Chapter 4-Capacity Design in The Supply Chain

Course:
LOGISTICS ENGINEERING AND SUPPLY

CHAIN DESIGN
International University
Vietnam National University HCMC
Chapter 4
Capacity Design in the Supply Chain
Lecturer: Dr. Nguyễn Hằng Giang Anh

Email: nhganh@hcmiu.edu.vn
Learning Objectives
❖ Explain the importance of capacity planning.

❖ Describe ways of defining and measuring capacity.
❖ Name several determinants of effective capacity.
❖ Discuss the major considerations related to developing
capacity alternatives.
❖ Briefly describe approaches that are useful for
evaluating capacity alternatives.
Main Contents
1. Capacity Planning
2. Developing Capacity Strategies
3. Capacity Planning Alternatives Evaluating Models
1.
CAPACITY PLANNING
What is capacity ?
❖ What is capacity?
❖ What is capacity of a supply chain?

→ Maximum amount of products that can be delivered to final
customers in a given time.
❖ Mismatching between Capacity and Demand:
o Overcapacity →
o Undercapacity →
What is Capacity Planning?
❖ Capacity planning is
❖ Capacity planning applies to both manufacturing and

service organizations.
❖ The key questions in capacity planning are:
1. What kind of capacity is needed?
2. How much is needed to match demand?
3. When is it needed?
Importance of capacity planning
❖ Capacity decisions have an impact on the ability to meet

future demands for products and services.
❖ Capacity decisions affect operating costs.
❖ Capacity is a major determinant of initial cost.
❖ Capacity decisions involve a long-term commitment of
resources.
❖ Capacity decision affect competitiveness.
❖ Capacity affects the ease of management.
Definitions and Measures of capacity
❖ Designed Capacity is the maximum rate of output achieved
under ideal conditions.
❖ Effective Capacity is the maximum realistic output in normal
conditions.
❖ Actual output is
Examples of commonly used measures of Capacity
Measures of system effectiveness
Actual output
Effeciency = ∗100%
Effective capacity
Actual output
Utilization = ∗100%
Design capacity
→ High efficiency would seem to indicate an effective use of

resources, but in many instances this emphasis can be
misleading.
→ Effective capacity should be increase.
Factors determine effective capacity
Example 1
• A vehicle repair department built up a repair facility

designed to fix up to 50 trucks per day.
• However, the repair facility can produce only 40 trucks per

day in reality, despite working at its maximum effort.
→ What is the efficiency and the utilization of the vehicle

repair department if the actual output is 36 trucks per day?
Solution
Steps in the Capacity Planning Process
Step 1. Estimate future capacity requirements.
Step 2. Find the the capacity available in present facilities.
Step 3. Identify gaps between capacity needed and available.
Step 4. Develop alternative plans for overcoming any gaps.
Step 5. Evaluate the capacity plans and find the best.
Step 6. Implement the best and monitor performance.
Example 3
• A&B Coaches of Blackpool plan their capacity in terms of ‘coach-days’.
• Forecasts show expected annual demands for the next five years to
average 400,000 full-day passengers and 750,000 half-day
passengers.
• A&B have 61 coaches, each with an effective capacity of 40
passengers a day for 300 days a year. Breakdowns and other
unexpected problems reduce efficiency to 90%.
• They employ 86 drivers who work an average of 220 days a year, but
illness and other absences reduce their efficiency to 85%. If there is a
shortage of coaches the company can buy extra ones for $110,000 or
hire them for $100 a day. If there is a shortage of drivers they can
recruit extra ones at a cost of $20,000 a year, or hire them from an
agency for $110 a day.
→ How can the company plan for the required demand?
Solution (1/2)
Step 1. Estimate future capacity requirements
o
Step 2. Find the capacity available
Solution (2/2)
Step 3. Identify gaps between capacity needed and available
Step 4. Develop alternative plans for overcoming any gaps
Step 5. Evaluate the capacity plans and find the best
Estimate Capacity Requirements (Supplementary)
• Demand forecast is converted to a number that can be
compared directly with the capacity measure being used.
Number of machines required Number of machines required for multiple

for one product/service products/services → setup time
𝐷𝑝 𝐷 𝐷
𝑀= 𝐷𝑝 + 𝑠 + ⋯ + 𝐷𝑝 + 𝑠
𝐶 𝑄 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 1 𝑄 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝑛
𝑁 1− 𝑀=
100 𝑁 1 − 𝐶/100
𝐷= number of units (customers) forecast per year

𝑝 = processing time (hrs/unit or hrs/customer)
𝑁= total number of hours per year of the operating process
𝑄 = number of units in each lot
𝑠 = setup time (hrs) for each lot
𝐶= desired capacity cushion - the amount of reserve capacity that a firm
maintains to handle sudden increases in demand.
Example 3 (Supplementary)
• A copy center in an office building prepares bound reports for
two clients. The center makes multiple copies (the lot size) of
each report. The processing time to run, collate, and bind each
copy depends on, among other factors, the number of pages.
• The center operates 250 days per year, with one eight-hour
shift. Management believes that a capacity cushion of 15% is
best. It currently has three copy machines. Based on the
following table of information, determine how many machines
are needed at the copy center.
Item X Y
Annual demand forecast (copies) 2000 6000
Standard processing time (hrs/copy) 0.5` 0.7
Average lot size (copies/report) 20 30
StandardUniversity
International setup time (hrs) 0.25 0.4
Solution
2.
DEVELOPING CAPACITY
STRATEGIES
Design flexibility into systems
• The long-term nature of capacity decisions and the risks in

long-term forecasts suggest benefits from designing
flexible systems.
• For example:
Provision for future expansion in the original design of a
structure frequently → obtained at a cheaper price
compared to what it would cost to remodel an existing
structure that did not have such a provision.
Identify bottlenecks in the system
• Not all parts of a supply chain have the same capacity.

Some parts limit overall output → this forms a bottleneck.
Identify bottlenecks in the system
An operation in a sequence of operations whose capacity is

lower than that of the other operations.
Example 4
Company A has a supply chain system for its powdered milk products as follows:
• The processing plant has a capacity of 4,000 kg/day for 7 days/week. It fills
standard boxes of 850g.
• The boxes are passed to two packing areas, each of which can form up to 220
cases/day with 15 boxes/case. The packing areas works a 7-day week.
• The cases are then taken to a warehouse by a transport company whose 5
trucks can each carry 70 cases and make up to 2 trips/day for 5 days/week.
• The warehouse can handle up to 3,000 cases/week.
• The delivery vans can handle only half of the warehouse’s capacity passed to
them.
→ What is the capacity of each member of the supply chain? What is the
overall capacity of the current supply chain system? (Unit: boxes/week)
Solution
Identify the optimal operating level
• Production units typically have an optimal level of operation in
terms of unit cost of output. At the optimal level, cost per unit is
the lowest for that production unit.
• Economies of scale
• Diseconomies of scale
3.
CAPACITY PLANNING
ALTERNATIVES EVALUATING
MODELS
Evaluating Models
1. Cost-volume analysis – Break-even analysis
2. Decision Theory – Decision Tree
3. Waiting – Line Analysis (William J. Stevenson

(2021) - Operations management 14th Edition. Mc GrawHill.
ISBN10: 1264151594. ISBN13: 9781264151592)
Cost - Volume Analysis
❖ Cost-volume analysis focuses on relationships between

cost, revenue and volume of output.
❖ Objective: Find the point at which total cost equals total
revenue
❖ Cost–volume analysis can be a valuable tool for comparing
capacity alternatives if certain assumptions are satisfied:
o One product is involved.
o Everything produced can be sold.
o Variable cost per unit is the same regardless of the volume.
o Fixed costs do not change with volume changes, or they are
step changes.
o Revenue per unit is the same regardless of volume.
o Revenue per unit exceeds variable cost per unit.
Cost - Volume relationships
Fixed, variable, and total costs Total revenue increases linearly with output
Example 5
The owner of Old-Fashioned Berry Pies, S. Simon, is contemplating

adding a new line of pies, which will require leasing new equipment
for a monthly payment of $6,000. Variable costs would be $2 per pie,
and pies would retail for $7 each.
a. How many pies must be sold in order to break even?
b. What would the profit (loss) be if 1,000 pies are made and sold in
a month?
c. How many pies must be sold to realize a profit of $4,000?
d. If 2,000 can be sold, and a profit target is $5,000, what price
should be charged per pie?
Solution
Decision Theory
❖ Decision theory is a helpful tool for financial comparison of

alternatives under conditions of risk or uncertainty.
❖ It is suited to capacity decisions and to a wide range of
operations management decisions.
❖ Some elements needed for this approach:
• A set of possible future conditions (e.g., demand will be
low, medium, or high) that will have a bearing on the results of
the decision.
• A list of alternatives for the manager to choose from.
• A known payoff for each alternative under each possible

future condition.
Decision tree
A decision tree is a schematic representation of the
alternatives available to a decision maker and their possible
consequences
Example 6
A manager must decide on the size of a video arcade to construct. The
manager has narrowed the choices to two: large or small. Information has
been collected on payoffs, and a decision tree has been constructed.
→ Analyze the decision tree and determine which alternative (build
small or build large) should be chosen to maximize expected monetary
value.
Solution
Waiting-Line Analysis
❖ Analysis of lines is useful for designing or modifying service

systems. Waiting lines have a tendency to form in a wide
variety of service systems (e.g., airport ticket counters, hospital
emergency rooms) → Symptoms of bottleneck operations.
❖ Analysis is useful in choosing a capacity level that will be cost-
effective through balancing the cost of having customers wait
with the cost of providing additional capacity.
❖ The main characteristics are:
o Population source: potential number of customers
o Number of servers (channels)
o Arrival and service patterns
o Queue discipline (order of service): FCFS rule
Population source
❖ Infinite-source situations exist whenever service is

unrestricted. The potential number of customers greatly
exceeds system capacity.
o Examples are supermarkets, drugstores, banks,
restaurants, theatres and amusement centers.
❖ Finite-source situations exist when the
o An example is the repair technician responsible for a

certain number of machines in a company.
Number of servers (channels)
❖ Channel is a server in a service system.

❖ Systems can be either single- or multiple-channel.
o Single-channel systems: small grocery stores with one
checkout counter and single-bay car washes.
o Multiple-channel systems: banks, at airline ticket
counters, at auto service centers, and at gas stations.
International University A simple queuing system

Four common variations of queuing systems
Measures of Waiting-line Performance
The operations manager looks at five measures when evaluating

existing or proposed service systems:
1. The average number of customers waiting (in line or in the
system).
2. The average time customers wait (in line or in the system).
3. System utilization: the percentage of capacity utilized.
4. The implied cost of a given level of capacity and its related
waiting line.
5. The probability that an arrival will have to wait for service.
Queuing Models
❖ Infinite-source model is appropriate for cases in which

the calling population is unlimited. It includes four
models:
1. Single server, exponential service time
2. Single server, constant service time
3. Multiple servers, exponential service time
4. Multiple priority service, exponential service time
❖ Finite-source model is appropriate for cases in which
the calling population is limited to a relatively small
number of potential calls.
Infinite-source symbols
Basic Relationships
Example 7
Customers arrive at a bakery at an average rate of 18 per hour on

weekday mornings. The arrival distribution can be described by a
Poisson distribution with a mean of 18. Each clerk can serve a customer
in an average of three minutes. This time can be described by an
exponential distribution with a mean of 3.0 minutes.
a. What are the arrival and service rates?
b. Compute the average number of customers being served at any
time.
c. Suppose it has been determined that the average number of
customers waiting in line is 8.1. Compute the average number of
customers in the system (i.e., waiting in line or being served), the
average time customers wait in line and the average time in the
system.
d. Determine the system utilization for M = 1, 2, and 3 servers.
Solution
Formulas for basic single server model
Example 8 - Single Server, Exponential Service Time
An airline is planning to open a satellite ticket desk in a new shopping

plaza, staffed by one ticket agent. It is estimated that requests for
tickets and information will average 15 per hour, and requests will have
a Poisson distribution. Service time is assumed to be exponentially
distributed. Previous experience with similar satellite operations
suggests that mean service time should average about three minutes
per request. Determine each of the following:
a. System utilization
b. Percentage of time the server (agent) will be idle
c. The expected number of customers waiting to be served
d. The average time customers will spend in the system
e. The probability of zero customers in the system and the
probability of four customers in the system
Solution

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Course:

LOGISTICS ENGINEERING AND SUPPLY

Lecturer: Dr. Nguyễn Hằng Giang Anh

❖ Explain the importance of capacity planning.

2. Developing Capacity Strategies

3. Capacity Planning Alternatives Evaluating Models

❖ What is capacity of a supply chain?

❖ Capacity planning applies to both manufacturing and

❖ Capacity decisions have an impact on the ability to meet

→ High efficiency would seem to indicate an effective use of

• A vehicle repair department built up a repair facility

• However, the repair facility can produce only 40 trucks per

→ What is the efficiency and the utilization of the vehicle

Step 1. Estimate future capacity requirements.

Step 2. Find the the capacity available in present facilities.

Step 3. Identify gaps between capacity needed and available.

Step 4. Develop alternative plans for overcoming any gaps.

Step 5. Evaluate the capacity plans and find the best.

Step 6. Implement the best and monitor performance.

Step 2. Find the capacity available

Step 4. Develop alternative plans for overcoming any gaps

Step 5. Evaluate the capacity plans and find the best

Number of machines required Number of machines required for multiple

𝐷= number of units (customers) forecast per year

Standard processing time (hrs/copy) 0.5` 0.7

Average lot size (copies/report) 20 30

• The long-term nature of capacity decisions and the risks in

• Not all parts of a supply chain have the same capacity.

An operation in a sequence of operations whose capacity is

1. Cost-volume analysis – Break-even analysis

2. Decision Theory – Decision Tree

3. Waiting – Line Analysis (William J. Stevenson

❖ Cost-volume analysis focuses on relationships between

The owner of Old-Fashioned Berry Pies, S. Simon, is contemplating

❖ Decision theory is a helpful tool for financial comparison of

• A list of alternatives for the manager to choose from.

• A known payoff for each alternative under each possible

❖ Analysis of lines is useful for designing or modifying service

❖ Infinite-source situations exist whenever service is

❖ Finite-source situations exist when the

o An example is the repair technician responsible for a

❖ Channel is a server in a service system.

International University A simple queuing system

The operations manager looks at five measures when evaluating

❖ Infinite-source model is appropriate for cases in which

Customers arrive at a bakery at an average rate of 18 per hour on

An airline is planning to open a satellite ticket desk in a new shopping

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