Manufacturing Management

K S Sangwan
BITS Pilani
Pilani Campus
 BITS Pilani
Pilani Campus

Capacity planning and facility layout

Capacity planning and facility
layout
 What is capacity planning?
 What kind of capacity is needed?
 Which capacity planning strategy is best suited ?
 How much capacity is needed to match demand?
 When more capacity is needed?
 Where facilities should be located (location)
 How facilities should be arranged (layout)

BITS Pilani, Pilani Campus

 Capacity planning

Capacity is the maximum capability to produce.

• It is the upper limit or ceiling on the load that an
operating unit can handle. It includes
 equipment,
 space,
 employee skills
• Capacity planning should also answer—
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?
BITS Pilani, Pilani Campus
Capacity planning

 Goal
To attain a match between the long-term supply
capabilities of an organization and the predicted
level of long-run demand
Over-capacity  operating costs that are too
high
Under-capacity  strained resources and
possible loss of customers

BITS Pilani, Pilani Campus

Importance of capacıty
decısıons
• Impact the ability of the organization to meet future
demands
• Affect operating costs
• Affect lead time responsiveness
• Are a major determinant of initial costs
• Involve long-term commitment of resources
• Affect competitiveness
• Affect ease of management
• Are more important and complex due to globalization
• Need to be planned for in advance due to their
consumption of financial and other resources

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Type of capacity planning

long-term capacity planning

Intermediate term capacity planning
Short term capacity planning
Long-term Add facilities
planning Add long lead time equipment
*
Intermediate- Subcontract Add personnel
term Add equipment Build or use inventory
planning Add shifts

Schedule jobs
Short-term
planning
* Schedule personnel
Allocate machinery

Modify capacity Use capacity

* Limited options exist
BITS Pilani, Pilani Campus
Long- term capacity
planning
Long-term capacity planning is a strategic decision that
establishes a firm’s overall level of resources.

It extends over a time horizon long enough to obtain those

resources—usually a year or more for building or expanding
facilities or acquiring new businesses.

Capacity decisions affect

 product lead times
 customer responsiveness
 operating costs, and
 a firm’s ability to compete.

BITS Pilani, Pilani Campus

 Capacity expansion strategies
Capacity
How much to increase
capacity depends on—
• The volume and certainty
of anticipated demand;
• Strategic objectives in
terms of growth, customer
service, and competition;
and
• The costs of expansion
and operation.

Example: Consider higher education’s strategy in preparing for a

tripling of the state’s college-bound population in the next decade.

BITS Pilani, Pilani Campus

 Capacity lead strategy
Capacity is expanded in anticipation of demand growth.
• This aggressive strategy is used
to lure customers from competitors
who are capacity constrained
• Also to gain a foothold
in a rapidly expanding market.
• It allows companies to respond
to unexpected surges in demand
and to provide superior levels of service
during peak demand periods.
Example: A young university might lead capacity expansion in hopes of
capturing students not admitted to the more established universities.
BITS Pilani, Pilani Campus
 Capacity lag strategy
Capacity is increased after an increase
in demand has been documented.
• This conservative strategy produces
a higher return on investment but
may lose customers in the process.
• It is used in industries with standard
products and cost-based or weak
competition.
• The strategy assumes that lost
customers will return from
competitors after capacity has
expanded.
Example: An established university, guaranteed applicants even in lean
years, may follow a capacity lag strategy.
BITS Pilani, Pilani Campus
 Average capacity strategy
Capacity is expanded to coincide
with average expected demand.
• This is a moderate strategy in
which managers are certain they
will be able to sell at least some
portion of expanded output, and
endure some periods of unmet
demand.
• Approximately half of the time
capacity leads demand, and half
of the time capacity lags
demand.
Example: A community college may choose the average capacity
strategy to fulfill its mission of educating the state’s youth but with little
risk.
BITS Pilani, Pilani Campus
Incremental versus one-step
expansion
Capacity can be increased
incrementally or in one large step.

• Incremental expansion is less risky

but more costly.
• An attractive alternative to
expanding capacity is outsourcing,
in which suppliers absorb the risk
of demand uncertainty.

BITS Pilani, Pilani Campus

Design and effective capacity

 Design capacity
 Maximum output rate or service capacity an
operation, process, or facility is designed for
 Effective capacity
 Design capacity minus allowances such as
personal time, maintenance, and scrap
 Actual output
 Rate of output actually achieved--cannot
exceed effective capacity.

BITS Pilani, Pilani Campus

Determinants of effective
capacity
A) Facilities
- Location (transportation cost, distance, labor supply)
- Design (room for expansion)
- Layout (material transfer, line balance)

B) Product/service
- Design (similar products standardization)
C) Process
- Quantitiy capabilities (productivity, using automated
machines)
- Quality capabilities (the more time spent for
inspection and rework the less capacity)

BITS Pilani, Pilani Campus

Determinants of effective
capacity
D) Human Factors
- job content
- training and experience
- motivation
- absenteeism and labor turnover
E) Operational Factors
- scheduling
- materials management
- quality assurance
- maintenance policies
- equipment breakdowns
F) External Factors
- Pollution control standards
- Unions
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Efficiency and utilization
Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity

Example: Design capacity = 50 units/day; Effective capacity = 40 units/day

Actual output = 36 units/day
Actual output = 36 units/day
Efficiency = = 90%
Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day

= 72% Design
capacity 50 units/day

BITS Pilani, Pilani Campus

Capacıty cushıon
• Extra capacity used to offset demand uncertainty
• Capacity cushion = 100% - Utilization
• Capacity cushion strategy
 Helps to meet excess demand during peak demand
seasons
 Lowers production costs
 Provides product and volume flexibility
 Improves quality of products and services
 Organizations that have greater demand uncertainty
typically have greater capacity cushion
 Organizations that have standard products and
services generally have greater capacity cushion
BITS Pilani, Pilani Campus
Identify the optimal operating
level
Cost of Output ($)
Average Unit

Economies Diseconomies
of Scale of Scale

Best Operating Level

Annual Volume (units)

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Identify the optimal operating
level
Minimum cost & optimal operating rate are
functions of size of production unit.
Average cost per unit

Small
plant Medium
plant Large
plant

0 Output rate

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Economies of scale
Best operating level - least average unit cost
Economies of scale - If the output rate is less than the
optimal level, increasing output rate results in decreasing
average unit costs. Declining costs up to the best
operating level result from fixed costs, labor cost being
spread over more units
Average cost per unit decreases as the volume increases.

BITS Pilani, Pilani Campus

Diseconomies of scale
Diseconomies of scale –
If the output rate is more than the optimal level,
increasing the output rate results in increasing average
unit costs.

Average cost per unit increases as the volume increases

due to scheduling problems, quality problems, reduced
morale, increased use of overtime

BITS Pilani, Pilani Campus

Thank You

BITS Pilani, Pilani Campus