity13 Measuring Capacity Example: Louisville Sluggers factory in Louisville, KY produced an output of 2700 bats, 2000 bats, 1900 bats, and 2400 bats. What is the measured capacity?

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12/12/2006Measuring Capacity14 Louisville Slugger Step one: Add the Historical Data… 2700+2000+1900+2400 = 9000 bats Step two: Divide the total by the number of periods, 4. 9000/4 = 2250 bats Thus, 2250 bats is the average capacity.

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12/12/2006Measuring Capacity15 Calculating Capacity: Now it gets a little tricky… Capacity = (# of shifts) x (# of hours a day) x (# of machines) x (# of days a week) (Provides Mins and Maxs in the ability to produce) Important! Variables are subject to change depending on information

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12/12/2006Measuring Capacity16 Calculating Capacity: Example: Ford has a factory in Detroit which produces transmissions. The factory has 2 shifts which man 4 machines, 8 hours day, 6 days a week. What is the factorys calculated capacity?

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12/12/2006Measuring Capacity17 Ford cont. Remember the Equation: Capacity = (# of shifts) x (# of hours a day) x (# of machines) x (# of days a week) There were 2 shifts, 4 machines, 8 hours a day, and 6 days wk Capacity = (2) x (4) x (8) x (6) Capacity = 384 standard hours per week

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12/12/2006Measuring Capacity18 Even more Ford. As mentioned Capacity = T x E x U. This calculated capacity is also call Rated or Nominal Capacity. Example cont. Say that Ford historically has a utilization of 93 % and a efficiency of 98 % then what would their capacity equal?

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12/12/2006Measuring Capacity19 Even more Ford cont. Capacity = T x E x U *Time Available = 384 hrs *Efficiency =.98 *Utilization =.93 Capacity = (384) x (.98) x (.93) Capacity = 349.98 Capacity = 350 standard hours

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12/12/2006Measuring Capacity20 Efficiency Definition: A measure (usually expressed as a percentage) of the actual output to the standard output expected. (APICS Dictionary, 1998)

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12/12/2006Measuring Capacity21 Calculating Efficiency: Efficiency = Standard hours x 100 Hours worked -or- Efficiency = Actual units produced x 100 Standard rate of production expected

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12/12/2006Measuring Capacity22 Calculating Efficiency: Example: At company X work is measured in hours. It took employees 12.75 hours to produce 12 standard hours of work. What is the companies efficiency?

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12/12/2006Measuring Capacity23 Calculating Efficiency: Efficiency = Standard hours x 100 Hours worked (Standard Hours = 12Hours worked = 12.75) Efficiency = 12=.9412 x 100 12.75 Efficiency = 94.12%

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12/12/2006Measuring Capacity24 Lets try a different one… Example: Company Y produces a standard of 250 units per hours. Today, in one eight hour shift the company produced 1925 units. What was the companys efficiency for the shift today?

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12/12/2006Measuring Capacity25 Calculating Efficiency: Efficiency = Actual units produced x 100 Standard rate of production expected Actual units produced = 1925 units Standard rate of production expected = ? (250 units per hour x 8 hours per shift = 2000)

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12/12/2006Measuring Capacity26 Calculating Efficiency: Efficiency = Actual units produced x 100 Standard rate of production expected Efficiency = 1925=.9625 x 100 2000 Efficiency = 96.25%

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12/12/2006Measuring Capacity27 Utilization Definition: A measure (usually expressed as a percentage) of how intensively a resources is being used to produce a good or service. (APICS Dictionary, 1998)

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12/12/2006Measuring Capacity28 Calculating Utilization : Utilization = Hours available – hours down x 100 Hours available Utilization = Hours worked x 100 Hours available

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12/12/2006Measuring Capacity29 Calculating Utilization : Example: Your company has 4 machines which are staffed by 2 eight hours shifts 6 days a week. Lately information has shown that there are about 20 per week in which machines are not in use due to breakdowns. Calculate your companies machine utilization.

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12/12/2006Measuring Capacity30 Calculating Utilization : Capacity = (# of shifts) x (# of hours a day) x (# of machines) x (# of days a week) Utilization = Hours available – hours down x 100 Hours available Utilization = Hours worked x 100 Hours available

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12/12/2006Measuring Capacity31 Calculating Utilization : First step, the companys machine hour capacity? Capacity = (# of shifts) x (# of hours a day) x (# of machines) x (# of days a week) Capacity = (2 shifts) x (8 hours a day) x (4 machines) x (6 days a week) Capacity = 384 machine hours

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12/12/2006Measuring Capacity32 Calculating Utilization : Second Step: Utilization = Hours available – hours down x 100 Hours available Utilization = (384 machine hours) – (20 hours down) x 100 384 machine hours Utilization = 364 machine hours x 100=.9479 x 100 384 machine hours Utilization = 94.79 %

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12/12/2006Measuring Capacity33 Real World Example Fisheries in Europe A measure that has gained increase use in fisheries…is capacity utilization (Pascoe, 2004) Capacity and Utilization are being determine based on the same ideas but much more in depth.

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12/12/2006Measuring Capacity34 One final point on Utilization Note that: – Over Utilization: Machine Breakdown Decrease in quality Lost time injuries –Under Utilization: Increase Costs Employees downtime (standing around)

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12/12/2006Measuring Capacity35 Applications cont. What is the right utilization and efficiency level for your organization? Companies need to find their Best Operating Level

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12/12/2006Measuring Capacity36 Review What is Capacity? What is the Difference between Measuring and Calculating Capacity? How does one determine Efficiency? How does one determine Utilization?

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12/12/2006Measuring Capacity37 Readings List Blackstone, J.H. (1989). Capacity Management. Ohio: South-Western Publishing. Bozarth, C.C. & Handfield R.B. (2005). Introduction to Operations and Supply Chain Management. New Jersey: Pearson Education Cox, J.F. & Blackstone, J.H. eds. (1998). APICS Dictionary (9 th ed.) Virginia: APICS

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12/12/2006Measuring Capacity38 Readings List Fare, R., Grosskopf, S., & Kokkelenberg, E. C. (1989). Measuring Plant Capacity, Utilization and Technical Change: A Nonparametric Approach. International Economic Review, 30 (3), 655-666. Newman, M. (2006). Empty wards and promises. Hospital Doctor, 20-22. Mahanti, T. K. (2006, October 2). Higher capacity utilisation raises global competitiveness. Knight Ridder Trinbune Business News. pg 1.

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12/12/2006Measuring Capacity39 Readings List Morlok, E. K., Chang, D. J. (2004). Measuring capacity flexibility of a transportation system. Transportation Research Part A: Policy & Practice, 38 (6), 405-420. Pascoe, S., Greboval, D., Kirkley, J., & Lindebo, E. (2004) Measuring and appraising capacity in fisheries: framework, analytical tools and data aggregation. Rome: FAO Fisheries Circular. No. 994 Ruist, E., Söderström, H. T. (1975). Measuring Capacity Utilization and Excess Demand. European Economic Review, 6 (4), 369-386. Taverna, M. A. (1998). BMW Rolls-Royce Targets Development Capacity Issues. Aviation Week & Space Technology, 149 (16), 77.

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