Capacity Management

Case Study
 CAPACITY PLANNING CASE STUDY

The batch manufacturing company of J.H. Warwick (Engineering) PLC has a product
range of six items which are sold direct to a chain of distributors. The six products
follow approximately similar process routes through the five production departments.
The time required in each of the five production departments to produce one unit of
each product is shown in Exhibit 1 Also shown is the time lost in each department due
to:
(a) Machine breakdowns
(b) Ancillary activities such as change overs etc.
(c) Idle time due to material shortages etc.

Exhibit 1
Departmental Hours per Product Selling
Part V W X Y Z Price
AB1023 0.250 0.125 0.063 0.063 0.375 £15
BX2064 0.227 0.363 0.363 0.136 0.227 £30
CS3075 0.368 0.368 0.368 0.368 0.368 £15
DQ4094 0.375 0.027 0.063 0.438 0.250 £50
EV5085 0.235 0.010 0.330 0.325 0.556 £15
FL6033 0.175 0.320 0.000 0.275 0.225 £15

Lost Time (as a percentage of Run Time)

Due to:
M/C Down 2.70 3.70 3.90 1.10 1.00
Ancillary 11.40 11.40 7.90 4.10 6.00
Idle 23.50 20.80 19.80 9.40 29.70

The sales volumes for the six products over the years are shown in Exhibit 2
together with the forecast level of demand for next year (+1)

Exhibit 2
SALES FORECAST
Part -4 -3 -2 -1 Today +1
AB1023 5000 6000 7000 7000 8000 8500
BX2064 8000 9000 10000 10500 12000 13000
CS3075 ------ 10000 20000 40000 70000 98000
DQ4094 2400 2500 2500 2600 2500 2600
EV5085 2200 2200 2000 1900 1600 1300
FL6033 4700 4400 4200 3900 3700 3500

In Exhibit 3 the expected capacity of each department is shown for the coming year
in terms of the number of machine hours available (it is not considered that labour
presents a capacity limitation).

Exhibit 3
V W X Y Z
Hours available 61200 57600 54000 50400 61200

In the current year it is expected that the company will have a gross income of
approximately £1.7M and a target of £2.0M has been set for next year with a gross
profit of £1.0M. You are required to suggest a strategy that will help to achieve these
objectives.

Note that the direct costs associated with the range of products are as follows in
Exhibit 4a.

Exhibit 4a
Part Material Labour
AB1023 £2.56 £3.80
BX2064 £4.10 £10.10
CS3075 £6.16 £1.92
DQ4094 £12.80 £12.80
EV5085 £10.50 £3.40
FL6033 £10.50 £2.70
 CAPACITY PLANNING CASE STUDY
(Further information)
The achievement of the planned business target for the current year seems to be
assured. However it is worth while to consider some of the information available from
the current year and to use this as a basis for developing the strategy for the future.
For example, each of the products should be considered to see it's importance to the
Company in terms of Income and Gross Profit or Contribution to Overheads (usually
abbreviated to just 'Contribution'). This is done in the amended version of Exhibit 4b
shown below.

Exhibit 4b
Part Current Mat Labour Price Unit/Cont Income Contribution
AB1023 8000 £2.56 £3.80 £15 £8.64 £120000 £69120
BX2064 12000 £4.10 £10.10 £30 £15.80 £360000 £189600
CS3075 70000 £6.16 £1.92 £15 £6.92 £1050000 £484400
DQ4094 2500 £12.80 £12.80 £50 £24.40 £125000 £61000
EV5085 1600 £10.50 £3.40 £15 £1.10 £24000 £1760
FL6033 3700 £10.50 £2.70 £15 £1.80 £55500 £6600
Total £1734500 £812540

In similar fashion the capacity implications can be calculated from Exhibit 1 and
Exhibit 2 as shown in Exhibit 5 below.

Exhibit 5
Part V W X Y Z
AB1023 2000.0 1000.0 500.0 500.0 3000.0
BX2064 2724.0 4356.0 4356.0 1632.0 2724.0
CS3075 25760.0 25760.0 25760.0 25760.0 25760.0
DQ4094 937.5 67.5 157.5 1095.0 625.0
EV5085 376.0 16.0 528.0 520.0 889.6
FL6033 647.5 1184.0 0.0 1017.5 832.5

Total 32445.0 32383.5 31305.5 30528.5 33831.1

Estimated
Down Time 876.0 1198.2 1220.9 335.8 338.3
Ancillary 3698.7 3691.7 2473.1 1251.7 2029.9
Idle 7624.6 6735.8 6198.5 2869.7 10047.8

Total Capacity
Required 44644.3 44009.2 41198.0 34985.7 46247.1

Available
Capacity 61200.0 57600.0 54000.0 50400.0 61200.0

Under/Over 16555.7 13590.8 12802.0 15414.3 14952.9

 CAPACITY PLANNING CASE STUDY
Next Year’s Data

If it is assumed that the prices and the costs will remain the same for next year (a
valid approximation since they are likely to be in the same proportions) then the
exercise carried out for the current year can be repeated for next year.

Exhibit 4c
Part +1 Mat Labour Price Unit/Cont Income Contribution
AB1023 8500 £2.56 £3.80 £15 £8.64 £127500 £73440
BX2064 13000 £4.10 £10.10 £30 £15.80 £390000 £205400
CS3075 98000 £6.16 £1.92 £15 £6.92 £1470000 £678160
DQ4094 2600 £12.80 £12.80 £50 £24.40 £130000 £63440
EV5085 1300 £10.50 £3.40 £15 £1.10 £19500 £1430
FL6033 3500 £10.50 £2.70 £15 £1.80 £52500 £6300
Total £2189500 £1028170

In similar fashion the capacity implications can be calculated from Exhibit 1 and
Exhibit 2 as shown in Exhibit 5 below.

Exhibit 5
Part V W X Y Z
AB1023 2125.0 1062.5 535.5 535.5 3187.5
BX2064 2951.0 4719.0 4719.0 1768.0 2951.0
CS3075 36064.0 36064.0 36064.0 36064.0 36064.0
DQ4094 975.0 70.2 163.8 1138.8 650.0
EV5085 305.5 13.0 429.0 422.5 722.8
FL6033 612.5 1120.0 0.0 962.5 787.5

Total 43033.0 43048.7 41911.3 40891.3 44362.8

Estimated
Down Time 1161.9 1592.8 1634.5 449.8 443.6
Ancillary 4905.8 4907.6 3311.0 1676.5 2661.8
Idle 10112.8 8954.1 8298.4 3843.8 13175.8

Total Capacity
Required 59213.4 58503.2 55155.3 46861.4 60644.0

Available
Capacity 61200.0 57600.0 54000.0 50400.0 61200.0

Under/Over 1986.6 (903.2) (1155.3) 3538.6 556.1

The above data shows that there is a shortage of capacity in departments W and X
and that it will not be possible to produce the full quantities forecast as demand in
Exhibit 2. The approach to dealing with this problem may be selected from a variety of
alternatives. A simple model of the system can be set up using a Spreadsheet (such
as Excel or Lotus) and different strategies may be tested on a 'what if' basis. The
factors to be taken into account include the contribution; gross income; price/volume
sensitivity; cost of increasing capacity and cost of goodwill.

It is helpful sometimes, when making decisions in circumstances of this kind, to display

the relevant data in the form of an ABC or Pareto diagram. In the figure below the
values of Contribution and Income are shown in rank order. It can be seen that the
products CS and BX dominate the operations of the firm. Equally, the relative
unimportance of FL and EV can be seen to be small to the point of insignificance.

Pareto Analysis by Income

1600000

1400000

1200000

1000000
Income
£'s

800000
Contribution
600000

400000

200000

0
CS3075 BX2064 DQ4094 AB1023 FL6033 EV5085

Part Numbers