Capacity Planning and Control

What is Capacity Planning and Control?

 is the process of determining the production capacity needed by an
organization to meet changing demands for its product.
 concerned with making sure there is some kind of balance between the
demand placed on an operation and its ability to satisfy that demand.
 it is an activity which can profoundly affect the efficiency and effectiveness
of the operation.
 If an operation has too much capacity at any point in time it will be
underutilizing it resources, paying out for machinery and facilities and often
paying its staff but, because demand is lower than capacity, its costs are
spread over two few customers.

Capacity
 Refers to an upper limit or ceiling on the load that an operating unit can
handle.
 capacity is the maximum amount of work that an organization is capable of
completing in an given period o time.

Capacity Control

 the process of monitoring production output, comparing it with capacity

plans, and taking corrective action when needed.

Classes of Capacity Planning

 Lead strategy: is adding capacity in anticipation of an increase in demand.

Lead strategy is an aggressive strategy with the goal of luring customers
away from the company`s competitors. The possible disadvantage to this
strategy is that it often results in excess inventor, which is costly and often
wasteful.

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  Lag strategy: refers to adding capacity only after the organization is
running at full capacity or beyond due to increase in demand (North Carolina
state University, 2006). This is a more conservative strategy. It decreases
the risk of waste, but it may result in the loss of possible customs

 Match strategy: is adding capacity in small amount in response to

changing demand in the market. This is a more moderate strategy. In the
context of systems engineering, capacity planning is used during system
design and system performance monitoring.

Measuring Capacity

Design capacity  the maximum output rate or service capacity an

operation, process, or facility is design for.
Effective capacity  design capacity minus allowance such as personal
time, maintenance, and scrap
Actual Output  the rate of output actually achieved. Actual output cannot
exceed effective capacity and is often less because of machine breakdowns,
absenteeism, shortages of materials, and quality problems, as well as factors that
are outside the control of the operations managers.
Rated Capacity  Available time x Utilization x Efficiency
Available Time  Number of hours a work center can be used.

Efficiency – is the ratio of actual output to effective capacity.

Utilization - is the ratio of actual output to design capacity.

Efficiency= Actual output / Effective Design x 100

Utilization = Actual Output / Design Capacity x 100
Or
Utilization = Hours actually worked / available hours x 100

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Examples:
1. Given the following information, compute the efficiency and the utilization of
the vehicle repair department.
Design Capacity = 50 trucks per day
Effective Capacity = 40 trucks per day
Actual Output = 36 trucks per day

Solution: Efficiency = Actual output / effective capacity x 100

= 36 trucks per day / 40 trucks per day x 100
= 90%

Utilization = Actual Output / Design Capacity x 100

= 36 trucks per day / 50 trucks per day x 100
= 72%

2. A work center has three machines and is operated for 8 hours a day 5 days
a week. What is available time?
Solution: Available Time = 3 x 8 x 5
= 120 hours per week

3. A work center is available 120 hours but actually produce good for 100
hours. What is the utilization of the work center?

Solution: Utilization = Hours actually worked / available hours x 100

= 100 hrs / 120 hrs x 100
= 83.33%

4. A work center produces 120 units in a shift. The effective design is 150 units
a shift. What is efficiency of the work center?

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 Solution: Efficiency= Actual output / Effective Design x 100
= 120 units / 150units x 100
= 80%

5. A work center consists of four machines and is operated 8 hours per day a
week. Historically, the utilization has been 83.33% and the efficiency 80%.
What is the rated capacity?

Solution: Available Time = 4 x 8 x 7

= 224 hours per week

Rated Capacity = Available time x Utilization x Efficiency

= 224 hrs. per week x 83.33% x 80%
= 149.33

Table 1
Measure of Capacity for Different Type of Organizations
Type of Organizations Capacity Measure
Auto Plant Number of Autos
Steel Plant Tons of steel
Beer plant Cases of Beer
Nuclear power plant Megawatts of electricity
Airline Available seat miles (ASMs)
Hospital Available bed-days
Movie theater Available seat- performances
Restaurant Available seat-turns
Jobbing machine shop Available labor-hours
School of Business Administration Available semester or quarter sections

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Some basic question in capacity planning are the following:
1. What kind of capacity is needed?
2. How much is needed?
3. When is it needed?

Determinants of Effective Capacity

1. Facilities: The design of facilities, including size and provision for

expansion, is key. Layout of the work area often determines how smoothly
work can be performed, and environmental factors such as heating, lighting,
and ventilation also play a significant role in determining whether personnel
can perform effectively or whether they must struggle to overcome poor
design characteristic.

2. Product and Service Factors: Product or service design can have a

tremendous influence on capacity. “The more uniform the output, the more
opportunities there are for standardization of methods and materials, which
leads to greater capacity.”

3. Process Factor: The quantity capability of a process is an obvious

determinant of capacity. “Process improvements that increase quality and
productivity can result in increased capacity.”

4. Human Factor: The task that make up a job, the variety of activities
involved, and the training, skill, and experience required to perform a job all
have an impact on the potential and actual output. In addition, employee
motivation has a very basic relationship to capacity, as do absenteeism and
labor turnover.

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 5. Policy Factors: Management policy can affect capacity by allowing or not
allowing capacity options such as overtime or second or third shifts.

6. Operational Factors: Scheduling problems may occur when an

organization has differences in equipment capabilities among alternative
pieces of equipment or differences in job requirements. Inventory stocking
decisions, late deliveries, purchasing requirements, acceptability of
purchased materials and parts, and quality inspection and control
procedures also can have an impact on effective capacity.

7. Supply Chain Factor: Supply chain factors must be taken into account in
capacity planning if substantial capacity changes are involved.

8. External Factors: Product standards, especially minimum quality and

performance standards, can restrict management’s option for increasing and
using capacity.

Forecasting Capacity Requirements

Long-term capacity  relate to overall level of capacity, such as facility size

 needs require forecasting over a time horizon and then
converting those forecasts into capacity requirements.
Short-term capacity  relate to probable variations in capacity requirements
created by such things as seasonal, random, and irregular
fluctuations in demand.
 needs are less concerned with cycles or trends than with
seasonal variations and other variations from range.

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Strategy Formulation
An organization typically bases its capacity strategy on the following:
1. The growth rate and variability of demand
2. The costs of building and operating facilities of various sizes
3. The rate and direction of technological innovation
4. The likely behavior of competitors
5. Availability of capital and other inputs.

Key decisions of Capacity Planning relate to

1. The amount of capacity needed
2. The timing of changes
3. The need to maintain balance throughout the system
4. The extent of flexibility of facilities and the workforce.

Steps in the Capacity Planning

1. Estimate future capacity requirements.
2. Evaluate existing capacity and facilities and identify gaps.
3. Identify alternatives for meeting requirements.
4. Conduct financial analyses of each alternative.
5. Assess key qualitative issues for each alternative.
6. Select the alternative to pursue that will be best in the long term.
7. Implement the selected alternative.
8. Monitor results.

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Effective Capacity Planning

Developing a comprehensive capacity plan can be daunting challenge at the

outset and requires dedication and commitment to maintain it on the ongoing basis.
The following nine tips can help ease some of the challenge and increase your
likelihood of an effective, successful program.

1. Start Small
Many a capacity planning effort fails after a few months because in
encompassed too broad a scope too early on.

2. Speak the Language of your Customer

When requesting workload forecasts from your developers and
especially your end-user costumer, discuss this in terms that the
developers and customers understand.

3. Consider Future Platforms

When evaluating tools to be used for capacity planning, keep in mind
new architectures that your shop may be considering, and select
packages that can be used on both current and future platforms.

4. Share Plans with Suppliers

If you plan to use your capacity planning products across multiple
platforms, it’s important to inform your supplier of your plans.

5. Plan for Occasional Workload Reductions

A forecasted change in workload may not always cause an increase
in the capacity required.

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6. Prepare for the Turnover of Personnel
One of the events that undermine a capacity planning effort early on
is when the individual most responsible for and most knowledgeable
about the overall program leaves the company.

7. Strive to Continually Improve the Process

One action to take is to carefully interview and select an individual
who in your best judgment appears unlikely to leave your firm
anytime soon.

8. Institute a Formal Capacity Planning Program

One of the best ways to continually improve the effectiveness of the
capacity planning process is to set a goal to expand and improved at
least one part of the process with each new version of the plan.

9. Market the Lesser-Known Benefits of Capacity Planning

In addition to being able to predict when, how much, and what type of
additional resources will be needed, a comprehensive capacity
planning program offers four lesser-known benefits that should be
marketed to infrastructure managers and executives. These Benefits
can improve an infrastructure by doing the following:

 Strengthening Relationship with developers and end users.

 Improving communication with the suppliers.

 Encouraging collaboration with other infrastructure groups.

 Promoting a culture of strategic planning as opposed to tactical

firefighting.

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Seven primary reasons why many infrastructures fail at implementing an
effective capacity planning program:

1. Analysts are to busy with day-to-day activities

2. Users aren’t interested in predicting future workloads
3. Users who are interested can’t forecast accurately
4. Capacity planners may be reluctant to use effective measuring tools
5. Corporate or IT directions may change from year to year
6. Planning is typically not part of an infrastructures culture
7. Manager sometimes confuse capacity management with capacity planning

THE CHALLENGES OF PLANNING SERVICE CAPACITY

Three Important Factors in Planning Service Capacity

1. The need to be near customer.

2. The inability to store services
3. The degree of volatility of demand.

Make or Buy?

One capacity requirements have been determined the organization must decide
whether to produce a good or provide a service itself, or to Outsource (buy) from
other organization. Many organizations buy parts or contract out services, for a
variety of reasons. Among those factors are:

1. Available capacity. If an organization has available the equipment,

necessary skills, and time, is often makes sense to produce an item or
perform a service in-house.

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 2. Expertise. If a firm lacks the expertise to do a job satisfactorily, buying
might be a reasonable alternative.

3. Quality Considerations. Firms that specialize can usually offer higher

quality than an organization can attain itself.

4. The nature of demand. When demand for an item is high and steady, the
organization is often better off doing the work itself. However, wide
fluctuations in demand or small orders are usually better handled by
specialists who are able to combine orders from multiple sources, which
results in higher volume and tends to offset individual buyer fluctuations.

5. Cost. Any cost savings achieved from buying or making must be weighed
against the preceding factors. Cost savings might come from the item itself
or from transportation cost savings.

6. Risk. Outsourcing may involve certain risks. One is loss of control over
operations. Another is the need to disclosed proprietary information.

Developing Capacity Alternatives

1. Design flexibility into systems.

The long term nature of many capacity decisions and the risks
inherent in long-term forecasts suggest potential benefits from
designing flexible systems.

2. Take a stage of life cycle into account.

Capacity requirements are often closely linked to the stage of the life
cycle that a product or service is in.

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  At the Introduction phase it can be difficult to determine both the
size of the market and the organization’s eventual share of that
market. Therefore, organizations should be cautious in making large
and/or inflexible capacity investments.
 In the growth phase the overall market may experience rapid
growth. However, the real issue is the rate at which the organization’s
market share grows, which may be more or less than the market rate,
depending on the success of the organization’s strategies.
 In the maturity phase the size of market levels off, and organizations
tend to have stable market shares. Organizations may still be able to
increase profitability by reducing costs and making full use of
capacity. However, some organizations may still try to increase
profitability by increasing capacity if they believe this stage will be
fairly long, or the cost to increase capacity is relatively small.

 In the decline phase an organization is faced with underutilization of

capacity due to declining demand. Organization may eliminate the
excess capacity by selling it, or by introducing new products or
services. An option that is sometimes used in manufacturing is to
transfer capacity to a location that has lower costs, which allows the
organization to continue to make a profit on the product for a while
longer.

3. Take a “big – picture” (i.e., systems) approach to capacity changes.

When developing capacity alternatives, it is important to consider
how parts of the system interrelate. For example, when making a
decision to increase the numbers of room in a hotel, one should also
take into account probable increased demands fro parking,
entertainment and food, and housekeeping. This is a “big picture”

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 The risk in not taking a big picture approach is that the system will be
unbalanced. Evidence of an unbalanced system is the existence of a
bottleneck operation.

Bottleneck Operation, is an operation in a sequence of operations

whose capacity is lower than the capacities of other operations in the
sequence.

Figure 1 : Bottleneck Operation

Operation 1 10/hr

Operation 2 10/hr
Bottleneck 30/hr
operation
Operation 3 10/hr

10/hr
Operation 4

4. Prepare to deal with capacity “chunks”

Capacity increases are often acquired in fairly large chunks rather

than smooth increments, making it difficult to achieve a match
between desired capacity and feasible capacity.

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5. Attempt to smooth out capacity requirements
Unevenness in capacity requirements also can create certain
problems. For instance, during periods of inclement weather, public
transportation ridership tends to increase substantially relative to
periods of pleasant weather.

6. Identify the optimal operating level.

Production units typically have an ideal or optimal level of operation
in terms of unit cost of output.

7. Choose a strategy if expansion is involved.

Consider whether incremental expansion or single is more
appropriate. Factors include competitive pressures, market
opportunities, costs and availability of fund, disruption of operations,
and training requirements.

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