Production&OperationsManagement

Process Choice Spectrum

CAPACITY PLANNING

Prof. Ajith Kumar, XLRI Jamshedpur

XLRI, Jamshedpur

Prof. Ajith Kumar

Production&OperationsManagement

Process Choice Spectrum

CapacityPlanning:whyitisimportant
Ensurethatsupplyanddemandmatchascloselyaspossible,
tominimizelostopportunities/wastedproduction.
Economiesvs.diseconomiesofscale.
Stayingcompetitive(marketshare)/stayingalive.
Capacitycanraiseindustryentrybarriers;capacityexpansion
announcementscanbesignalstonewentrants&preempt
competition.

XLRI, Jamshedpur

Prof. Ajith Kumar

Production&OperationsManagement

Process Choice Spectrum

Capacity
Maximumrateofoutputofaresource,aprocessora
system.
Assumingrealisticworkschedules&machineusage,thatis
sustainablelongterm.

MeasuresofCapacity
Outputmeasures
Inputmeasures

XLRI, Jamshedpur

Prof. Ajith Kumar

Production&OperationsManagement

Process Choice Spectrum

MeasuresofCapacity
Outputmeasures
Fewproducts,highvolumes,standardizationishigh,flexibilitylow.
RIL,JamnagarPlant:197,000m3 ofcrudeoilperday.
MarutiSuzuki:14,50,000vehicleunitsperyear.
Anairline:25,000seatmilesperdayor,2millionpassengers
peryear.
Theevaluationofcapacityavailabletakesinto
accountscheduleddowntimesandbreakssuchas
holidayshutdowns.Itmayormaynotinclude
unforeseenbreakdowns&otherinterruptions.
XLRI, Jamshedpur

Prof. Ajith Kumar

Production&OperationsManagement

Process Choice Spectrum

MeasuresofCapacity
Inputmeasures
Manyproducts,lowvolumes,standardizationislow,flexibilityhigh.
Amachineshop:10lathes,3millingmachines,1CNCmachine.
Anoffsetprinter:3singlecolourm/c,1fourcolourm/c.
IndigoAirlines:fleetof98A320s.
Theairlineflies~630flightsconnecting~40destinationseachday.Thinkofeach
sourcedestinationpairasauniqueproduct(service).Hence,largevariety.

ProblemwithInputmeasures
Mustconverttoanoutputrate,inordertocompareitwith
demand,computeutilizationetc

XLRI, Jamshedpur

Prof. Ajith Kumar

Production&OperationsManagement

Process Choice Spectrum

Utilization
Thedegreetowhichaparticularmachine,space,workforce,or
eventheentireprocess/system,isbeingused.
Generallymeasuredasanaverageoveratimeperiod(%):

Utilization=

XLRI, Jamshedpur

Averageoutputrateinagiventimeperiod
Capacityavailableinthattimeperiod

Prof. Ajith Kumar

X100

Production&OperationsManagement

Process Choice Spectrum

UtilizationExample
Asteelmakingplantcanproduce200tonsperhour,operating24
hoursandisscheduledtooperate315daysayear.Demandina
givenyear=1,120,000tonsandassumethatallofitismet.
Capacity=200x24x315=1,512,000tons/yr
Actualoutput=1,120,000tons/yr
Utilization=1,120,000/1,512,000=74.07%

XLRI, Jamshedpur

Prof. Ajith Kumar

Production&OperationsManagement

Process Choice Spectrum

UtilizationExample
Asmallairlineonaparticularday
AIRCRAFT

# seats
available

#
passengers
traveled

Distance
covered
(km)

Seat-km

Passenger
km

280

176

421

117880

74096

160

127

640

102400

81280

72

70

250

18000

17500

410

291

520

213200

151320

280

252

680

190400

171360

410

128

520

213200

66560

Total

855080

562116

Passengerloadfactor=Totalpassengerkm/Totalseatkm
=562116/855080
=65.74%
XLRI, Jamshedpur

Prof. Ajith Kumar

Production&OperationsManagement

Process Choice Spectrum

Canutilizationexceed100%?
Yes,cansometimesexceed100%owingtotemporary
useofmarginalmethodsofproductionsuchas:
Overtime.
Reducedmaintenancedowntimes.
Reducedplannedshutdowns.
Overstaffing.
Thesecannotbesustainedoveralongtime.
Note:Sincetheseareshortterm&temporaryinterventions,the
maximumcapacityisnotchanged&thedenominatorremains
thesame.
XLRI, Jamshedpur

Prof. Ajith Kumar

Production&OperationsManagement

Process Choice Spectrum

Whyisutilizationgenerally<100%?
Breakdownsofmachines,labourstrikes,unforeseen
interruptions.
Insufficientsupplyofinputssuchasrawmaterials,
labourandelectricity.
Demand<capacity.
Capacitycanbeincreasedonlydiscretely.

XLRI, Jamshedpur

Prof. Ajith Kumar

10

Production&OperationsManagement

Process Choice Spectrum

Capacitycushion
Theamountofreservecapacityaprocesshas,to
handlesuddenincreasesindemandortemporary
lossesofproductioncapacity
Capacitycushion=100% averageutilizationrate
Largecushionsdesirable

Smallcushionsdesirable

Variabilityishighe.g.aretail
outlet~40%cushion,hotel
industry~40%cushion.

Industryiscapitalintensive.
Candetectinternal
inefficienciesbetter.
Papermanufacturing<10%,
cruiseshipabout5%.
HW: Searchtheinternetforaverageutilizationsindifferent
industries.Whatfactorsdrivethatlevelofutilization?

XLRI, Jamshedpur

Prof. Ajith Kumar

11

Production&OperationsManagement

Process Choice Spectrum

Longtermcapacityplanning
1.Estimatefuturecapacityrequirements
2.Assessgapbycomparingwithavailablecapacity
3.Identifyalternatives.
4.Evaluatealternativestopickthebestone.

XLRI, Jamshedpur

Prof. Ajith Kumar

12

Production&OperationsManagement

Process Choice Spectrum

Evaluatingfuturecapacityrequirement
FourproductsA,B,CandDaretobeproduced.Thetable
givestheirestimatedannualdemand,productionlotsizes,
setuptimes,unitprocessingtimesanddesiredcapacity
cushion.AparticularCNCmachinecanbeoperated312days
ayear,16hoursaday.Acapacitycushionof12%isdesirable
toaccountforvariationandunforeseeninterruptions.How
manyCNCmachinesareneeded?
Product

Avg proc
time/unit (min)

Avg set up
time (min)

Lot Size

Estimated
demand (/yr)

72

300

80000

2.5

181

500

45000

147

450

90000

195

350

28000

XLRI, Jamshedpur

Prof. Ajith Kumar

13

Production&OperationsManagement

Process Choice Spectrum

Evaluatingfuturecapacityrequirement
Avg proc Avg set
Product time / unit up time
(min)
(min)
A
B
C
D

8
2.5
4
2

72
181
147
195

Estimated
Lot Size demand
(/yr)
300
500
450
350

Capacity
demanded (min)

8000
4500
9000
2800

659200
128790
389400
71600

1248990

Totalcapacitydemanded=i [di*pi +(di/ti)*Si]

di demand;pi unitproctime;ti lotsize;Si setuptime.

Capacitypermachine=312*16*0.88=4393hrs
M=1248990/60*4393=4.7~5machines.
XLRI, Jamshedpur

Prof. Ajith Kumar

14

Production&OperationsManagement

Process Choice Spectrum

Evaluatingfuturecapacityrequirement
Wecannothaveexactly4.7machines.
eitherroundoffto5machines.
or,have4machines&usetemporarymeasuresto
increasecapacity.

Ifwehave5machinesthen,
actualcapacityachieved=(5*312*16*60)=1497600min
actualcapacitycushion=(1497600 124,8990)/1497600
=16.6%

XLRI, Jamshedpur

Prof. Ajith Kumar

15

Production&OperationsManagement

Process Choice Spectrum

Decidingbetweenalternatives

Arestaurantisplanningan
expansionatthebeginningofa
givenyear itcanchoose
betweenalargeandasmall
expansion.
Source: http://www.veggieplaces.co.uk/images

Thedemandintheimmediatelyfollowingyearcanbebighigh
orlowwithlikelihoodsof0.6and0.4respectively.Ifthe
demandishighafterasmallexpansion,thecompanycan
choosetoexpandafter6monthsandexploitit.Thedecision
treeshowstheprojectreturnsforeachpath.Whatshouldthe
restaurantchoose?
XLRI, Jamshedpur

Prof. Ajith Kumar

16

Production&OperationsManagement

Process Choice Spectrum

Decidingbetweenalternatives
Low demand [0.40]

Rs. 15 lakhs
Do not expand

Small
expansion

High demand [0.60]

Rs. 27 lakhs

2
Expand further

Rs. 62 lakhs

1
Large
expansion

Low demand [0.40]

High demand [0.60]

XLRI, Jamshedpur

Rs. 8 lakhs

Rs. 90 lakhs

Prof. Ajith Kumar

17

Production&OperationsManagement

Process Choice Spectrum

Decidingbetweenalternatives
Low demand [0.40]

Rs. 15 lakhs
Do not expand

Small
expansion

Rs.
57.2
lakhs

1
Large
expansion

Rs. 43.2 High demand [0.60]

lakhs
Rs. 62
lakhs
Low demand [0.40]

Rs. 57.2 High demand [0.60]

lakhs

XLRI, Jamshedpur

Rs. 27 lakhs

Expand further

Rs. 62 lakhs

Rs. 8 lakhs

Rs. 90 lakhs

Prof. Ajith Kumar

18