Chapter – 5

process selection and capacity planning

3.3 Capacity Planning

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 Capacity planning
 Capacity is the upper limit or ceiling on the load that an
operating unit (plant, machine, department) can handle
 Capacity is the maximum output rate of a facility
 Capacity planning is the process of establishing the output
rate that can be achieved at a facility
 Goal

 To achieve a match between the long-term supply capabilities of

an organization and the predicted level of long-run demand
 Overcapacity (high costs)
 Under capacity ( loss of customers)

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 Capacity planning….cond
Organizations involved in capacity planning
for various reasons:
 Changes in demand

 Changes in technology

 Changes in environment

 Perceived threats or opportunity

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 Capacity planning….cond

Key question in capacity planning

 What kind of capacity is needed?
 depends on product/service to be produced
 How much is needed?
 When is it needed? depends on forecasts

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 Importance of Capacity Decisions

1. Impacts ability to meet future demands

2. Affects operating costs
- costs of over capacity and under capacity
3. Major determinant of initial costs
- greater the capacity of a productive unit, the greater is cost, but the larger units cost
proportionately less than smaller ones
4. Involves long-term commitment
5. Affects competitiveness
- excess capacity may serve as a barrier to entry by other firms
6. Affects ease of management
- appropriate capacity makes management easier than when capacity is mismatched

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 Measuring Capacity
 There is no one best way to measure capacity
 Output measures like kgs per day are easier to understand
 With multiple products, inputs measures work better

Input Measures of Output Measures

Type of Business
Capacity of Capacity
Car manufacturer Labor hours Cars per shift
Hospital Available beds Patients per month
Pizza parlor Labor hours Pizzas per day
Floor space in
Retail store Revenue per foot
square feet

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 Measuring Capacity….cond
 1.Design capacity:
 Maximum output rate under ideal conditions
 maximum output rate or service capacity an operation, process, or
facility is designed for
 E.g.: A bakery can make 30 custom cakes per day when pushed at holiday time

 2.Effective capacity:
 Maximum output rate under normal (realistic) conditions
 Design capacity minus allowances such as personal time (e.g coffee
break), maintenance, and scrap & other expected factors
 E.g.: On the average this bakery can make 20 custom cakes per day

 3. Actual output
 rate of output actually achieved-cannot exceed effective capacity due
to machine breakdown, absenteeism, shortage of materials &other
unexpected factors. Design Capacity > Effective Capacity > Actual Output 7
Measuring Effectiveness of
Capacity Use
 Measures how much of the available capacity is
actually being used:
actual output
Efficency  (100%)
effective capacity

4. Efficiency is the percent of effective capacity achieved

actual output
Utilization  (100%)
design capacity
5. Utilization is the percent of design capacity achieved

It measures effectiveness (system effectiveness)

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 Capacity of a given Bakery is given below:

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
The Bakery operates 7 days per week, three, 8 hour shifts

 Determine the design capacity per week, utilization,

efficiency and Expected Output of this production.

 N.B.: 6. Expected Output =

(Effective Capacity)(Efficiency)

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Solution:
1. Design capacity = (7 x 3 x 8) x (1,200)
= 201,600 rolls
2. Utilization = Actual output (100%)
Design capacity

Utilization = 148,000/201,600 = 73.4%

3. Efficiency= Actual output (100%)
Effective capacity
Efficiency = (148,000/175,000) x 100% = 84.6%

4. Expected Output = (Effective Capacity)(Efficiency)

= 175,000 rolls X 84.6%
= 148,050rolls per week
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 Computing Capacity Utilization:
A repair facility has the capacity to repair 800 trucks
per month.
However, due to scheduled maintenance of their
equipment, management feels that they can repair
no more than 600 trucks per month.
Last month, two of the employees were absent
several days each, and only 400 trucks were
repaired.

What are the utilization and efficiency of the repair

shop? 11
 Solution

actual output 400

Efficency  (100%)  (100%)  66.67%
effective capacity 600
Efficiency is the percent of effective capacity achieved

actual output 400

Utilization  (100%)  (100%)  50%
design capacity 800
Utilization is the percent of design capacity achieved

 Compared to the effective capacity of 600 trucks per month, 400

trucks per month looks relatively good, but compared to the design
capacity of 800, 400 trucks per month is much less impressive
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 Class Work
 Considering the information below, compute
the efficiency and the utilization of a vehicle
repair department.
- Design capacity = 50 trucks per day
- Effective capacity = 40 trucks per day
- Actual output = 36 trucks per day

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 Ans. Efficiency=36/40 x 100% = 90%,
Utilization=36/50 x 100% = 72%

Rated capacity
 Rated capacity – is a measure of the
maximum usable capacity of a particular
facility.
 Rated capacity will always be less than or
equal to effective capacity. The equation
used to compute rated capacity is:
 7. Rated capacity = (Design Capacity) (Effective
Capacity %) (Efficiency%)
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  Class work

Example:
 Domain Bakery has a plant for processing breakfast rolls.
 The facility has an efficiency of 90%, and the effective
capacity is 80%
 Three process lines are used to produce the rolls.
 The lines operate 7 days a week and three 8-hours shifts
per day. Each line was designed to process 120 standard
rolls per hour.
 What is the rated capacity?
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 Solution

 Given: Number of lines = 3

 Number of hours= Each facility is used 7 days a week, 3 shifts

a day = 7 x 3 x 8 = 168, Number of rolls/per hour = 120.

Therefore,
Design capacity = number of lines x number of hours x number
of rolls/hr = 3 x 168 x120 = 60,480 rolls per week.
Effective capacity = 80%, Efficiency = 90%
 Rated Capacity = (design capacity) (effective capacity%)

(efficiency%) = 60,480 x 0.80 x 0.90 = 43, 546 rolls per week

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 Measuring Effectiveness of Capacity Use----cond

 Key to improving capacity utilization is to

increase effective capacity by
 Correcting quality problems
 Maintaining equipment in good operating conditions
 Fully utilizing bottleneck operations
 Thus, increasing utilization depends on being able to
increase effective capacity

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 Determinants of Effective Capacity

 Facilities:- design of facilities including size and provision

for expansion; and location factor such as transportation
cost, distance to market, labor supply, energy sources.
Layout of facilities- how smoothly work can be performed
 Product and service factor:- The more the products are
uniform/standard, the greater the capacity than variety
products
 Process factors: if quality of output does not meet
standard, the rate of output will be slowed by inspection &
rework activities

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 Determinants of Effective Capacity….cont’d
 Human factors: training, skill, and experience
required
 Operational factors : scheduling, inventory
stocking , late delivery, etc
 Supply chain factors: any short coming to
suppliers, warehousing, transportation, distributors
(if capacity is to be increased or decreased)
 External factors: product standards, safety
regulations, unions, pollution control standards
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 Capacity strategy
Capacity Strategies are typically based on assumptions and
predictions about:
 Long-term demand patterns

 Growth rate and variability

 Costs of building and operating facilities
 Rate and direction of technological change

 Behavior of competitors

 Availability of capital and other inputs

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 Key Decisions of
Capacity Planning Capacity cushion - % of capacity held in
reserve for unexpected occurrences
Capacity cushion = capacity – average demand
1. Amount of capacity needed
 considerations of expected demand & capacity costs ,
and capacity cushion
 capacity cushion –extra capacity in excess of expected
demand used to offset demand uncertainty
 Organizations that have greater demand uncertainty

typically have greater capacity cushion

 Organizations that have standard products and

services generally have smaller capacity cushion

Capacity flexibility – essentially means having the capability to
deliver what the customer wants within a lead time shorter than
competitors
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 Key Decisions of Capacity Planning…cont’d

2. Timing of changes:- availability of capital, lead time,

and expected demand
3. Need to maintain balance:- requires proportionate
changes in capacity in all related areas of the
system
4. Extent of flexibility of facilities:- due to demand
uncertainty and degree of variety in work
requirement

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Making Capacity Planning Decisions

The three-step procedure

1. Identify Capacity Requirements
2. Develop Capacity Alternatives
3. Evaluate Capacity Alternatives

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 1. Identifying capacity requirements

 Forecasting Capacity:
 Long-term capacity requirements based on future demand
 Identifying future demand based on forecasting

 Converting those forecasts into capacity requirements

 Forecast and capacity decision must includ strategic implications

 Strategic Implications
 How much capacity a competitor might have
 Potential for overcapacity in industry a possible hazard

 Capacity cushions
 Plan to underutilize capacity to provide flexibility

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 Calculating Processing Requirements
 A necessary piece of information is the capacity
requirements of products that will be processed

 To find the amount of capacity required, first calculate

standard hours then derive actual hours needed, adjust for
organizational efficiencies (EO), adjust for worker efficiency
(EW), adjust for Equipment efficiency (EM), then add time
associated with batches and unit setups.

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 The formula used to find the amount of capacity
required is:
T= Nu (tp + ts) + n( tb )
A= T/(EO x EW x EM)
NR= A/H
 Where: T = Total productive standard hours
Nu = Number of units needed
tp = standard processing time per unit
ts = standard setup time per unit
n = number of batches
tb = setup time per batch
A = actual hours required
NR = total number of resource units needed
H = hours available during the time period 26
  Class Work

 A company has a demand of 200 units of a product next month; standard

operating time per unit is 8 hours and it takes 0.5 hours to setup each, the unit will
be processed in 10 batches with 4 hours recalibration/setup time between each
batch. Organizational efficiency is 95%, workers are operating at 100% and
machines are working at 90% efficiency. The plant will work 22 days next month
and it has 8 hours working day. How many machines are needed?
Solution:
 Given: Nu = 200 units, tp = 8 hour, ts = 0.5 hour,

 n =10 batch, tb = 4 hour,

 EO = 95%, EW = 100%, EM = 90%

NR=?

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 Solution
 Require Number of machines needed?
- H = 22/day x 8 hour = 176 hour
- T = 200(8hr + 0.5 hr) + 10 (4 hr) = 1740 hour
- A = 1740 hr / (0.95x1x0.9) = 2035.1 hr
- NR = A/H = 2035.1/176 = 11.56 ˜ 12 machines

 Thus for producing a volume that can satisfy the

required demand, the company requires to have
12 machines.

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 Calculating processing requirements E.g.2

Calculating processing requirements requires reasonably accurate

demand forecasts, standard processing times, and available work time

pD i i
NR  i 1
T
where
N R  number of required machines
pi  standard processing time for product i
Di  demand for product i during the planning horizon
T  processing time available during the planning horizon

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 Exercise: Calculating processing Requirements

 A company has a demand of 200 units of product A and

300 units of product B next month; standard processing
time per unit is 8 hour for Product A and 6 hours for
product B. The plant will work 20 days next month.
The company uses 3 shifts per day and 8 working hours
per shift. Assuming that the two products can be
processed with similar machines, and the machines can be
used in the 3 shifts, how many machines are required for
next month production?

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Solution: Calculating
processing Requirements

 200unitsX 8hours  300unitsX 6hours 3400hours 

 RN  
3shiftsX 8hourspershiftX 20days 480hours 
 
 7.0833machines 
 8machines 
 
 

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 2. Developing Capacity Alternatives

 Capacity alternatives include

 do nothing

 expand large now (may included capacity cushion)

 expand small now with option to add later

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 Capacity Considerations
 The Best Operating Level is the output that results in
the lowest average unit cost
 Economies of Scale:
 Where the cost per unit of output drops as volume of output
increases
 Spread the fixed costs of buildings & equipment over multiple
units, allow bulk purchasing & handling of material
 Diseconomies of Scale:
 Where the cost per unit rises as volume increases
 Often caused by congestion (overwhelming the process with too
much work-in-process) and scheduling complexity

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 Best Operating Level and Size

 Alternative 1: Purchase one large facility, requiring one large

initial investment
 Alternative 2: Add capacity incrementally in smaller chunks
as needed
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 Other Capacity Considerations
 Focused factories:
 Small, specialized facilities with limited objectives
 Plant within a plant (PWP):
 Segmenting larger operations into smaller operating
units with focused objectives
 Subcontractor networks:
 Outsource non-core items to free up capacity for what
you do well

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 3. Evaluating Capacity Alternatives
 Many tools exist such as cost-volume analysis,
financial analysis, decision tree and weighting line
to assist in evaluating alternatives
 Most popular tool is Decision Tree
 Decision Tree analysis tool is:
 a modeling tool for evaluating sequential decisions

which identifies the alternatives at each point in time

(decision points), estimate probable consequences of
each decision (chance events) & the ultimate outcomes
(e.g.: profit or loss)

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