1. MD707 Operations Management Professor Joy Field
Capacity Planning
MD707 Operations Management
Professor Joy Field

2. Capacity Planning
Capacity is the maximum rate of output for a facility.
Capacity planning considers questions such as:
What should be the balance between long-term and short-term capacity?
Should we expand capacity before the demand is there or wait until demand is more certain? 
What facility size is optimal?
Capacity decisions follow from a firm’s operations strategy and forecasted demand pattern.

3. Measuring Capacity Type Utilization Output measures Input measures
Average output rate/maximum capacity
Maximum capacity = effective or design capacity?

4. Capacity Bottlenecks and Flow Three-Stage Process1
200/hr 2
50/hr 3
Inputs
Outputs

5. Capacity Cushion Pressures for a large capacity cushion
Uneven demand
Uncertain demand
Uncertain supply
Changing product mix
Capacity comes in large increments (economies of scale)
Pressures for a small capacity cushion
Capital costs

6. Links with Other Operational Characteristics and Priorities
Operational Characteristic/Priority
Capacity Cushion
Faster delivery times
Larger
High quality levels
Smaller
Higher capital intensity
Less worker flexibility
More stable schedules

7. Timing of Capacity Increments Two Capacity Strategies
Planned unused capacity
Forecast of capacity required
Planned use of short-term options

8. Optimal Operating Level

9. Steps in the Capacity Planning Process
Estimate capacity requirements
Identify gaps
Develop alternatives
Evaluate the alternatives 
Select an alternative and implement

10. Make or Buy Decision Problem
Hahn Manufacturing has been purchasing a key component of one of its products from a local supplier. The current purchase price is $1,500 per unit. Efforts to standardize parts have succeeded to the point that this same component can now be used in five different products. Annual component usage should increase from 150 to 750 units. Management wonders whether it is time to make the component in-house, rather than to continue buying it from the supplier. Fixed costs would increase by about $40,000 per year for the new equipment and tooling needed. The cost of raw materials and variable overhead would be about $1,100 per unit, and labor costs would go up by another $300 per unit produced.
Should Hahn make rather than buy?
What is the break-even quantity?
What other considerations might be important?

11. Determining Resource Requirements
The amount of resources (e.g., machines, people, service counters, etc.) needed at a bottleneck operation is based on the total processing and setup time required to meet demand.
where
M = number of bottleneck resources needed to meet production requirements
D = yearly demand (in number of units/year)
p = processing time per unit (in hours)
Q = lot size
s = setup time/lot (in hours)
N = number of hours available/machine/year
c = capacity cushion (in percentage)

12. Resource Capacity Problem
You have been asked to put together a capacity plan for a critical bottleneck operation at the Surefoot Sandal Company. Your capacity measure is number of machines. Three products (men’s women’s, and kid’s sandals) are manufactured. The time standards (processing and setup), lot sizes, and demand forecasts are given in the following table. The firm operates two 8-hour shifts, 5 days per week, 50 weeks per year. Experience shows that a capacity cushion of 5 percent is sufficient. Assume a new setup for each lot produced.
Product
Processing (hr/pair)
Setup (hr/lot)
Size (pairs/lot)
Demand Forecast (pairs/yr)
Men’s sandals
0.05
0.5
240
80,000
Women’s sandals
0.10
2.2
180
60,000
Kid’s sandals
0.02
3.8
360
120,000
How many machines are needed at the bottleneck?
If the operation currently has two machines, what is the capacity gap?
If the operation can not buy any more machines, which products can be made?
If the operation currently has five machines, what is the utilization?

13. Resource Capacity Problem Solutions
Total time available per machine per year
(2 shifts/day)(8 hours/shift)(5 days/week)(50 weeks/year) = 4000 hours/machine/year
With a 5% capacity cushion, the hours/machine/year that are available = 4000(1-0.05) = 3800 hours/machine/year
Total time to produce the yearly demand of each product (this is equal to the processing time plus the setup time)
Men’s =(0.05)(80,000)+(80,000/240)(0.5)= 4167 hrs
Women’s =(0.10)(60,000)+(60,000/180)(2.2)= 6733 hrs
Kid’s =(0.02)(120,000)+(120,000/360)(3.8)= 3667 hrs
Total time for all products = = hrs

14. Resource Capacity Problem Solutions (cont.)
Machines needed = (14,567/3800) = 3.83 = 4 machines
Capacity gap is = 2 machines
With two machines, we have (3800)(2) = 7600 hours of machine capacity. We can make all of the women’s sandals (6733 hours) and some of the men’s sandals, for example.
With five machines, (5)(4000) = 20,000 machine-hours/year are available. The total number of machine-hours/year needed for production are 14, Utilization = (14,567/20,000)(100%) = 73%. Thus, the capacity cushion is (100% - 73%) = 27%.