Module – 3

Capacity & Location Planning: Importance of capacity decisions, defining and measuring
capacity, determinants of effective capacity, determining capacity requirement, developing
capacity alternatives, Need for location decisions, nature of locations decisions, general
procedure for making locations decisions, evaluating locations decisions, facilities layout – need
for layout decisions, types of processing.

Question Bank
1 What are design capacity and effective capacity? Give two examples which are
commonly used as measure of capacity.
2 List the factors that determine effective capacity and explain them briefly
3 Explain how capacity decisions are strategic for an organization
4 Briefly explain the steps in the capacity planning process
5 How do long-term and short-term capacity considerations differ?
6 Give an example of a good and service that exhibit these seasonal demand patterns. (a)
Annual (b) Monthly (c) Weekly and (d) Daily
7 Give some examples of building flexibility into system design
8 Why is it important to adopt a big picture approach to capacity planning? Explain
9 What are the ways to enhance development of capacity strategies? List them
10 What are economies of scale and diseconomies of scale? List the reasons for the same.
11 What is facilities layout? List the objectives of layout design.
12 What is product layout? List the advantages and disadvantages.
13 What is process layout? List the advantages and disadvantages
14 What is the need of location decisions? What are the objectives of the manager when
making location decisions?
15 Explain with a block diagram, how process selection and capacity planning influence
system design?
16 List and briefly explain the basic process (production) types
17 What is the importance of location decisions? List and explain the general procedure for
making location decisions
18 Briefly explain the techniques used in evaluating location alternatives
19 Explain the procedure used to develop factor rating
20 What is center of gravity method? Determine the center of gravity location for these
destinations:
21 A firm developing agency must determine how many photo enlarger cubicles are
required to maintain in output of 200 goods per hour. The set up and exposure time can
theoretically be done on 2 minutes per print, but operators are on the average only 90
percent efficient and in addition 5 percent of print scrapped and redone. Also the
cubicles can utilized for enlarging only 70 percent of the time.
(a) What is the required system capacity in prints /hr. ?
(b) What average output/hr can be expected from each cubicles taking its use factor and
efficiency to account?
(c) How many enlarger cubicles are required?
22 How do you define ‘capacity’ and how do you measure it? A factory wishes to acquire
stamping machines to produce 30,000 T shirts per month. They operate 200 hours per
month but the machines will be used of 75% of the time only and output is 5%
defective. A stamping operation takes one minute per T-shirt. Assuming 95%
efficiency, how many machines are required?
23 A Bharat foundry is considering expansion of the existing facility by adding 1ton
capacity of curing furnace for manufacturing a automobile component. Each batch of 1
ton automobile component must undergo 30 minute of furnace time, including loading
and unloading operations. Due to power restrictions, furnace is used only 80% of time.
In a shift of 8 hours the required output is to be 16 tons. If the plant system estimated is
40% of system capacity, determine the number of furnaces required.
Capacity: The upper limit or ceiling on the load that an operating unit can handle

Capacity Planning
Design of the production system involves planning for the inputs, conversion process and outputs
of production operation. The effective management of capacity is the most important
responsibility of production management. The objective of capacity management (i.e. planning
and control of capacity) is to match the level of operations to the level of demand.
Capacity planning is to be carried out keeping in mind future growth and expansion plans,
market trends, sales forecasting, etc. It is a simple task to plan the capacity in case of stable
demand. But in practice the demand will be seldom stable. The fluctuation of demand creates
problems regarding the procurement of resources to meet the customer demand. Capacity
decisions are strategic in nature. Capacity is the rate of productive capability of a facility.
Capacity is usually expressed as volume of output per period of time.
Production managers are more concerned about the capacity for the following reasons:
 Sufficient capacity is required to meet the customers demand in time.

 Capacity affects the cost efficiency of operations.

 Capacity affects the scheduling system.

 Capacity creation requires an investment.

Capacity planning is the first step when an organisation decides to produce more or new
products.

CAPACITY DECISIONS ARE STRATEGIC

For a number of reasons, capacity decisions are among the most fundamental of all the design
decisions that managers must make. In fact, capacity decisions can be critical for an
organization:
1. Capacity decisions have a real impact on the ability of the organization to meet future
demands for products and services; capacity essentially limits the rate of output possible. Having
capacity to satisfy demand can often allow a company to take advantage of tremendous benefits.
When Microsoft introduced its new Xbox in late 2005, there were insufficient supplies, resulting
in lost sales and unhappy customers. And shortages of flu vaccine in some years due to
production problems affected capacity, limiting the availability of the vaccine.

2. Capacity decisions affect operating costs. Ideally, capacity and demand requirements will be
matched, which will tend to minimize operating costs. In practice, this is not always achieved
because actual demand either differs from expected demand or tends to vary (e.g., cyclically). In
such cases, a decision might be made to attempt to balance the costs of over- and undercapacity.

3. Capacity is usually a major determinant of initial cost. Typically, the greater the capacity of a
productive unit, the greater its cost. This does not necessarily imply a one-for-one relationship;
larger units tend to cost proportionately less than smaller units.
4. Capacity decisions often involve long-term commitment of resources and the fact that,once
they are implemented, those decisions may be difficult or impossible to modify without incurring
major costs.

5. Capacity decisions can affect competitiveness. If a firm has excess capacity, or can quickly
add capacity, that fact may serve as a barrier to entry by other firms. Then too, capacity can
affect delivery speed, which can be a competitive advantage.

6. Capacity affects the ease of management; having appropriate capacity makes management
easier than when capacity is mismatched.

7. Globalization has increased the importance and the complexity of capacity decisions. Far-
flung supply chains and distant markets add to the uncertainty about capacity needs.

8. Because capacity decisions often involve substantial financial and other resources, it is
necessary to plan for them far in advance. For example, it may take years for a new power
generating plant to be constructed and become operational. However, this increases the risk that
the designated amount of capacity will not match actual demand when the capacity becomes
available.

DEFINING AND MEASURING CAPACITY

Capacity often refers to an upper limit on the rate of output. Even though this seems simple
enough, there are subtle difficulties in actually measuring capacity in certain cases. These
difficulties arise because of different interpretations of the term capacity and problems with
identifying suitable measures for a specific situation.

In selecting a measure of capacity, it is important to choose one that does not require updating.
For example, dollar amounts are often a poor measure of capacity (e.g., capacity of $30 million a
year) because price changes necessitate updating of that measure.

Up to this point, we have been using a general definition of capacity. Although it is functional,
it can be refined into two useful definitions of capacity:

1. Design capacity:
The maximum output rate or service capacity an operation, process, or facility is
designed for.

2. Effective capacity:
Design capacity minus allowances such as personal time, and maintenance.

Design capacity is the maximum rate of output achieved under ideal conditions. Effective
capacity is always less than design capacity owing to realities of changing product mix, the need
for periodic maintenance of equipment, lunch breaks, coffee breaks, problems in scheduling and
balancing operations, and similar circumstances. 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.

These different measures of capacity are useful in defining two measures of system
effectiveness: efficiency and utilization.
Efficiency is the ratio of actual output to effective capacity.
Capacity utilization is the ratio of actual output to design capacity.

Efficiency and Utilization

Efficiency = Actual output / Effective capacity
Utilization = Actual output / Design capacity

Efficiency/Utilization Example for a Trucking Company

Design capacity = 50 trucks/day available
Effective capacity = 40 trucks/day, because 20% of truck capacity goes through planned
maintenance
Actual output = 36 trucks/day, 3 trucks delayed at maintenance, 1 had a flat tire

Actual Output 36 units / day

Efficiency    90%
Effective Capacity 40 units / day
Actual Output 36 units / day
Utilizatio n    72%
Design Capacity 50 units / day

DETERMINANTS OF EFFECTIVE CAPACITY

 Facilities: The size and provision for expansion are key in the design of facilities. Other
facility factors include locational factors (transportation costs, distance to market, labor
supply, energy sources). The layout of the work area can determine how smoothly work
can be performed.
 Product and Service Factors: The more uniform the output, the more opportunities
there are for standardization of methods and materials. This leads to greater capacity.
 Process Factors: Quantity capability is an important determinant of capacity, but so is
output quality. If the quality does not meet standards, then output rate decreases because
of need of inspection and rework activities. Process improvements that increase quality
and productivity can result in increased capacity. Another process factor to consider is the
time it takes to change over equipment settings for different products or services.
 Human Factors: the tasks that are needed in certain jobs, the array of activities involved
and the training, skill, and experience required to perform a job all affect the potential
 and actual output. Employee motivation, absenteeism, and labor turnover all affect the
output rate as well.
 Policy Factors: Management policy can affect capacity by allowing or not allowing
capacity options such as overtime or second or third shifts
 Operational Factors: Scheduling problems may occur when an organization has
differences in equipment capabilities among different pieces of equipment or differences
in job requirements. Other areas of impact on effective capacity include inventory
stocking decisions, late deliveries, purchasing requirements, acceptability of purchased
materials and parts, and quality inspection and control procedures.
 Supply Chain Factors: Questions include: What impact will the changes have on
suppliers, warehousing, transportation, and distributors? If capacity will be increased,
will these elements of the supply chain be able to handle the increase? If capacity is to be
decreased, what impact will the loss of business have on these elements of the supply
chain?
 External Factors: Minimum quality and performance standards can restrict
management's options for increasing and using capacity.

The most important parts of effective capacity are process and human factors. Process factors
must be efficient and must operate smoothly, if not the rate of output will dramatically decrease.
Human factors must be trained well and have experience, they must be motivated and have a low
absenteeism and labor turnover. In resolving constraint issues, all possible alternative solutions
must be evaluated.

Table summarizes these factors. In addition, inadequate planning can be a major limiting
determinant of effective capacity.
Table : Factors that determine effective capacity