5 CAPACITY

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Capacity

⚫ Is the maximum rate of output for a process

⚫ Capacity decisions are based on

⚫ Current & future demand

⚫ Perceived opportunities for growth & profit

⚫ Capacity planning is made at two levels:

⚫ Long-term capacity plans involve (at least 2 years):

⚫ Investments in new facilities & equipment

⚫ Short-term capacity plans involve:

⚫ Workforce, overtime budgets, inventories

⚫ Capacity, Inventory & Variability decisions directly impact each

other

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Process Management Triangle

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Measuring Capacity

❖ Each measures: items per unit time

⚫ Output Measures

⚫ High-volume processes with limited products or services; Ex.,

Restaurant : Number of customer per hour or per day

⚫ Input Measures
⚫ Low-volume flexible processes;

Ex., Photocopy Center: Number of machine or machine hours

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Capacity Utilization
⚫ The degree to which capacity is currently
being used to generate products or
services
Output
Capacity utilization = X 100%
Effective Capacity

Output = actual quantity or required quantity(where demand > process capacity)

Effective capacity = maximum output under normal conditions

* Both output and effective capacity units must be in same

terms such as customer/hr, units, minutes, dollars etc.

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Capacity Definitions
⚫ Effective capacity
⚫ The maximum output that a process or firm can
reasonably sustain under normal conditions
⚫ Peak capacity or rated capacity
⚫ The maximum output that a process or facility
can achieve under ideal conditions
⚫ Can be achieved by using marginal methods
such as over time, extra shifts, part time
hiring, subcontracting
⚫ Peak capacity can be sustain for only a short
period of time.

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Capacity Cushion
⚫ Reserve capacity used to deal with
sudden increases in demand
Capacity cushion = 100% - Average Utilization (%)
⚫ How much capacity cushion depends on
⚫ The uncertainty and/or variability of demand
⚫ The cost of lost business
⚫ The cost of idle capacity (primary disadvantage)

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Bottleneck
⚫ An operation that has the lowest effective
capacity of any process
⚫ Limits the output rate of the process
⚫ Any operation with capacity requirements
of more than 100% utilization
⚫ Interaction of processes must be
considered (dependent operations)

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Identifying the Capacity Bottleneck

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Identifying the Capacity Bottleneck

***Very important: the bottleneck is not necessarily the

slowest step
Effective capacity Photograph = 2 staff people / 5 min per student per staff
= 0.4 students per minute
= 24 students per hours
Effective capacity Reception = 5 students/4 minutes per student
= 1.2 students per minutes
= 72 students per hours

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Inventory

⚫ Any stock of items used to support

the production of goods and
services or satisfy customer
demand
⚫ Critical implications of Inventory
⚫ Cost of producing goods or service; Ex.,
cost of physical space, potentially lost business
⚫ Time that customer or products take to
move through a process; Ex., waiting time
in bank line

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Throughput Time or Flow Time
⚫ Total time for an item to move through a
process from the first operation to the last
⚫ Includes
⚫ Operations time
⚫ Movement time between operations
⚫ Wait time
⚫ Machine setup
⚫ Waiting for resources as people & information

Throughput time = Operations + Movement + Wait

time time time
(Specific item)

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Throughput Time & Inventory
⚫ Related mathematically by Little’s Law:

Avg. WIP inventory

Flow time or Throughput time =
(Average) Output rate

▪ Output rate must always = items per time

▪ *WIP = Work-in-process

▪ If a copy centre had avg. 80 customers order waiting for in

various stages of production and serviced 200 customers each
five days , an order is expected to take 80/200 = 0.4 weeks or
two days to complete

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Measuring Process Performance

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Variability

⚫ Designing and evaluating process

capacity is rarely as straightforward
⚫ Production and demand changes
⚫ Example: season to season

⚫ Variation
⚫ A measure of how much something
changes
⚫ Variability is much less intuitive

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Definitions

⚫ Dependent operations
⚫ Operations that are performed in sequence
⚫ Blocked operation
⚫ An operation that cannot pass work along
to the next operation downstream and must
stop
⚫ Starved operation
⚫ An operation that runs out of work to
perform

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Two Basic Options for Variability

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Variability Measurement
⚫ Coefficient of variation (cv)
⚫ Comparing variability between operations or
processes
⚫ Ratio of standard deviation to the average
⚫ High cv > 1.33, it appears in
⚫ Long machine repair time
⚫ Dramatic demand fluctuations

Standard deviation
Coefficient of variation =
Average

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Two Forms of Variability
⚫ Random variation
⚫ Uncertainty that results from chance related to
small differences in:
⚫ Equipment operations
⚫ People’s behavior
⚫ Environmental conditions

⚫ Predictable variation
⚫ Changes determined by specific, usually larger
scale causes, often driven by natural cycles
such as time of day, day of week, season of year etc.
⚫ Preventive maintenance

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Theory of Constraints
Theory of Constraints
⚫ Before expanding the capacity, it is critical to
ensure that existing resources are used
efficiently and effectively by focusing on
maximizing the value of the bottleneck
⚫ Focus is on whatever impedes progress
towards the goal of maximizing the flow of
total value added funds or sales less
discounts and variable costs
Drum-rope-buffer method
⚫ Focus on scheduling around bottlenecks

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Drum-rope-buffer method

⚫ The bottleneck becomes “drum” for the

rest of the process, setting the pace.
⚫ Inputs are pulled into the process only at
that pace ( i.e., rope)
⚫ Extra inventory is placed around the
bottleneck so that it is never starved or
blocked( i.e., buffer)

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Drum Rope-Buffer: An example

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Applying Theory of Constraints (TOC)
TOC focuses management’s attention and action on
the bottleneck, and involves the following steps
1. Identify the system bottleneck(s)
2. Exploit the bottleneck(s)
3. Subordinate all other decisions to #2
4. Elevate the bottleneck(s)
5. Do not let inertia set in

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Process Variability &
Capacity Cushion

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Capacity Timing and Economics
⚫ Effective management capacity considers
both short-term challenges and adjustable
long-term capacity
⚫ Too little capacity can often be painful as
too much
⚫ Managers need to consider if their firm’s
capacity should expand, or wait until
demand arrives
⚫ Decisions are linked to both operations
strategy and process configuration

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Timing of Expansion
⚫ Two extreme strategies
⚫ Expansionist strategy
⚫ Stays ahead of demand, minimizes the chance of
sales lost to insufficient capacity
⚫ Large infrequent jumps
⚫ Wait-and-see strategy
⚫ Lags behind demand, relies on short-term options
such as the use of overtime, temporary workers,
subcontractors, stock outs, and postponements
maintenance to meet any shortfalls
⚫ Smaller more frequent jumps
⚫ Intermediate Strategy
⚫ Follow the leader: Expanding when others do

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Types of Capacity Strategies

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Economies & Diseconomies of Scale
⚫ Economies of scale
⚫ Average unit cost of a good or service can be
reduced by increasing its output rate
⚫ Four principal reasons for economies of scale
⚫ Spreading fixed costs
⚫ Reducing construction costs
⚫ Cutting costs of purchased materials
⚫ Finding process advantages

⚫ Diseconomies of Scale
⚫ Average cost per unit increases as the facility’s
size increases

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Economies & Diseconomies of Scale

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