Operations Management

Session 6-7 – Strategic Capacity Planning

Dr. Ramesh Krishnan

IIM Kozhikode
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Ramesh.Krishnan@iimk.ac.in
Introduction
 Oversupply vs Undersupply/ Capacity – Impact.
 How many units should my facility produce to
satisfy the customer demand of x units?
 Can we increase the facility’s capacity as we see
the increase in demand?
 What if there is a seasonality in demand – winter
wear?
 Flexibility as a competitive advantage?

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Capacity Planning Questions
 Key questions:
 What kind of capacity is needed?
 How much 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
changes?
 Can the supply chain handle the necessary changes?

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 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
 Design capacity: The maximum output rate or service capacity an operation, process, or
facility is designed for
 Effective capacity: Design capacity minus allowances such as personal time and maintenance

Business Inputs Outputs

Auto manufacturing Labor hours, machine hours Number of cars per shift
Measures
of Steel mill Furnace size Tons of steel per day
capacity
Oil refinery Refinery size Gallons of fuel per day
Number of acres, number of Bushels of grain per acre per year, gallons of
Farming
cows milk per day

Number of tables, seating

Restaurant Number of meals served per day
capacity

Theater Number of seats Number of tickets sold per performance

Retail sales Square feet of floor space Revenue generated per day
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Capacity Measurements

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Example S1

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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

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Capacity Strategies
Strategies are typically based on assumptions and
predictions about:
❖ Long-term demand patterns
❖ Technological change
❖ Competitor behavior

 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

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 Demand Management Strategies

➢ Demand exceeds capacity

➢ Curtail demand by raising prices, scheduling longer lead times and
discouraging marginally profitable production line
➢ Long-term solution is to increase capacity
➢ Capacity exceeds demand
➢ Stimulate market – price reductions/aggressive marketing
➢ Product changes
➢ Adjusting to seasonal demands
➢ Produce products with complementary demand patterns
➢ Example: Mango pulp processing industries

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BOTTLENECK MANAGEMENT

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Bottleneck Analysis and the 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
➢ The time to produce a unit or a specified batch size
is the cycle time

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Bottleneck Analysis and the Theory of Constraints
➢ The bottleneck/cycle time is the time of the
slowest workstation (the one that takes the
longest) in a production system
➢ The throughput/ time is the time it takes a unit
to go through production from start to end.

A B C

2 min/unit 4 min/unit 3 min/unit

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Capacity Analysis
➢ Two identical sandwich lines
➢ Lines have two workers and three operations
➢ All completed sandwiches are wrapped

First assembly line

Bread Fill Toaster

15 sec/sandwich 20 sec/sandwich 40 sec/sandwich
Wrap/
Order
Deliver
30 sec/sandwich
Bread Fill Toaster 37.5 sec/sandwich

15 sec/sandwich 20 sec/sandwich 40 sec/sandwich

Second assembly line

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Capacity Analysis Bread Fill Toaster
15 sec 20 sec 40 sec Wrap
Order
30 sec
Bread Fill Toaster 37.5 sec
15 sec 20 sec 40 sec

➢ The two lines are identical, so parallel processing

can occur
➢ At 40 seconds, the toaster has the longest
processing time and is the bottleneck for each
line
➢ At 40 seconds for two sandwiches, the
bottleneck time of the combined lines = 20
seconds
➢ At 37.5 seconds, wrapping and delivery is the
bottleneck for the entire operation
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 Bread Fill Toaster
15 sec 20 sec 40 sec Wrap
Order
30 sec
Bread Fill Toaster
Capacity Analysis 15 sec 20 sec 40 sec
37.5 sec

➢ Capacity per hour is 3,600 seconds/37.5

seconds/sandwich = 96 sandwiches per hour

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 Theory of Constraints by Goldratt and Cox
•What needs to be changed?
Thinking Processes •What should it be changed to?
•What actions will cause the change?

STEP OBJECTIVE
Identify Identify the current constraint (the single part of the process that limits the rate at which
the goal is achieved).
Exploit Make quick improvements to the throughput of the constraint using existing resources
(i.e., make the most of what you have).
Subordinate Review all other activities in the process to ensure that they are aligned with and truly
support the needs of the constraint.
Elevate If the constraint still exists (i.e., it has not moved), consider what further actions can be
taken to eliminate it from being the constraint. Normally, actions are continued at this step
until the constraint has been “broken” (until it has moved somewhere else). In some cases,
capital investment may be required.
Repeat The Five Focusing Steps are a continuous improvement cycle. Therefore, once a constraint
is resolved the next constraint should immediately be addressed. This step is a reminder to
never become complacent – aggressively improve the current constraint…and then
immediately move on to the next constraint. 5-35
Principles of Bottleneck Management
1. Release work orders to the system at the pace of set by
the bottleneck’s capacity
➢ Drum – constraint; the “beat” for the process and determines total
throughput
➢ Buffer – inventory required to maintain consistent production at
constraint
➢ Rope – signal generated by the constraint indicating that some amount
of inventory has been consumed
2. Lost time at the bottleneck represents lost capacity for
the whole system – keep it busy
3. Increasing the capacity of a non-bottleneck station is a
mirage – extra inventory
4. Increasing the capacity of a bottleneck increases the
capacity of the whole system 5-37
Benefits of Theory of Constraints
• Increased Profit: the primary goal of TOC for most companies
• Fast Improvement: a result of focusing all attention on one critical area –
the system constraint
• Improved Capacity: optimizing the constraint enables more product to be
manufactured
• Reduced Lead Times: optimizing the constraint results in smoother and
faster product flow
• Reduced Inventory: eliminating bottlenecks means there will be less work-
in-process

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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 effective 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

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