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Capacity Planning For Products and Services

Learning Objectives

Explain the importance of capacity planning. Discuss ways of defining and measuring capacity. Describe the determinants of effective capacity. Discuss the major considerations related to developing capacity alternatives. Briefly describe approaches that are useful for evaluating capacity alternatives

CAPACITY:
The capacity of a facility is defined as the maximum load that can be handled by it during a given period. Load can be expressed in terms of the amount of inputs or output.

When a company produces many products or services, the measure of capacity in terms of output may not be suitable. Hence we may say that the measure of capacity is dependent upon the suitability of situation.

CAPACITY PLANNING
The effective management of capacity is the most important responsibility of production management. The objective of the capacity management is to match the level of operations to the level of demand. Capacity planning is to be carried out keeping in mind1 Future growth and expansion plans 2 Market trends 3 Sales forecasting.. etc

Need of capacity planning.

Production managers are more concerned about the capacity planning for the following reasons: 1 Capacity planning is the first step when an organization decides to produce MORE or NEW products. 2 Sufficient capacity is required to meet the customers demand in time. 3 Capacity affects the cost of operations. 4 capacity affects the scheduling and inventory planning.
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Capacity Planning
Capacity is the upper limit on the load that an operating unit can handle. Capacity is the rate of productive capability of a facility. It is expressed as volume of output per period of time. Capacity also includes

Equipment Space Employee

skills
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Importance of Capacity Decisions

1.

2.

3.
4. 5. 6. 7.

Impacts ability to meet future demands Affects operating costs Major factor for initial costs Involves long-term commitment Affects competitiveness Affects ease of management Impacts long range planning
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Capacity

Design capacity
maximum

output rate or service capacity an operation, process, or facility is designed for capacity minus allowances such as personal time, maintenance, and scrap of output actually achieved--cannot exceed effective capacity.
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Effective capacity
Design

Actual output
rate

Efficiency and Utilization

Actual output Efficiency = Effective capacity

Actual output
Utilization = Design capacity
Both measures expressed as percentages
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Efficiency/Utilization Example
Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 units/day
Actual output = 36 units/day 90% Effective capacity 40 units/ day 36 units/day = 72%

Efficiency =
Utilization =
Design capacity
Actual output = 50 units/day

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Determinants of Effective Capacity

Facilities Product and service factors Process factors Human factors Policy factors Operational factors Supply chain factors External factors

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Strategy Formulation
Capacity strategy for long-term demand Demand patterns Growth rate and variability Facilities

Cost

of building and operating

and direction of technology changes

Technological changes
Rate

Behavior of competitors Availability of capital and other inputs

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ABC company produces toilet soaps at their works in Mumbai. An aggregate planning measure used by ABC is tonnes of soap which includes making and packaging of the soap. The planning is done for a time horizon of one year and for 4 quarters.

Quarter Demand (tonnes) .

I 40

II 60

III 50

IV 45

The company has a regular workforce which can produce 35 tonnes of output per quarter. If the workers are allowed to work overtime with a restriction that the extra time cannot be more than 20 per cent of the regular time in any time. The output rate is 25 per cent higher than regular time during overtime but the overtime expenses are 40 per cent more than that of regular time. The company subcontracts the soap making and packaging operation to a SSI unit but only at the cost of 50 per cent premium than the cost of regular production. The regular time production costs are Rs. 10,000 per tonne. Inventory carrying costs are Rs. 5,000 per tonne per annum. Design the cost efficient aggregate plan assuming zero starting inventory. Compute total production cost.
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Production planning options are :

REGULAR TIME PRODUCTION OVERTIME PRODUCTION SUBCONTRACTING CARRYING INVENTORY

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The regular time production with a combination of remaining options can be used to make the production plan;

There is a limitation on a regular time production. It can not be more than 35 tonnes/quarter,but demand exceeds this in each of the four quarter So along with RT .other options are to be used .

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In order to priorities these options, compute the cost per unit of production. (the options are preferred based upon the lower cost)

Regular time production

10,000 Rs. Per tonne

Overtime production 10,000+(0.4*10,000) =14,000 Rs./tonne

Subcontracting 10,000+(0.5*10,000) =15,000 Rs/tonne 14,000+(5000/4) =15,250 Rs/tonne
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Produce in OT and carry the inventory for 1 quarter

So the maximum priority is given to the regular production, but it is not sufficient in each quarter. Then the preference is given to overtime production but there is a restriction, extra time can not be more than 20% of the regular allowable products are produced in regular time. So subcontracting can be done to any extent .there is no limit .,and hence 4th option is not at all preferred.

In any quarter ,the maximum amount that can be produced by overtime ?

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In any quarter ,the maximum amount that can be produced by overtime = (0.20*35)*1.25 = 8.75 tonnes. In any quarter , the maximum amount that can be produced in a regular + overtime is = 35 + 8.75 = 43.75 tonnes.

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Quarter

Output

Regular production (tonnes)

Overtime production (tonnes)

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Subcontracting

TOTAL (tonnes)

1ST

35

40

2ND
3RD 4TH

35

8.75

16.25

60

35

8.75

6.25

50

35

8.75

1.25

45
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Production costs are computed for these plans are :

QUTR.1 QUTR. 2 (35*10,000) + (5* 14,000) (35*10,000)+(8.75*14,000) +(16.25*15,000) 4,20,000 Rs 7.16,250 Rs

QUTR.3 (35*10,000)+(8.75*14,000)+(6.25 *15,000) QUTR.4 (35*10,000)+(8.75*14,000)+(1.25 *15,000) Total Production Cost =

5,66,250 Rs 4,91,250 Rs 21,93,750 Rs.

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Key Decisions of Capacity Planning

1.

Amount of capacity needed

Capacity cushion (100% - Utilization)

2. 3.

4.

Timing of changes Need to maintain balance Extent of flexibility of facilities

Capacity cushion extra demand intended to offset uncertainty

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Steps for Capacity Planning

1.
2. 3. 4. 5.

6.
7. 8.

Estimate future capacity requirements Evaluate existing capacity Identify alternatives Conduct financial analysis Assess key qualitative issues Select one alternative Implement alternative chosen Monitor results
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Forecasting Capacity Requirements

Long-term vs. short-term capacity needs Long-term relates to overall level of capacity such as facility size, trends, and cycles Short-term relates to variations from seasonal, random, and irregular fluctuations in demand

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Calculating Processing Requirements Standard

Product Annual Demand processing time per unit (hr.) Processing time needed (hr.)

#1 #2 #3

400 300 700

5.0 8.0 2.0

2,000 2,400 1,400 5,800

If annual capacity is 2000 hours, then we need three machines to handle the required volume: 5,800 hours/2,000 hours = 2.90 machines
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Planning Service Capacity

Need to be near customers

Capacity

and location are closely tied

must be matched with timing of

Inability to store services

Capacity

demand

Degree of volatility of demand

Peak

demand periods

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In-House or Outsourcing
Outsource: obtain a good or service from an external provider 1. 2. 3. 4. 5.

6.

Available capacity Expertise Quality considerations Nature of demand Cost Risk

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Developing Capacity Alternatives

1. Design

flexibility into systems 2. Take stage of life cycle into account

3. Take

a big picture approach to capacity changes 4. Prepare to deal with capacity chunks 5. Attempt to smooth out capacity requirements 6. Identify the optimal operating level
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Figure 5.2

Bottleneck Bottleneck Operationoperation: An operation in a sequence of operations whose

Machine #1 Machine #2

10/hr

capacity is lower than that of the other operations

10/hr

Bottleneck Operation
10/hr 10/hr

30/hr

Machine #3

Machine #4

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Bottleneck Operation
Bottleneck

Operation 1 20/hr.

Operation 2 10/hr.

Operation 3 15/hr.

10/hr.

Maximum output rate limited by bottleneck

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Economies of Scale

Economies of scale
If

the output rate is less than the optimal level, increasing output rate results in decreasing average unit costs the output rate is more than the optimal level, increasing the output rate results in increasing average unit costs

Diseconomies of scale
If

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Figure 5.4

Optimal Rate of Output

Production units have an optimal rate of output for minimal cost. Average cost per unit
Minimum average cost per unit

Minimum cost

Rate of output
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Figure 5.5

Economies of Scale
Minimum cost & optimal operating rate are functions of size of production unit. Average cost per unit

Small
plant

Medium plant

Large plant

Output rate
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Evaluating Alternatives

Cost-volume analysis
Break-even

point

Financial analysis
Cash

flow Present value

Decision theory Waiting-line analysis

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Figure 5.6a

Cost-Volume Relationships
Amount ($)

Fixed cost (FC) 0 Q (volume in units)

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Figure 5.6b

Cost-Volume Relationships
Amount ($)

Q (volume in units)
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Figure 5.6c

Cost-Volume Relationships
Amount ($) 0

BEP units Q (volume in units)

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Break-Even Problem with Step Figure 5.7a Fixed Costs

3 machines

2 machines 1 machine Quantity

Step fixed costs and variable costs.
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Figure 5.7b

Break-Even Problem with Step Fixed Costs

$
BEP2
TC 3 BEP
3

TC

TC
2 1

Quantity Multiple break-even points

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Assumptions of Cost-Volume Analysis

1. One

product is involved 2. Everything produced can be sold 3. Variable cost per unit is the same regardless of volume 4. Fixed costs do not change with volume 5. Revenue per unit constant with volume 6. Revenue per unit exceeds variable cost per unit
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Financial Analysis Cash Flow - the difference between

cash received from sales and other sources, and cash outflow for labor, material, overhead, and taxes.

Present Value - the sum, in current value, of all future cash flows of an investment proposal.

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Decision Theory
Helpful tool for financial comparison of alternatives under conditions of risk or uncertainty Suited to capacity decisions See Chapter 5 Supplement

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Waiting-Line Analysis
Useful for designing or modifying service systems Waiting-lines occur across a wide variety of service systems Waiting-lines are caused by bottlenecks in the process Helps managers plan capacity level that will be cost-effective by balancing the cost of having customers wait in line with the

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Video: Capacity

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Video: Call Ctr. Cap.

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