Capacity Planning Overview

ISSUE
The fundamental problem of operations management is balancing capacity and demand

Capacity Issues
How much and when should capacity be added? What type of capacity should be added? Where should additional capacity be added?

Productive Capacity
Productive Capacity, generally measured in physical units, refers either to the maximum output rate for products or services, or to the amounts of key resources available in each operating period. Units/period (month, year) (Uniform output) Machine hours/period (Variable output) Man hours/period

Capacity Measurement
Facility Steel Mill Shoe Factory Commercial Airline Bottling plant Hospital or Hotel Auto Repair Shop Bank Telephone Switchboard Unit of measure Tons of steel/day Pairs of shoes/shift Passenger miles/route Gallons/shift Number of beds Mechanic hours/day Operating capital Number of lines

Demand & Productive Capacity

Dimension of Demand Quantity Timing Quality Effect on Capacity Requirements How much capacity is needed? When should capacity be available? What kind of capacity is needed? Where should capacity be installed?

Location

Capacity Terms
Design Capacity:
Maximum output per unit of time that the process can achieve under ideal conditions

Effective Capacity :
Output per unit of time that is reasonably sustainable.

Actual or Operating Capacity:

Average actual output per unit of time over the immediate past periods.

Capacity Terms
Capacity Utilization:
a measure of the degree to which a system is used: (capacity used / best operating level)

Capacity Cushion:
the difference between projected requirements and actual capacity

Bottleneck Capacity
Effective throughput of the system through the bottleneck process

Procedure for developing a plan to change capacity Determine Project Capacity requirements given a Step 1 demand forecast and existing process bottlenecks Step 2 Formulate alternatives to meet future capacity requirements Type of Technology Centralized vs Decentralized plants Opportunity for Subcontracting

Step 3

Evaluate alternatives based on : Economic factors, costs, revenues, risks Strategic impacts: competition, flexibility, quality and organizational & managerial adjustments
Select optimum alternative and implement capacitydevelopment plan

Step 4

Representative Service Facility

Single Channel Single Stage Restaurant with one cash register, one hostess Multiple Stages Cafeteria service line Automatic car wash Multiple Channel Single Stage Bank Tellers for deposits & withdrawls Supermarket cashiers Multiple Stages Medical Treatment of patiemts at hospital

Moores Law
Every 18 months processing power doubles while cost holds constant.

Overcapacity NOW
Automotive Communication Airlines Consumer electronics Chronic overcapacity almost always results in price erosion.

Over Capacity Auto Industry Worldwide demand is for 50 million, capacity is for 74 million Excess capacity is one of the driving forces behind mergers. Most of the overcapacity is in Southeast Asia. If a company waits until demand equals capacity, it may miss the market.
Source: Fortune, December 1997

Short and Long-Term Capacity Management

Short-Term:
overtime, floating labor, added shifts sub-contracting workforce supplements (e.g., temps)

Intermediate Term:
efficiency improvements product re-design marketing emphasis

Long-Term:
equipment additions facility expansions workforce policies (e.g., long-term hiring)

CONCLUSION
Capacity decisions have a strategic impact on the competitiveness of the manufacturing operation. Look at utilization vs. performance.

Reducing variability can sometimes have similar logistical effects as adding capacity.