OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT

04 CAPACITY PLANNING

#1 VID_Capacity Planning - Overview and Key Concepts

Capacity Management

Capacity
- the maximum rate of output of a processor system
- is in our daily life
- how many people should a concert hall have? how many people should a restaurant be able to
serve? how many batteries should a plant be able to produce?

1. Design Capacity
- theoretical maximum output in a given period under ideal conditions
- Project Engineer design machine to run at 200 parts per minute

2. Effective Capacity
- output expected by the company under current operations constraints
- for example: different product mix as was initially designed some capacity cushions

Capacity Available
- is affected by work content change, product mix change, equipment change, speed or pace at
which the work is done

Measure
- Utilization = Real Production /Design Capacity
- Efficiency = Real Production / Effective Capacity
- efficiency is the main driver for the operations director

Number of Capacity and Strategy

1. Add capacity to go ahead demand
- this is an expansionist strategy
- this can result in economics of scale
2. Wait and see
- this is a conservative strategy
- it follows demand and expands in smaller increments
- some risk is what we perhaps can be unable to respond to high demand
- management should choose between these two strategies or another in between

Short-term capacity (0 to 3 months)

- our main drivers for capacity management are planning jobs, planning people, schedule
machines, adding overtime work
Medium-term capacity (3 to 12 months)
- our main drivers are subcontract operations, add manpower, increase or use stocks, add shifts,
add equipment

Long-term capacity planning (1 to 5 years)

- our main drivers have added installations at equipment with long installation lead time

#2 VID_Capacity Analysis

Process Strategies
- the objective of a process strategy is to build a production process that meets customer
requirements and product specifications within cost and other managerial constraints

Capacity
- the throughput or the number of units a facility can hold, receive, store, or produce in a period
of time
- determines fixed costs
- determines if demand will be satisfied
- three-time horizons

Design and Effective Capacity

- design capacity is the maximum theoretical output of a system (normally expressed as a rate)
- effective capacity is the capacity a firm expects to achieve given current operating constraints
(often lower than design capacity)

Utilization and Efficiency

Utilization – the percent of design capacity achieved (Utilization = Actual output/Design

capacity)

Efficiency – the percent of effective capacity achieved (Efficiency = Actual outout/Effective

capacity)
Capacity and Strategy
- capacity decisions impact all 10 decisions of operations management as well as other functional
areas of the organization
- capacity decisions must be integrated into the organization’s mission and strategy

Capacity Considerations
1. Forecast demand accurately
2. Understand the technology and capacity increments
3. Find the optimum operating level (volume)
4. Build for change

Managing Demand
1. Demand exceeds capacity
- curtail demand by raising prices, scheduling longer lead time
-long term solution is to increase capacity
2. Capacity exceeds demand
- stimulate market
- product changes
3. Adjusting to seasonal demands
- produce products with complementary demand patterns

Tactics for Matching Capacity to Demand

1. Making staffing changes
2. Adjusting equipment
- purchasing additional machinery
- selling or leasing out existing equipment
3. Improving processes to increase throughput
4. Redesigning products to facilitate more throughput
5. Adding process flexibility to meet changing product preferences
 6. Closing facilities

Demand and Capacity Management in the Service Sector

1. Demand management
- appointment, reservations, FCFS rule
2. Capacity management
- full time, temporary, part-time staff

Bottleneck Analysis and Theory of Constraints

 Each work area can have its own unique capacity
 Capacity analysis determines the throughput capacity of workstations in a system
 A bottleneck is a limiting factor or constraint
 A bottleneck has the lowest effective capacity in a system

Process Times for Stations, Systems, and Cycles

 The process time of a station is the time to produce a unit at that single workstation
 The process time of a system is the time of the longest process in the system…the
bottleneck
 The process cycle time is the time it takes for a product to go through the production
process with no waiting
 The system process time is the process time of the bottleneck after dividing by the
number of parallel operations
 The system capacity is the inverse of the system process time
 The process cycle time is the total time through the longest path in the system

Capacity Analysis
 Two identical sandwich lines
 Lines have two workers and three operations
 All completed sandwiches are wrapped
Theory of Constraints
- five-step process for recognizing and managing limitations
1. Identify the constraint
2. Develop a plan for overcoming the constraints
3. Focus resources on accomplishing Step 2
4. Reduce the effects of constraints by offloading work or expanding capability
5. Once overcome, go back to Step 1 and find new constraints

Bottleneck Management
1. Release work orders to the system at the pace of set by the bottleneck
2. Lost time at the bottleneck represents lost time for the whole system
3. Increasing the capacity of a non-bottleneck station is a mirage
4. Increasing the capacity of a bottleneck increases the capacity of the whole system

#3 VID_How to Do Capacity Planning

The best way to run things is to plan ahead and avoid problems from occurring in the first place.
This allows you to spend your time on more productive tasks such as implementing new
applications that will bring in new business.

Three basic steps in the capacity planning process:

1. Determine service level requirements - this is about figuring out what the business
needs are from your end-users, from the folks that are using the IT services that you
provide, what do they require in terms of response time and throughput from your IT
systems.
2. Analyze current capacity and determine how your systems are performing right now
and whether they are meeting those service level requirements.

- Sometimes there is a variation on the order of these two steps. Some organizations
analyze current capacity and see the response times that they are providing right now and then
base their service level requirements on that. If your current response times are adequate that
might make sense.

3. Plan for the future - what this step is about determining from the business what the
forecasted changes are likely to be in terms of workload changes, what the requirements are
going to be on the IT organization in the future and then figuring out the best way to configure
your IT infrastructure to meet those needs.

There are a lot of considerations that come into play when you are doing planning. You
need to account for your networking infrastructure. You have servers to worry about and in
today's environments, you have virtual servers to worry about quite frequently, clusters of
physical servers, and most of the time you are working in a multi-tiered environment, so you
might have a web server that is connected to some middleware and then an application and
perhaps a back-end database that sort of thinks you have multi-tiered environments that you need
to do capacity planning for there is a lot of complexity involved in real life situations. As you are
doing your capacity planning you need to take into consideration things like the power
requirements of the equipment that you are recommending or the cooling requirements and
probably first and foremost, it would be the financial requirements. What does it take to provide
the infrastructure that you are talking about in your capacity plan? There is a lot of different
things that can complicate the capacity planning effort.

Methods for doing capacity planning:

 Trending
 Simulation
 Testing
 Analytic Modeling

Trending
- a very simple process
- it does not require sophisticated tools but it does not take into account the nonlinear behavior
that computer systems exhibit in real life
- when you actually get some of your components getting more fully utilized which should be
one of your goals, then if you are using simple trending, you may not account for a drastic
increase in response time. For example: as those components get more fully utilized so trending
is simple but not accurate, probably not accurate enough for critical workloads.

Simulation
- is very accurate but very time-consuming to build the models

Testing
- can be very accurate too but with testing, typically what you are talking about doing is
introducing some synthetic transactions on a testbed that very closely resembles the production
environment and this is going to require a lot of expense. You have to set up the synthetic
transactions. You have to hope that your synthetic transactions are representative of the real ones
that will come in a production environment and the cost of the testbed can be prohibitive. It can
be very expensive to do this so you get accuracy but at great expense.

Analytic modeling
- with analytic modeling and the analytic queuing network solver, you have the benefits of
accuracy and it is fast, easy, and inexpensive
- more accurate than trending
- faster and cheaper than simulation and testing
- it is an ideal tool for a lot of different situations

1st step: Determining service level requirements

- service levels are best if they are established for business, business relevant work, units and
business relevant categories of
terms of workloads that are
- in order to be able to perform capacity planning in business relevant terms, you need a way to
measure and analyze performance based on what business functions are being performed
- the way that we accomplish this is through a facility we call workload definition

Workload definition
- allows you to measure and analyze performance based on who is requesting the work, the type
of work being done (for example: order entry or financial reporting) or how the work is being
performed (for example online inquiries versus batch backups)
Team Quest IT service analyzer
- with this, we can see all of the processes running at any particular time

2nd step: Analyze current capacity

- determining how your infrastructure is meeting service levels

3rd step: Plan for the future

- taking a look at what you think might be changing in the future in terms of business workloads
or maybe in terms of system configuration and power and cooling and some of those other
complexities

#4 VID_Strategic Capacity Planning

Capacity
- the upper limit or ceiling on the load that an operating unit can handl
- basically the maximum amount of units that your factory can produce
- Goal: to achieve a match between the long-term supply capabilities of an organization and the
predicted level of long-run demand
- to reach that equilibrium point where you match exactly the long-term supply capacity that you
can with what you predict to be that level of long run demand, how many units people are going
to buy and predicting the exact amount is not possible but you want to get as close as possible to
the demand and when you reach that perfect point where you are

Capacity Planning Questions

 Key Questions:
- What kind of capacity is needed?
- How much capacity is needed to match demand?
- When is it needed?
 Related Questions:
-How much will it cost?
-What are the potential benefits and risks?
-Are there sustainability issues?
-Should capacity be changed all at once, or through several smaller changers?
- Can the supply chain handle the necessary changes?

Capacity Decisions
- strategic decisions
-impact the ability of the organization to meet future demands
-affect operating costs
-are a major determinant of initial cost
-often involve long-term commitment of resources
-can affect competitiveness
-affect the ease of management
-are more important and complex due to globalization
-need to be planned for in advance due to their consumption of financial and other resources
Defining and Measuring Capacity
 Measure capacity in units that do not require updating -why is measuring capacity in
dollars problematic?
 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

Measuring System Effectiveness

 Actual output
-the rate of output actually achieved
-cannot exceed effective capacity
 Efficiency: Efficiency = actual output/effective capacity
 Utilization: Utilization = actual output/design capacity

Capacity Strategies
 Leading – build capacity in anticipation of future demand increases
 Following – build capacity when demand exceeds current capacity
 Tracking – similar to the following strategy, but adds capacity in relatively small
increments to keep pace with increasing demand
Capacity cushion
- extra capacity used to offset demand uncertainty
-capacity cushion = 100% - utilization
-capacity cushion strategy:
 Organizations that have greater demand uncertainty typically have greater
capacity cushion
 Organizations that have standard products and services generally have greater
capacity cushion

Steps in Capacity Planning

1. Estimate future capacity requirements
2. Evaluate existing capacity and facilities; identify gaps
3. Identify alternatives for meeting requirements
4. Conduct financial analyses
5. Assess key qualitative issues
6. Select the best alternative for the long term
7. Implement alternative chosen
8. Monitor results

Economies of Scale
-if output rate is less than the optimal level, increasing the output rate results in decreasing
average per unit costs
Diseconomies of Scale
-if the output rate is more than the optimal level, increasing the output rate results in increasing
average per unit costs

Operations Strategy
 Capacity planning impacts all areas of the organization
-it determines the conditions under which operations will have to function
-flexibility allows an organization to be agile:
 It reduces the organization’s dependence on forecast accuracy and reliability
 Many organizations utilize capacity cushions to achieve flexibility
- bottleneck management is one way by which organizations can enhance their
effectiveness capacities
- capacity expansion strategies are important organizational considerations
 Expand-early strategy
 Wait-and-see strategy
- capacity contraction is sometimes necessary
 Capacity disposal strategies become important under these conditions