hello and welcome to our session today about strategic capacity planning for products

and services this is chapter 5

in your operations management book and this is
is capacity planning capacity if you look at the definition is the upper limit or ceiling on
the load that an operating unit can handle but simply simply put capacity is basically the
maximum amount of units that your factory can produce and the goal is you know as a
business owner somebody whomowns a factory or even a service business as you want
to reach that equilibrium point where you match exactly the long-term supply capacity
that you can you know the amount of units you can produce with what you predict to be
that level of long run demand how much how many units people are going to buy and of
course 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 the exact
amount of capacity to make the long run demand you're gonna have the highest level of
profitability which is obviously what every business is striving for now when you start
planning your capacity you have to answer three basic questions which you know when
you think about it make total sense first of all what kind of capacity do you need and
what does that mean it means what is capacity for you do you need machines do you
need the employees do you need trucks do you need computers when you say capacity
when it implies to your specific production what does it mean then the second question
is how much capacity do you need to match the demand as we mentioned before you
want to find that perfect point where you have enough capacity to match the exact
amount of demand and as I said mentioned before that's very hard to get but you want
to get as close as possible and the third question is when do you need it so for example
let's say that you predict that you're going to have a man for 10 million units in the next
five years that doesn't necessarily mean that you need to have the capacity to produce
10 million units right now it could be that you were you will be able to start with a
smaller capacity and increase it as demand grows especially when you introduce a new
product you know it takes time for people to learn about it it takes time for demand to to
grow so you want to be able to match your capacity to the variable demands you're
gonna see in the in the lifecycle of a product now if you look at the other related
questions again they all make sense before you decide on how much capacity you're
gonna buy or add to your factory you want to know how much it's gonna cost you want
to know the potential benefits and risks you want to know if you need to buy like I
mentioned before all of it at once or can you do
3:08
it in small increments and for example
3:11
if you buy you know if you're producing
3:14
cars and the machines are huge you can't
3:18
you know the machine is designed to do a
3:21
thousand cars a day the fact that you
3:23
can only sell 500 right now doesn't mean
3:26
you can buy a 500 machine per day a 500
3:32
cars per day machine it's just not
3:33
possible so sometimes even if you want
3:36
to buy capacity in small increments it's
3:39
not possible because of the sizes of the
3:41
machines and one of the most important
3:45
questions when you want to add capacity
3:48
or even design initial capacity is you
3:50
have to make sure that everyone else in
3:53
the supply chain can meet this capacity
3:56
so for example let's say you will have a
3:59
factory that produces 5 million units a
4:02
day and you have a perfect supply chain
4:05
the raw material comes in the shipments
4:08
go out on UPS trucks whatever everything
4:11
works perfectly for 5 million units per
4:14
day but suddenly you decide you want to
4:16
double you want to go to 10 million
4:18
units per day because there's more
4:19
demand you have to make sure that your
4:22
supplier of raw materials can now double
4:26
the
4:27
capacity towards you in the same thing
4:29
with the UPS trucks you know make sure
4:31
that UPS in your area has enough trucks
4:33
to deliver 10 million units per day so
4:36
really when you do all these capacity
4:38
planning you have to look at the big
4:39
picture now capacity decision are always
4:43
strategic decision and what do what do
4:46
we mean by saying it we say what do we
4:48
mean by saying that it's a strategic
4:50
decision is that we try to emphasize how
4:53
important it is to plan your capacity
4:56
correctly because if you make mistakes
5:00
in terms of planning your capacity you
5:02
can you can very much ruin your business
5:05
and think about it as a you know as a
5:07
consumer if you want to buy something
5:09
you go to a store and they say oh we
5:11
don't have it right now but we're gonna
5:13
get it in two weeks are you gonna wait
5:15
two weeks probably not you're gonna go
5:17
to a store that has it and that store
5:19
just lost you as a customer for that
5:22
particular item but maybe they lost you
5:24
as a customer forever because you know
5:25
they're not reliable so not having
5:28
enough capacity to meet the man can
5:31
really cost the business not just in
5:34
terms of the the money they're losing
5:35
but also in terms of reputation but on
5:38
the other hand having too much capacity
5:41
you're wasting money on machines that
5:43
are not being used you know you're
5:45
paying employees to produce stuff that
5:47
you you can't sell so you know you're
5:49
gonna ruin your business by by spending
5:52
more than you're making how do we define
5:56
and measure capacity first of all it's
5:59
really important when you measure
6:01
capacity to measure it in units that do
6:03
not require updating and that's why
6:06
using currencies is not a good unit for
6:11
measuring capacity so using dollars or
6:14
pounds or euros or whatever that's not a
6:17
good measuring unit because dollar
6:19
values change we have inflation we have
6:22
exchange rates you know it's so bearable
6:24
that that it's really going to change
6:26
your capacity calculation sometimes on a
6:29
daily basis so what you want to have is
6:31
you want to use a unit that is kind of
6:33
fixed for example amount of iPhones that
6:36
you can
6:38
manufacture for hours that's pretty much
6:40
a fix unit that you can then decide how
6:44
many machines you want to buy based on
6:46
the amount of iPhones per hour that you
6:49
want to manufacture now there are two
6:52
very useful definitions for capacity one
6:55
is the design capacity and the other one
6:57
is effective capacity design capacity is
7:00
the maximum output rate or service
7:03
capacity that a machine or process is
7:06
designed for what that means is that we
7:09
have a bunch of engineers that you know
7:10
they created this machine they design
7:13
that they manufacture it and they have
7:15
to come with a number when you buy it to
7:17
tell you what is the maximum design
7:19
capacity for this machine and design
7:22
capacity could be something in the that
7:24
you can think about it as if a machine
7:27
is designed to do a thousand units per
7:31
day if you push it to do a thousand and
7:34
one
7:36
nobody's guaranteeing that the machine
7:38
is not gonna explode that you're not
7:40
gonna have defense and cetera and cetera
7:42
so you know when people design machines
7:45
they have to put some kind of a limit as
7:47
to the maximum capacity that this
7:51
machine can do if you worked it in a
7:54
perfect environment you know a hundred
7:56
percent no in reality that never ever
8:01
happens because no matter what no matter
8:03
what machine you have it's gonna need
8:05
some maintenance it's gonna need to meet
8:08
you're gonna need to load materials into
8:10
it you're gonna need to have people you
8:13
know operate it it's never never never
8:16
to design capacity and that's where we
8:18
get effective capacity effective
8:21
capacity is you take the design capacity
8:23
you know what the engineers designed the
8:26
machine to have the maximum capacity I
8:28
near reduce allowances for personal time
8:32
and maintenance and effective capacity
8:35
is really what what is the maximum
8:38
capacity you can get from this machine
8:40
in real life in the real world not in a
8:42
lab or on some on some engineers board
8:46
now how do you how do you measure that
8:50
diffidence of the system to make sure
8:51
that you know you are getting the
8:53
capacity that you want to get you take
8:55
the actual output and the actual output
8:58
is what you actually was able to get you
9:00
know the machine was designed to do a
9:02
thousand and you got nine hundred the
9:04
nine hundred is the actual amount of
9:06
units you were able to produce now
9:09
actual output can never exceed effective
9:12
capacity and and stop for a moment think
9:15
why why is it that actual output can
9:18
never exceed effective capacity it's
9:21
because effective capacity is
9:23
effectively the the maximum that you can
9:27
get from this machine so there's no way
9:30
you can get your actual output can be
9:32
more than this maximum because you
9:34
define the the effective capacity is the
9:37
maximum that you can get from this
9:39
machine in a real-world situation so we
9:42
have two ways to measure effectiveness
9:45
of a system efficiency an efficiency
9:47
equals the actual output divided by the
9:51
effective capacity so if going back to
9:54
the previous example my machine is
9:56
capable in terms of you know effective
9:59
capacity to do a thousand units per day
10:03
and I was able to do nine hundred you know the machine got stuck for some time I had
some issues with getting the raw material doesn't matter I was only able to get nine
hundred units out of the machine my efficiency is ninety percent nine hundred over one
thousand gives me ninety percent efficiency now the other measure for system
effectiveness is utilization and utilization is a factor of the design capacity how much of
the design capacity that the engineers and the designers of the machine came up with
am i utilizing so I take the actual output let's say it's nine hundred like our previous
example and I divided by design capacity let's say on my design capacity for the sake of
this is 1200 and I divide let me use my calculator nine hundred dividedby twelve
hundred units gives me a seventy-five five percent utilization capacity strategies there
are only basically three strategies you can do with capacity and when you think about it
makes absolute common sense either you're leading which means that you building
capacity in anticipation of thedemand increases so you know you think oh the man is
gonna increase by a hundred units per day you just buy a hundred more a capacity for
you you you purchase capacity to produce a hundred more units per day but the
driftwood leading here is that you might be wrong you think that you're gonna need a
hundred units a hundred units per day extra capacity but you're actually selling you
know demand is 50 units per day so you just bought capacity don't need the next
strategy is following so following is like the exact opposite you say okay I'm not gonna
buy any capacity until people need it but what's the drawback is that it's you don't have a
magic wand maybe you do but most people don't have a magic wand that they can just
go poof poof and then they have extra capacity capacity costs money and time and
training employees and limited factory space so by the time you add this capacity you
might lose the demand because you are not able to meet it the third option is in
between it's tracking tracking is similar to following but instead of you know going in big
jumps what you're trying to do is go and add capacity in small increments as you see
demand going and the tricky thing about tracking is the tracking is how do you track
demand and and get it as close as possible and match your capacity asn close as
possible to this demand so so this tracking the mechanism is can be pretty complicated
but in reality most businesses would try to use the tracking because between leading
and following tracking seems to be the most cost efficient a way to go about capacity
planning