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

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

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

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

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.

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)

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

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

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? –?–?

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?

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)

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

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?

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

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

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?

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

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?

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 = Capacity = 350 standard hours

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)

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

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

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

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?

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)

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

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)

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

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.

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

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

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 machine hours Utilization = 364 machine hours x 100=.9479 x machine hours Utilization = %

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.

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)

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

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?

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

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), Newman, M. (2006). Empty wards and promises. Hospital Doctor, Mahanti, T. K. (2006, October 2). Higher capacity utilisation raises global competitiveness. Knight Ridder Trinbune Business News. pg 1.

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), 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), Taverna, M. A. (1998). BMW Rolls-Royce Targets Development Capacity Issues. Aviation Week & Space Technology, 149 (16), 77.