Capacity Planning

Capacity Planning
• Every operations system uses of resources including labor, machines, tools
• Capacity is a fixed investment for repetitive use by the system.
• Capacity denotes the availability of resources for use of various processes.
• It can be donated as maximum output of products and services one can achieve by using
these resources.

Example: A machine capable of stamping circular washers that are used in the final assembly
of a product.
• Capacity of machine can be express: the number of machine hours or the number of washers
that can produced. 200 machine hour available for processing, or if we assume one can stamp
200 washers per hour then the capacity can be express 40,000 washers per month.
• ABB manufacturer circuit breakers, the firm will compute capacity in terms of number of
breakers produce per month.
• A hospital has a certain number of beds
• A bus has a certain number of seats
• Capacity has a significant impact on the cost of operations of the system.
• Capacity investment are large and fixed in nature.

The key question in capacity planning are:

1. What kind of capacity is needed?
2. How much is needed to match demand?
3. When it needed?

The question what kind of capacity is needed is depends on the products and services

a) Forecasting is key
b) How much it costs?
c) What are the potential benefits and risks?
d) Should capacity be changed all at once or small change?
e) Can supply chain handle the change?
 Measures of Capacity
• There is a different interpretation of capacity, actually it is difficult to measure capacity.
$ amount is a poor measure of capacity.
• Design capacity is the maximum rate of output achieved.

• Effective capacity is always less than the design capacity – changing product mix, periodic
maintenance, lunch breaks, problem in scheduling and balancing operations etc.

• Actual output cannot exceed effective capacity because machine breakdown, absent of
workers, shortages of materials, quality factor outside the control of the operations.

Two measures are:

Efficiency = (actual output/ effective capacity) x 100%
Utilization = (actual output/design capacity) x 100 %

Both measures are expressed as percentage

Example:
Compute the efficiency and the utilization of the vehicle repair department:

Design capacity = 50 trucks per day

Effective capacity = 40 trucks per day

Actual output = 36 trucks per day

Efficiency = (36 truck per day/ 40 trucks per day) x 100%= 90 %

Utilization = (36 truck per day/ 50 trucks per day) x 100%= 72 %

Estimate labor and machine requirements:

The computation of the labor requirements depends on two major factors:

The amount of standard labor hours required per unit of the product and the efficiency
of the labor.

Let, projected demand per unit time duration the planning horizon = D

Standard labor hours required per unit of product = SL

Efficiency of Labor = EL

Capacity requirement (labor)= (D x SL)/ EL

Machine requirements by using subscript M in the place of L:

Capacity requirement (machine)= (D x SM)/ EM

Example 1:

A manufacturer of medium-voltage circuit breakers is planning for a capacity build-up of

8 cubical and 13 circuit breaker per day. The fabrication division is responsible for
manufacturing metal sheet components that are welded together to form the cubical.
Some metal sheet components are welded to host the circuit breakers inside the cubical.
the components are painted after the welding. While the fabrication uses a CNC press,
painting a manual job. The standard time required at the CNC press for fabricating a
cubical is 150 minutes and the time for the breaker housing is 36 minutes. A cubical required
43 m2 of area to be painted and a breaker house requires 2.60 m2 of area of painting.
The standard time required to paint 1 m2 of area is 18 minutes. The machines work at 80 per
cent efficiency and the manual works at 90 percent efficiency. Using the given data,
compute the labor hour and machine hour requirement.
 Problem 2:
A product is manufacturer in a shop using s five stage process. The first step in the process is to
cut the sheet metal to required shapes and sizes using a shearing process. After the shearing
process, the components are subjected to pressing operations to alter the shape of the flat sheet
As per the design. In the third stage of the process, welding is done to join the components.
The next step in the process is a painting operations. After painting, the components are packed
and kept ready for dispatch. The time taken for each of the operations each stage has only one
machine for operation. Map the process and analyses the capacity with respect to the
following scenarios:
a) If the shop works on a 8 hours shift with an effective available time of 450 minutes, what is
the production capacity of the shop?
b) Where is the bottleneck in the system? If we should we make the investment?
c) Identify the additional capacity required for a daily production target of 25 units. Compute
the utilization of the machines as per the revised capacity calculation.
d) What is the key reference of this exercise?
Sharing Pressing Welding Painting Packing

20m 30 m 15 m 12 m 6m
 Cost – Volume Analysis
• Cost volume analysis focuses on relationship between costs, revenue, and volume of output.
• The purpose of cost volume analysis is to estimate the income of an organization under
different operating condition.
Costs:
Fixed costs: rental costs, property taxes, equipment coats, admin costs
Variable costs: material costs, labor cost, remain same regardless of volume of output
TC= FC + VC
VC= Q x v , v = variable cost per unit

Total Revenue (TR)= R x Q

The volume at which total cost and total revenue are equal is the Break-even point.

Profit (P) = TR- TC= R x Q – (FC + v X Q)

P = Q(R-v) – FC
Required volume, Q, Q = (P+FC)/ R- v
 • A special case, the volume output needed for total revenue to equal total cost.
This break-even point, computed using the formula:
QBEP = FC/(R-v)
Problem 3:
• A manger has the option of purchase one, two or three machines. Fixed costs and the
potential volume are given in the table:
Number of Total Annual Fixed Range of output
Machines Costs
1 $ 9,600 0 to 300
2 15,000 301 to 600
3 20,000 601 to 900

Variable cost is $ 10 per unit and revenue is $ 40 per unit

a) Determine the break-even analysis.
b) If projected annual demand is between 580 to 660 units, how many machines should the
manger purchase?
 Problem 4:

The manager of an oil refinery must decide on the maximum mix of 2 possible
blending processes of which the inputs and outputs production run are as
follows:
____________________________________________________________
Input Output
Process Crude A Crude B Gasoline X Gasoline Y
1 4 6 9 6
2 5 6 5 5

The maximum amounts available of crude A and B are 250 units and 200 units
respectively. Market demand shows that at least 150 units of gasoline X and
130 units of gasoline Y must be produced. The profits per production run from
process 1 and process 2 are Rs 40 and Rs 50 respectively. Formulate LPP
for maximizing the profits.
Let x1= no. of production run in process 1
x2= no of production run in process 2

Maximize Z = 40x1 + 50x2

Subject to
6x1 + 5x2 ≤ 250 (Input Constrains)
4x1 + 6x2 ≤ 200

6x1 + 5x2 ≥ 150 ( Output Constraints)

9x1 + 5x2 ≥ 130

x1 and x2 ≥ 0 ( non-negative constraints)