Capacity Planning

For Operations Management, 9e by

PowerPoint Slides
Krajewski/Ritzman/Malhotra
by Jeff Heyl © 2010 Pearson Education
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 6–1
Planning Capacity

 Capacity is the maximum rate of output of

a process or system
 Accounting, finance, marketing,
operations, purchasing, and human
resources all need capacity information to
make decisions
 Capacity planning is done in the long-term
and the short-term
 Questions involve the amount of capacity
cushion and expansion strategies

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Design capacity /effective
capacity/Actual Output
 Design capacity :
The theoretical capacity of an operation – the capacity which its technical
designers had in mind when they commissioned the operation – cannot
always be achieved in practice.
 Effective capacity:
The machine or the production line can not run at its maximum capacity.
Because different products will have different manufacturing
requirements. So, there are some losses due to the changeover or other
manufacturing requirements. The actual capacity which remains, after
different losses is called the effective capacity of operation.
 Actual Output:
The actual output of the line will be even lower than the effective capacity due to
some other factors. Such factors as quality problems, machine breakdowns,
absenteeism and avoidable problems.

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Efficiency and Utilization

Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity

Both measures expressed as percentages

6–4
Capacity and Scale
 Economies of scale: A concept that states that that the
average unit production cost of a good or service can be reduced
by increasing its output rate. Main reasons are
 Spreading fixed costs
 Reducing construction costs
 Cutting costs of purchased materials
 Finding process advantages

 Diseconomies of scale: A concept that states that that

the average unit production cost of a good or service increases as the
capacity increases. Main reasons are
 Excessive size can bring Complexity
 Excessive size can bring loss of focus
 Inefficiencies
 Too many layers of employees/bureaucracy practice
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Capacity and Scale

250-bed 750-bed
hospital hospital
500-bed
(dollars per patient)
Average unit cost

hospital

Economies Diseconomies
of scale of scale

Output rate (patients per week)

Figure 6.1 – Economies and Diseconomies of Scale

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Capacity Timing and Sizing
 Sizing capacity cushions
 Capacity cushions are the amount of reserve
capacity a process uses to handle sudden changes

Capacity cushion = 100% – Average Utilization rate (%)

 Expansionist strategies: Large and infrequent jump in capacity
 Minimizes the chances of sales loss/Increase the market
share
 Economies of scale
 Wait-and-see strategies: Smaller and more frequent jump in
capacity
 Lags behind demand. To meet any shortfalls, it relies on
short term options such as overtime, subcontractors,
stock outs, and postponement of preventive maintenance
on equipments
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Capacity Timing and Sizing

Planned unused Forecast of capacity

capacity required
Capacity

Capacity
increment

Time between
increments

Time

(a) Expansionist strategy

Figure 6.2 – Two Capacity Strategies

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Capacity Timing and Sizing

Planned use of Forecast of capacity

short-term options required
Capacity

Capacity
increment
Time between
increments

Time

(b) Wait-and-see strategy

Figure 6.2 – Two Capacity Strategies

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Systematic Approach to long term
capacity decisions

1. Estimate future capacity requirements

2. Identify gaps by comparing requirements

with available capacity

3. Develop alternative plans for reducing the

gaps

4. Evaluate each alternative, both

qualitatively and quantitatively, and make
a final choice

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Systematic Approach

 Step 1 is to determine the capacity required

to meet future demand using an
appropriate planning horizon
 Output measures based on rates of
production
 Input measures may be used when
 Product variety and process divergence is high
 The product or service mix is changing
 Productivity rates are expected to change
 Significant learning effects are expected

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Systematic Approach

 For one service or product processed at

one operation with a one year time period,
the capacity requirement, M, is
Capacity Processing hours required for year’s demand
requirement = Hours available from a single capacity unit
(such as an employee or machine) per year,
after deducting desired cushion
Dp
M=
N[1 – (C/100)]
where
D= demand forecast for the year (number of customers
serviced or units of product)
p= processing time (in hours per customer served or unit
produced)
N= total number of hours per year during which the process
operates
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Education, desired as Prenticecapacity
Hall. cushion (expressed as a percent) 6 – 12
 Systematic Approach

 Setup times may be required if multiple

products are produced
Processing and setup hours required for
year’s demand, summed over all services
Capacity or products
requirement = Hours available from a single capacity unit
per year, after deducting desired cushion

[Dp + (D/Q)s]product 1 + [Dp + (D/Q)s]product 2 + … +

[Dp + (D/Q)s]product n
M=
N[1 – (C/100)]
here
Q= number of units in each lot
s= setup time (in hours) per lot

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Estimating Capacity Requirements
EXAMPLE 6.1
A copy center in an office building prepares bound reports for
two clients. The center makes multiple copies (the lot size) of
each report. The processing time to run, collate, and bind each
copy depends on, among other factors, the number of pages.
The center operates 250 days per year, with one 8-hour shift.
Management believes that a capacity cushion of 15 percent
(beyond the allowance built into time standards) is best. It
currently has three copy machines. Based on the following
table of information, determine how many machines are needed
at the copy center.

Item Client X Client Y

Annual demand forecast (copies) 2,000 6,000
Standard processing time (hour/copy) 0.5 0.7
Average lot size (copies per report) 20 30
Standard setup time (hours) 0.25 0.40

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Estimating Capacity Requirements
SOLUTION

[Dp + (D/Q)s]product 1 + [Dp + (D/Q)s]product 2 + … + [Dp + (D/Q)s]product n

M=
N[1 – (C/100)]

[2,000(0.5) + (2,000/20)(0.25)]client X + [6,000(0.7) + (6,000/30)(0.40)]client Y

=
[(250 day/year)(1 shift/day)(8 hours/shift)][1.0 - (15/100)]

5,305
= = 3.12
1,700

Rounding up to the next integer gives a requirement of

four machines.

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Systematic Approach

 Step 2 is to identify gaps between

projected capacity requirements (M) and
current capacity
 Complicated by multiple operations and
resource inputs

 Step 3 is to develop alternatives

 Base case is to do nothing and suffer the
consequences
 Many different alternatives are possible

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Systematic Approach

 Step 4 is to evaluate the alternatives

 Qualitative concerns include strategic fit and
uncertainties
 Quantitative concerns may include cash flows
and other quantitative measures

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Solved Problem 1
You have been asked to put together a capacity plan for a
critical operation at the Surefoot Sandal Company. Your
capacity measure is number of machines. Three products
(men’s, women’s, and children’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.
Time Standards
Processing Setup Lot size Demand Forecast
Product
(hr/pair) (hr/pair) (pairs/lot) (pairs/yr)
Men’s sandals 0.05 0.5 240 80,000
Women’s sandals 0.10 2.2 180 60,000
Children’s sandals 0.02 3.8 360 120,000

a. How many machines are needed?

b. If the operation currently has two machines, what is the
capacity gap?
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Solved Problem 1
SOLUTION
a. The number of hours of operation per year, N, is N = (2
shifts/day)(8 hours/shifts) (250 days/machine-year) = 4,000
hours/machine-year
The number of machines required, M, is the sum of machine-
hour requirements for all three products divided by the
number of productive hours available for one machine:

[Dp + (D/Q)s]men + [Dp + (D/Q)s]women + [Dp + (D/Q)s]children

M=
N[1 - (C/100)]
[80,000(0.05) + (80,000/240)0.5] + [60,000(0.10) + (60,000/180)2.2]
+ [120,000(0.02) + (120,000/360)3.8]
=
4,000[1 - (5/100)]

14,567 hours/year
= = 3.83 or 4 machines
3,800 hours/machine-year
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