Capacity

Management Science
Mr. Juanito J. Valles, Sr.
NU-Fairview Faculty
Capacity

• The maximum rate of output for a facility.

• The facility can be a workstation or an entire organization.
• The manager must provide the capacity to meet the current and
future demand otherwise the organization will miss opportunities
for growth and profits.
Capacity Planning

• Central to the long-term success of an organization

• When choosing a capacity strategy, managers have to consider
questions such as the following:
1. How much of a cushion is needed to handle variable, uncertain
demand?
2. Should we extend capacity before the demand is there or wait
until demand is more certain?
Measures of Capacity: Input or Output

• Output measures are the usual choice for line flow processes.
Example, a restaurant maybe able to handle 100 take-out
customers or 50 sit-down customers per hour. It might also handle
50 take-out and 25 st-down customers or many other combinations
of the two-type of customers.
• As the amount of customization and variety in the product mix
becomes excessive, output-based capacity measures become less
useful.
• Output measures are best utilized when the firm provides a
relatively small number of standardized products and services.
Measures of Capacity: Input or Output

• Input measures are the usual choice for flexible processes.

• For example, in a photocopy shop, capacity can be measured in
machine hours or number of machines.
Unitilization

• The degree to which equipment, space, or labor is currently being

used, is expressed as percentage.
A SYSTEMATIC APPROACH TO CAPACITY DECISIONS

• Although each situation is somewhat different, a four-step

procedure generally can help managers make sound capacity
decisions.
1. Estimate future capacity requirements.
2. Identify gaps by comparing requirements with available capacity.
3. Develop alternative plans for filling the gaps.
4. Evaluate each alternative, both qualitatively and quantitatively,
and make a final choice.
1.Estimate Capacity Requirements
• The capacity is expressed as the number of machines available at at an
operation.
Estimate Capacity

• The processing time, p, is the numerator depends on the process

and methods selected to do the work. Estimates of p come from
established works standards. The denominators is the total number
of hours, N, available per year multiplied by a proportion that
accounts for the desired capacity cushion, C. The proportion is
simply 1.0 – C, where C is converted to a proportion by dividing by
100.
Capacity Requirements: Setup Time

• If multiple products or services are involved, extra time is needed

to change over from one product or service to the next.
• Setup time is the time required to change a machine from making
one product or service to making another.
• The total setup time is found by dividing the number of units
forecast per year, D, by the number of units made in each lot,
which gives the number of setups per year, and then multiplying by
the time per setup.
 Capacity Requirements: Setup Time

• Always round up the fractional part unless it is cost coefficient to use short-term options such as overtime or
stockouts to cover any shortfalls.
2. Identify Gaps

• A capacity gap is any difference(positive or negative) between projected

demand and current capacity.
• Identifying gap requires use of the correct capacity measure.
• Complications arise when multiple operations and several resource inputs
are involved.
• For example, airline executives incorrectly concluded that airlines having
larger share of seats flown attract larger share of. Total passengers. In orther
words fly more seats get more passengers but it turned out that competitors
flying smaller planes were more successful.
• The correct measures of capacity was the number of departures rather than
the number of seats.
3. Develop Alternatives

• The nest step is to develop alternative plans to cope with

projected gaps.
• One alternative, called the base case, is to do nothing and simply
lose orders from any demand that exceeds current capacity.
4. Evaluate Alternatives: Qualitative concerns

• Qualitatively, the manager has to look at how each alternative fits

the overall capacity strategy and other aspects of the business not
covered by financial analysis.
• One particular concern might be uncertainties about demand,
competitive reaction, technological change, and cost estimates.
• Some of these factors cannot be quantified and have to be
assessed on the basis of judgement and experience.
 4. Evaluate Alternatives: Quantitative
concerns
• Quantitatively, the manager estimates the change in cash flow for
each alternative over the forecast time horizon, compared to the
base case.
• Cash flow is the difference between the flow of funds into and out
of an organization over a period of time, including revenues,
costs, and change in assets and liabilities.
 Example: Estimating Requirements
• 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 eight-hour shift. Management
believes that a capacity cushion of 15 percent(beyond the allowance built into time standards) is best. Based on
the following tbale of information , determine how many machines are needed at the copy center.

Item Client X Client Y

Annual demand 2000 6000
forecast(copies)
Standard processing 0.5 0.7
time(hour/copy)
Average lot size (copies per 20 30
report)
Standard setup time(hours) 0.25 0.40
Solution
 Example: Identifying Gaps
• Grandmother’s Chicken Restaurant is experiencing a boom in business. The owner expects to serve a total
of 80,000 meals this year. Although the kitchen is operating at 100 percent capacity, the dining room can
handle a total of 105,000 diners per year. Forecasted demand for the next five years is as follows:
Year Total Meals
Year 1 90,0000 meals
Year 2 100,000 meals
Year 3 110,000 meals
Year 4 120,000 meals
Year 5 130,000 meals

What are the capacity gaps in Grandmother’s kitchen and dining room through year 5?
Solution
Example: Evaluating the Alternatives
• One alternative for Grandmother’s Chicken Restaurant is to expand
both the kitchen and the dining room now, bringing their
capacities up to 130,000 meals per year. The initial investment
would be $200,000, made at the end of this year(year 0). The
average meal is priced t $10, and the before-tax profit margin is
20 percent. The 20% figure was arrived at by determining that, for
each $10 meal, $6 covers variable costs and $2 goes toward fixed
costs(other than depreciation). The remaining $2 goes to pretax
profit. What are the pretax cash flows from this project for the
next five years, compared to those of the base case of doing
nothing?
Solution