2 Capacity is the maximum output rate of a production or service facility Capacity planning is the process of establishing the output rate that may be needed at a facility:Strategic issues(long term): how much and when to spend capital for additional facility & equipmentTactical issues(short term): workforce & inventory levels, & day-to-day use of equipment
3 Measuring Capacity Examples There is no one best way to measure capacityOutput measures are easier to understandWith multiple products, inputs measures work better
4 Capacity Information Needed Design capacity:Maximum output rate under ideal conditionsA bakery can make 30 custom cakes per day when pushed at holiday timeEffective capacity:Maximum output rate under normal (realistic) conditionsOn the average this bakery can make 20 custom cakes per day
5 Calculating Capacity Utilization Measures how much of the available capacity is actually being used:Measures effectivenessUse either effective or design capacity in denominator
6 Example of Capacity Utilization 5-6Example of Capacity UtilizationDuring one week of production, a plant produced 83 units of a product. Its historic highest or best utilization recorded was 120 units per week. What is this plant’s capacity utilization rate?Answer:Capacity utilization rate = Capacity usedBest operating level= 83/120=0.69 or 69%6
8 Example of Computing Capacity Utilization: In the bakery example the design capacity is 30 custom cakes per day. Currently the bakery is producing 28 cakes per day. What is the bakery’s capacity utilization relative to both design and effective capacity?
9 ExampleIf operated around the clock under ideal conditions, the fabrication department of an engine manufacturer can make 100 engines per day. Management believes that a maximum output rate of only 45 engines per day can be sustained economical over a long period of time. Currently, the department is producing an average of 50 engines per day. What is the utilization of the department relative to peak capacity? Effective capacity?
10 How Much Capacity Is Best? The Best Operating Level is the output that results in the lowest average unit costEconomies of Scale:Where the cost per unit of output drops as volume of output increasesSpread the fixed costs of buildings & equipment over multiple units, allow bulk purchasing & handling of materialDiseconomies of Scale:Where the cost per unit rises as volume increasesOften caused by congestion (overwhelming the process with too much work-in-process) and scheduling complexity
11 Best Operating Level and Size Alternative 1: Purchase one large facility, requiring one largeinitial investmentAlternative 2: Add capacity incrementally in smaller chunks asneeded
12 Economies & Diseconomies of Scale 5-12Economies & Diseconomies of Scale100-unitplant200-unit300-unit400-unitVolumeAverageunit costof outputEconomies of Scale and the Learning Curve workingDiseconomies of Scale start working
14 Capacity cushionThe capacity cushion is the amount of reserve capacity that a firm maintains to handle sudden increases in demand or temporary losses of production capacity.It measures the amount by which the average utilization (in terms of effective capacity) falls below 100 percent.Capacity cushion = 100% - Utilization rate (%)
15 When to expand and by how much? The timing and sizing of expansion are related. If demand is increasing and the time between increments increases, the size of the increments must also increase.Expansionist strategywhich stays ahead of demand, minimizes the chance of sales lost to insufficient capacity.Wait-and-see strategylags behind demand, relying on short-term options
16 Estimate capacity requirements(Single Machine) Processing hours required for year’s demandHours available from one machine per year after deducting the desired cushionEstimate capacity requirements(Multiple M/c)Sum of Processing & setup hours required for year’s demand for each productHours available from one machine per year after deducting the desired cushion
17 Estimate capacity requirements (Single M/c) M=D p /N[1-C/100)] WhereM= no of machines required for single processD = number of units (customers) forecast per yearp = processing time (in hours per unit or customers)N = total number of hours per year during which the process operatesC = desired capacity cushion
18 Estimate capacity requirements M=[Dp+(D/Q)S]product1 + [Dp+(D/Q)S]product [Dp+(D/Q)S]productnN[1-C/100)]WhereM= no of machines required for multiple processD = number of units (customers) forecast per yearp = processing time (in hours per unit or customers)N = total number of hours per year during which the process operatesC = desired capacity cushionQ = number of units in each lots = setup time (in hours) per lot
19 ExampleA copy center in an office building prepares bound reports for two clients. The center makes multiple copies (the lot size) of each report. The processing time to run, collate, and bind each copy depends on, among other factors, the number of pages. The center operates 250 days per year, with an eight hours shift. Management believes that a capacity cushion of 15% is best. It currently has 3 copy machines. Based on the following table of information, determine how many machines are needed at the copy center.Item Client X Client YAnnual demand forecast (copies)Standard processing time (hour/copy)Average lot size (copies per report)Standard setup time (hours)
20 Identify GapsA capacity gap is any difference (positive or negative) between projected demand and current capacity. Identifying gaps requires use of the correct capacity measure. Complications arise when multiple operations and several resource inputs are involved.In 1970 when airline executive states fly more seats to get more passengers many airlines responded by buying more jumbo jets, but competitors flying smaller planes were more successful. The correct measure of capacity was the number of departments rather than the number of seats.
21 Step 2: Identify GapsA restaurant is experiencing a boom in business. The owner expects toserve a total of 80,000 meals this year. Although the kitchen is operatingat 100 percent capacity, the dining room can handle a total of 1,05,000dinners per year. Forecasted demand for the next five years is asfollows:Year 1: 90,000 mealsYear 2: 1,00,000 mealsYear 3: 1,10,000 mealsYear 4: 1,20,000 mealsYear 5: 1,30,000 mealsWhat are the capacity gaps in the restaurant’s kitchen and dining roomthrough year 5?
22 Develop alternatives The next step is to develop alternative plans to cope with projected gaps.One alternative is base case, which is do nothing and simply lose orders from any demand that exceeds current capacity.Other alternatives are various timing and sizing options for adding new capacity, including the expansionist and wait-and-see strategies.
23 Tools for Capacity Planning Waiting Line ModelSimulationDecision Tree
24 5-24ExampleA glass factory specializing in crystal is experiencing a substantial backlog, and the firm's management is considering three courses of action:A) Arrange for subcontractingB) Construct new facilitiesC) Do nothing (no change)The correct choice depends largely upon demand, which may be low, medium, or high. By consensus, management estimates the respective demand probabilities as 0.1, 0.5, and 0.4.20
25 5-25The management also estimates the profits when choosing from the three alternatives (A, B, and C) under the differing probable levels of demand. These profits, in thousands of dollars are presented in the table below:21
26 Example: Good Eats Café Good Eats Café is about to build a new restaurant. An architect has developed three building designs, each with a different seating capacity. Good Eats estimates that the average number of customers per hour will be 80, 100, or 120 with respective probabilities of 0.4, 0.2, and The payoff table showing the profits for the three designs is on the next slide.Payoff TableAverage Number of Customers Per Hourc1 = c2 = c3 = 120Design A $10, $15, $14,000Design B $ 8, $18, $12,000Design C $ 6, $16, $21,000