CAPACITY

PLANNING
Prof. Arijit Mitra
■ Capacity
– The upper limit or ceiling on the load that an operating unit can handle. Capacity
needs include
■ Equipment
■ Space
■ Employee skills

■ Capacity Planning – The goal is to achieve a match between the long-term supply
capabilities of an organization and the predicted level of long-term demand
(Forecasted Value)

■ Overcapacity → operating costs that are too high

■ Undercapacity → strained resources and possible loss of customers

Capacity Decisions Are Strategic → Involves huge investment and long-term

commitment of resources
Determining Capacity for Different Facilities
■ Capacity in terms of Output e.g. No. of vehicle per day in an
Automobile Plant
■ Capacity in terms of Input e.g. no. of beds in hospitals, no. of skilled
welders available
■ Holding Capacity – Water Tank

■ Capacity Determination for customized flow

– Experiential
– Data driven
– Simulation
■ Capacity Determination for a line flow –
– Bottleneck Capacity
– Theory of Constraint
Some useful definitions of capacity Measuring System Effectiveness

■ Design capacity - The maximum output rate ■ Efficiency

or service capacity an operation, process, or actual output

Efficiency =
facility is designed for effective capacity

■ Utilization
■ Effective capacity - Design capacity minus
actual output
allowances such as personal time and Utilization =
maintenance
design capacity

Both are measured as percentages

■ Actual output
– The rate of output actually achieved
– It cannot exceed effective capacity
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 smaller capacity cushion
Worker’s skill as the capacity: Welding Example
■ Project Requirement – 30000 inches ¼ inch welding in 1 day
■ Welder skill/capability – 140 inches per hr. for a standard welder
■ Description of the welder-gang – It consists of 30 standard welders
■ Working hrs. – 9 hrs. per day
■ Break – 15 min (tea-break in the 1st half) + 30 min (Lunch) + 15 min (tea-break in the
2nd half)

■ Calculate – Design Capacity, Effective Capacity, Utilization, Efficiency & Capacity

Cushion.
 Bakery Example: Capacity in terms of Output

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 X 8-hour shifts

Find Out Capacity Utilization, Efficiency & Cushion

Calculating Processing Requirements: No. of resource required
k

pD i i
It requires reasonably accurate demand
NR = i =1
T
forecasts, standard processing times,
where
N R = number of required machines and available work time
pi = standard processing time for product i
Di = demand for product i during the planning horizon
T = processing time available during the planning horizon

A Problem: A company is planning to buy a machine to process these products. How many
machines should be bought? 1 machine means 1 worker also!!

Available Working time – 8 hrs. X 250 days

Product Annual Std. Processing Total Processing
in a year Demand Time per unit (hr.) Time Needed (hr.)
• Calculate for single Shift
A 400 5 2000
• Calculate for 2 – shift
B 300 8 2400
• Calculate for 3 Shift
• Conclusion on the no. of machines C 700 2 1400
Bottleneck Operation: Capacity of a line flow
20 / hr. 10 / hr. 15 / hr.

Operation 1 Operation 2 Operation 3

■ An operation in a sequence of operations whose capacity is lower than that of the

other operations
■ What is the Capacity of this system?
■ Ans – The Capacity of Bottleneck i.e., 10/hr.

• Bottleneck or Constraint - Something that limits the performance of a process or system in

achieving its goals
• Categories of Constraint: Market, Resource, Material, Financial, Knowledge or competency,
Policy
Resolving Constraint Issues: Theory of Constraint (TOC)

1. Identify the most pressing constraint (Bottleneck)

2. Change the operation to achieve maximum benefit, given the

constraint

3. Make sure other portions of the process are supportive of the

constraint

4. Explore and evaluate ways to overcome the constraint

5. Repeat the process until the constraint levels are at acceptable levels
 Problem - 1

A production process at Kenneth Day Manufacturing is shown in the figure below. The drilling operation occurs
separately from, and simultaneously with, sawing and sanding, which are independent and sequential
operations. A product needs to go through only one of the three assembly operations (the operations are in
parallel).
1. Which operation is the bottleneck?
2. What is the bottleneck time?
3. If the firm operates 8 hours per day, 20 days per month, what is the monthly capacity of the manufacturing
process?
Problem - 2

Cleaning

Takes Develops 24 min/unit Check

Check in Dentist
X-ray X-ray out
2 min/unit 2 min/unit 4 min/unit X-ray 8 min/unit 6 min/unit
exam
5 min/unit

1. Which operation is the bottleneck?

2. What is the bottleneck time?
3. If the dispensary operates 8 hours per day, 22 days per month, what is the monthly capacity
of the dispensary?
Capacity Strategies
Leading / Capacity Lead Strategy
– Build capacity in anticipation of
future demand increases
Following / Capacity Lag Strategy
– Build capacity when demand
exceeds current capacity
Tracking / Average Capacity Strategy
– Similar to the following strategy,
but adds capacity in relatively
small increments to keep pace
with increasing demand
Incremental Vs One-step Expansion
Evaluating Capacity Alternatives
1. Cost-Volume Analysis and Break-even Point (BEP)

2. Identifying the Optimum Operating Level based on

Min. Average Cost

3. Decision Theory or Expected Monetary Value (EMV)

Cost-Volume Analysis
■ Focuses on the relationship between cost, revenue, and
volume of output
– Fixed Costs (FC) – Tend to remain constant regardless of
output volume
– Variable Costs (VC) – Vary directly with volume of output
■ VC = Quantity(Q) x variable cost per unit (v)

– Total Cost (TC) = FC + VC

– Total Revenue (TR) = revenue per unit (R) x Q
Break-Even Point (BEP)
■ BEP
– The volume of output at which total cost and total revenue are
equal
– Profit (P) = TR – TC = R x Q – (FC +v x Q)
= Q(R – v) – FC

FC
QBEP =
R−v
The Break-even point is said to achieved when the Profit is zero.
Cost-Volume
.
Relationships
Cost-Volume Analysis Assumptions

■ One product is involved

■ Everything produced can be sold
■ The variable cost per unit is the same regardless of volume
■ Fixed costs do not change with volume changes, or they are
step changes
■ The revenue per unit is the same regardless of volume
■ Revenue per unit exceeds variable cost per unit
Problem
■ Fixed Cost – $6000
■ Revenue per unit - $7
■ Variable Cost per unit - $2

■ Find the Break-even Point in terms of quantity

■ Find the profit or loss if 1000 units are produced
■ How many units to be produced to get a profit of
$4000?
Cost-Volume Relationships for multiple break-even points

■ Capacity alternatives may involve step costs, which are

costs that increase stepwise as potential volume
increases.
– The implication of such a situation is the possible occurrence
of multiple break-even quantities.
Problem
No. of Total Annual Corresponding
Machines Fixed Costs Range of Output
1 9600 0 – 300
2 15000 301 – 600
3 20000 601 - 900

• Variable Cost - $10 per unit

• Price - $40 per unit

• Determine break-even point for each range

• Suppose the projected demand is 580 – 660 units. How many
machines should be bought?
 Optimal Operating Level Economies of Scale:

Reasons for economies of scale:

Average cost per unit If output rate is less than the optimal level,
increasing the output rate results in • Fixed costs are spread over a larger number of
decreasing average per unit costs
units
• Construction costs increase at a decreasing rate
as facility size increases
If the output rate is more than the
• Processing costs decrease due to
optimal level, increasing the output standardization
rate results in increasing average
per unit costs

Diseconomies of Scale
Min. cost
Reasons for diseconomies of scale:

• Distribution costs increase due to traffic

congestion and shipping from a centralized
Optimal Rate of output
facility rather than multiple smaller facilities
Output Rate
• Complexity increases costs
• Inflexibility can be an issue
• Additional levels of bureaucracy
Problem: Using differentiation to find the minimum Avg. cost

A firm produces x tons of output at a total cost of Rs. R, where,

R = 0.1*x3 - 5x2 + 10x + 5
At what level of output will the
A. The average variable cost
B. The average total cost

attain their respective minima?

Different Facility Size and Optimal Operating Level: Multiple Minima

Minimum cost & optimal operating rate are

functions of size of production unit.

Average cost per unit

Small
plant Medium
plant
Large
plant

Output rate
Decision Theory: Expected Monetary Value (EMV)
■ A Hospital is considering capacity assessment.

■ If a Large unit is built, $100000 is the profit from a favorable market. An unfavorable
market would yield a loss of $90000.

■ If a Medium unit is built, $60000 is the profit from a favorable market. An unfavorable
market would yield a loss of $10000.

■ If a Small unit is built, $40000 is the profit from a favorable market. An unfavorable
market would yield a loss of $5000.

■ A recent market research says that there is a probability of 0.4 that the market will be
favorable or else it will be considered as unfavorable market

■ Take a capacity decision with EMV approach or Decision Theory

In-House or Outsource? (Make Vs. Buy)

■ Once capacity requirements are determined, the organization must decide

whether to produce a good or service itself or outsource
■ Factors to consider:
– Available capacity
– Expertise
– Quality considerations
– The nature of demand
– Cost
– Risks
Service Capacity Planning: Some Additional Challenges

– The need to be near customers

■ Convenience
– The inability to store services
■ Cannot store services for consumption later
– The degree of demand volatility
■ Volume and timing of demand
■ Time required to service individual customers

Evaluating Alternatives in Service Capacity

■ Waiting Line Analysis

■ Data driven Simulation