Capacity Management

Capacity Management in Operations

• Capacity – the ability to hold, receive, store, or
accommodate
• The amount of output that a system is capable of
achieving over a specific period of time
• Capacity management needs to consider both inputs and
outputs
• Capacity Planning-
• Determining the overall level of capacity-intensive
resources that best supports the company’s long-range
competitive strategy
• Facilities
• Equipment
• Labor force size
Capacity Planning Time Durations

Long range

• Greater than one year

Intermediate range

• Monthly or quarterly plans covering the next 6 to

18 months

Short range

• Less than one month

Types of Capacity
Design capacity represents the maximum rate of output that can be
achieved under ideal conditions.
Effective capacity is the maximum rate of output which can be
practically achieved under the constraints of time consumed in set-
ups, oiling & cleaning, defective items, etc. Effective capacity is
always lesser than the design capacity.
Actual capacity is the maximum output rate which is actually
achieved under the constraints of machine breakdowns, labor
inefficiencies & absenteeism, defective products, late deliveries of
materials by the supplier, and so on. Actual capacity can be equal to
or less than the effective capacity.
Efficiency vs Effectiveness
Capacity Planning Concepts
• Capacity utilization rate – How much capacity is used
from the available capacity

• Effectiveness ?
• Economies of scale – the idea that as a plant gets larger
and volume increases, the average cost per unit tends to
drop
• Diseconomies of scale – at some point, the plant
becomes too large and average cost per unit begins to
increase
Capacity Flexibility
the ability to rapidly increase or decrease product levels or the
ability to shift rapidly from one product or service to another

Flexible • Ability to quickly adapt to change

Plants • Zero-changeover time

Flexible • Flexible manufacturing systems

Processes • Simple, easily set up equipment

Flexible • Ability to switch from one kind of task to

another quickly
Workers • Multiple skills (cross training)
Considerations in Changing Capacity
Maintaining System Balance
• Similar capacities desired at each operation
• Manage bottleneck operations

Frequency of Capacity Additions

• Cost of upgrading too frequently
• Cost of upgrading too infrequently

External Sources of Capacity

• Outsourcing
• Capacity Sharing
• Subcontracting

Decreasing Capacity
• Temporary reductions
• Permanent reductions
Determining Capacity Requirements

Project labor and

Use forecasting Calculate labor
equipment
to predict sales and equipment
availability over
for individual requirements to
the planning
products meet forecasts
horizon
Question—Determining Capacity Requirements
FORECASTED YEARLY DEMAND (in 000s)
• An Irrigation Company selling sprinklers need
1 2 3 4
to find capacity requirements for next 4 years
Plastic 90 32 44 55 56
• Two production lines available to make
bronze and plastic sprinklers with three Plastic 180 15 16 17 18
different nozzles. Both lines can produce all Plastic 360 50 55 64 67
type of nozzles Bronze 90 7 8 9 10
Bronze 180 3 4 5 6
Bronze 360 11 12 15 18

Bronze M/c Plastic M/c

• 2 operators per machine • 4 operators per machine

• 1 m/c can produce 12,000 • 1 m/c can produce 200,000
• Available machine-3 • Available machine-1
Capacity Requirements- solution
Plastic Year 1 Year 2 Year 3 Year 4
M/c & labour Demand for plastic sprinklers 97 115 136 141
needed for Plastic
Percentage of capacity used
nozzles
Machine requirements
Labor requirements

Bronze Year 1 Year 2 Year 3 Year 4

M/c & labour Demand for bronze sprinklers 21 24 29 34
needed for Bronze Percentage of capacity used
nozzles Machine requirements
Labor requirements

Bronze Year 1 Year 2 Year 3 Year 4

Plastic demand Demand for bronze sprinklers 32 36 41 52
unchanged. Percentage of capacity used - - - -
Bronze demand Machine requirements - - - -
increased Labor requirements - - - -
Capacity Requirements- solution
Plastic Year 1 Year 2 Year 3 Year 4
M/c & labour Demand for plastic sprinklers 97 115 136 141
needed for Plastic
Percentage of capacity used 48.5% 57.5% 68.0% 70.5%
nozzles
Machine requirements .485 .575 .680 .705
Labor requirements 1.94 2.30 2.72 2.82

Bronze Year 1 Year 2 Year 3 Year 4

M/c & labour Demand for bronze sprinklers 21 24 29 34
needed for Bronze Percentage of capacity used 58.3% 66.7% 80.6% 94.4%
nozzles Machine requirements 1.75 2.00 2.42 2.83
Labor requirements 3.50 4.00 4.83 5.66

Bronze Year 1 Year 2 Year 3 Year 4

Plastic demand Demand for bronze sprinklers 32 36 41 52
unchanged. Percentage of capacity used - - - -
Bronze demand Machine requirements - - - -
increased Labor requirements - - - -
Capacity Requirements- solution
Plastic Year 1 Year 2 Year 3 Year 4
M/c & labour Demand for plastic sprinklers 97 115 136 141
needed for Plastic
Percentage of capacity used 48.5% 57.5% 68.0% 70.5%
nozzles
Machine requirements .485 .575 .680 .705
Labor requirements 1.94 2.30 2.72 2.82

Bronze Year 1 Year 2 Year 3 Year 4

M/c & labour Demand for bronze sprinklers 21 24 29 34
needed for Bronze Percentage of capacity used 58.3% 66.7% 80.6% 94.4%
nozzles Machine requirements 1.75 2.00 2.42 2.83
Labor requirements 3.50 4.00 4.83 5.66

Bronze Year 1 Year 2 Year 3 Year 4

Plastic demand Demand for bronze sprinklers 32 36 41 52
unchanged. Percentage of capacity used 88.9% 100.0% 113.9% 144.4%
Bronze demand Machine requirements 2.67 3 3.42 4.33
increased Labor requirements 5.33 6 6.83 8.67
Decision Trees for Capacity Analysis

• A decision tree is a schematic model of the sequence

of steps in a problem – including the conditions and
consequences of each step.
• Decision trees help analysts understand the problem
and assist in identifying the best solution.
• Decision tree components include:
• Decision nodes – represented with squares
• Chance nodes – represented with circles
• Paths – links between nodes
Decision Tree Problem- Example
A glass factory is experiencing a The management also estimates the
substantial backlog, and the firm's profits when choosing from the three
management is considering three alternatives (A, B, and C) under the
courses of action: differing probable levels of demand.
These values, in thousands of dollars
A) Arrange for subcontracting, are presented in the table below:
B) Construct new facilities.
C) Do nothing (no change)
0.1 0.5 0.4
The correct choice depends Low Medium High
largely upon demand, which may
be low, medium, or high. A 10 50 90
Management estimates the B -120 25 200
respective demand probabilities C 20 40 60
as .10, .50, and .40.
Decision Tree Problem: States of nature,
probabilities, and payoffs

High demand (.4) $90k

Medium demand (.5) $50k

Low demand (.1) $10k

A High demand (.4) $200k

B Medium demand (.5) $25k

Low demand (.1) -$120k

C
High demand (.4) $60k

Medium demand (.5) $40k

Low demand (.1) $20k

Decision Problem – Example-2

Do Nothing
EV = $0 Sell to dept. chain @ $4.0 million
P = .70

1 EV = ?

P = .30 Sell to insurance co. @ $5.0 million

Buy/Develop Rezoned
Property P = .60
EV = ? 3 1,500 apts. @ $3,000 = $4.5 million
EV = ? High price
P = .60
2 EV = ?
1,500 apts. @ $2,000 = $3.0 million
Low price
Land purchase cost = $2 mn Not P = .40
Rezoning cost = $1 mn Rezoned
P = .40
Build 600 homes @ $4,000 = $2.4 million
Decision Problem -contd.

Do Nothing
EV = $0 Sell to dept. chain @ $4.0 million
P = .70

1 EV = $4.3 – 1.0 million = $3.3 million

P = .30 Sell to insurance co. @ $5.0 million

Buy/Develop Rezoned
Property P = .60
EV = $940,000 3 High price 1,500 apts. @ $3,000 = $4.5 million
EV = $2.94 million
P = .60
2 EV = $3.9 - $1.0 million = $2.9 million
1,500 apts. @ $2,000 = $3.0 million
Low price
Not P = .40
Rezoned
P = .40
Build 600 homes @ $4,000 = $2.4 million