Capacity Planning

1
 Steps in the Capacity Planning Process


Estimate the capacity of the present facilities.

Forecast the long-range future capacity needs.

Identify and analyze sources of capacity to meet these
needs.

Select from among the alternative sources of capacity.

2
 Definitions of Capacity


In general, production capacity is the maximum
production rate of an organization.

Capacity can be difficult to quantify due
to ???????????????????

3
 Definitions of Capacity


In general, production capacity is the maximum
production rate of an organization.

Capacity can be difficult to quantify due to …

Day-to-day uncertainties such as employee
absences, equipment breakdowns, and material-
delivery delays

Products and services differ in production rates
(so product mix is a factor)

Different interpretations of maximum capacity

4
 Definitions of Capacity


The Federal Reserve Board defines sustainable
practical capacity as the greatest level of output that
a plant can maintain …


within the framework of a realistic work schedule


taking account of normal downtime


assuming sufficient availability of inputs to operate
the machinery and equipment in place
5
 Measurements of Capacity

Output Rate Capacity


For a facility having a single product or a few
homogeneous products, the unit of measure is
straightforward (barrels of beer per month)

For a facility having a diverse mix of products, an
aggregate unit of capacity must be established
using a common unit of output
(??????????????????)

6
 Measurements of Capacity

Output Rate Capacity


For a facility having a single product or a few
homogeneous products, the unit of measure is
straightforward (barrels of beer per month)

For a facility having a diverse mix of products, an
aggregate unit of capacity must be established
using a common unit of output (sales dollars per
week)

7
 Measurements of Capacity

Input Rate Capacity


Commonly used for service operations????? where
output measures are particularly difficult.

8
 Measurements of Capacity

Input Rate Capacity


Commonly used for service operations where
output measures are particularly difficult


Hospitals use available beds per month


Airlines use available seat-miles per month


Movie theatres use available seats per month
9
 Measurements of Capacity

Capacity Utilization Percentage


Relates actual output to output capacity

Example: Actual automobiles produced in a quarter
divided by the quarterly automobile production
capacity


Relates actual input used to input capacity

Example: Actual accountant hours used in a month
divided by the monthly account-hours available
10
 Measurements of Capacity

Capacity Cushion???????????????????

11
 Measurements of Capacity

Capacity Cushion

an additional amount of capacity added onto the
expected demand to allow for:
greater than expected demand


demand during peak demand seasons



lower production costs????????



product and volume flexibility



improved quality of products and services



12
 Forecasting Capacity Demand


Consider the life of the input (e.g. facility is 10-30 yr)

Understand product life cycle as it impacts capacity

Anticipate technological developments

Anticipate competitors’ actions

Forecast the firm’s demand

13
 Other Considerations


Resource availability

Accuracy of the long-range forecast

Capacity cushion

Changes in competitive environment

14
 Expansion of Long-Term Capacity


Subcontract with other companies

Acquire other companies, facilities, or resources

Develop sites, construct buildings, buy equipment

Expand, update, or modify existing facilities

Reactivate standby facilities

15
 Reduction of Long-Term Capacity


Sell off existing resources, lay off employees

Mothball (later use or sale) facilities, transfer
employees

Develop and phase in new products/services

16
 Economies of Scale


Best operating level - least average unit cost


Economies of scale - average cost per unit decreases
as the volume increases toward the best operating
level


Diseconomies of scale - average cost per unit
increases as the volume increases beyond the best
operating level
17
 Economies and Diseconomies of Scale
Average Unit
Cost of Output ($)

Economies Diseconomies
of Scale of Scale

Best Operating Level

Annual Volume (units)

18
 Economies of Scale


Declining costs result from:

Fixed costs being spread over more and more units

Longer production runs result in a smaller
proportion of labor being allocated to setups

Proportionally less material scrap

… and other economies

19
 Diseconomies of Scale


Increasing costs result from increased congestion of
workers and material, which contributes to:

Increasing inefficiency

Difficulty in scheduling

Damaged goods

Reduced morale

Increased use of overtime

… and other diseconomies

20
 Two General Approaches
to Expanding Long-Range Capacity

All at Once – build the ultimate facility now and
grow into it

Incrementally – build incrementally as capacity
demand grows

21
 Two General Approaches
to Expanding Long-Range Capacity

All at Once

Little risk of having to turn down business due to
inadequate capacity

Less interruption of production

One large construction project costs less than
several smaller projects

Due to inflation, construction costs will be higher
in the future

Most appropriate for mature products with stable
demand
22
 Two General Approaches
to Expanding Long-Range Capacity

Incrementally

Less risky if forecast needs do not materialize

Funds that could be used for other types of
investments will not be tied up in excess capacity

More appropriate for new products

23
 Subcontractor Networks

A viable alternative to larger-capacity facilities is to

develop subcontractor and supplier networks.

“Farming out” or outsourcing your capacity needs
to your suppliers

Developing long-range relationships with suppliers
of parts, components, and subassemblies

Relying less on backward vertical integration

Requiring less capital for production facilities

More easily varying capacity during slack or peak
demand periods

24
 Outsourcing Service Functions


Building maintenance

Data processing

Delivery

Payroll

Bookkeeping

Customer service

Mailroom

Benefits administration

… and more

25
 Economies of Scope


The ability to produce many product models in one
flexible facility more cheaply than in separate facilities


Highly flexible and programmable automation allows
quick, inexpensive product-to-product changes


Economies are created by spreading the automation cost
over many products
26
 Example: King Publishing


Break-Even Analysis
King Publishing intends to publish a book in
residential landscaping. Fixed costs are $125,000 per
year, variable costs per unit are $32, and selling price
per unit is $42.
A) How many units must be sold per year to break
even? B) How much annual revenue is required to
break even? C) If annual sales are 20,000 units, what
are the annual profits? D) What variable cost per unit
would result in $100,000 annual profits if annual
sales are 20,000 units?

27
 Decision Tree Analysis


Structures complex multiphase decisions, showing:

What decisions must be made

What sequence the decisions must occur

Interdependence of the decisions

Allows objective evaluation of alternatives

Incorporates uncertainty

Develops expected values

28
 Example: Good Eats Café


Decision Tree Analysis
Good Eats Café is about to build a new restaurant.
An architect has developed three building designs,
each with a different seating capacity. Good Eats
estimates that the average number of customers per
hour will be 80, 100, or 120 with respective
probabilities of 0.4, 0.2, and 0.4. The payoff table
showing the profits for the three designs is on the
next slide.

29
 Example:
Example: Good
Good Eats
Eats Café
Café

 Payoff Table
Average Number of Customers Per Hour
c11 = 80 c22 = 100 c33 = 120

Design A $10,000 $15,000 $14,000

Design B $ 8,000 $18,000 $12,000
Design C $ 6,000 $16,000 $21,000

30
 Example:
Example: Good
Good Eats
Eats Café
Café

Expected Value Approach
Calculate the expected value for each decision. The
decision tree on the next slide can assist in this
calculation. Here d1, d2, d3 represent the decision
alternatives of designs A, B, C, and c1, c2, c3 represent
the different average customer volumes (80, 100, and
120) that might occur.

31
 Line Balancing

The quantities of workers and machines assigned to each task in the line should be
rebalanced to meet the optimal production rate.

32
 Line Balancing

 Precedence diagram

Network showing order of
tasks and restrictions on their
performance
 Cycle time

Maximum time product
spends at any one
workstation

33
 Line Balancing

 Precedence diagram
Cycle time example

Network showing order of
tasks and production
restrictions on time
their available
Cd =
performance desired units of output
 Cycle time (8 hours x 60 minutes / hour)

C d =
Maximum (120time units)
product
spends at any one
480
workstation Cd = = 4 minutes
120

34
 Flow Time vs Cycle Time
 Cycle time = max time spent at any station
 Flow time = time to complete all stations

35
 Flow Time vs Cycle Time
 Cycle time = max time spent at any station
 Flow time = time to complete all stations

1 2 3
4 minutes 4 minutes 4 minutes

Flow time ??????

Cycle time = ??????
36
 Flow Time vs Cycle Time
 Cycle time = max time spent at any station
 Flow time = time to complete all stations

1 2 3
4 minutes 4 minutes 4 minutes

Flow time = 4 + 4 + 4 = 12 minutes

Cycle time = max (4, 4, 4) = 4 minutes
37
 Efficiency of Line
Minimum number
Efficiency
of workstations

t t
j j
i i

E= i=1
nCa
N= i=1
Cd

where
ti = completion time for element i
j = number of work elements
n = actual number of workstations
Ca = actual cycle time
Cd = desired cycle time 38
 Line Balancing Process
1. Draw and label a precedence diagram.
2. Calculate the desired cycle time required for the line.
3. Calculate the theoretical minimum number of workstations.
4. Group elements into workstations, recognizing cycle time and
precedence constraints.
5. Calculate the efficiency of the line.

6. Stop if theoretical minimum number of workstations on an

acceptable efficiency level reached. If not, go back to step 4.

39
Line Balancing:

Real Fruit Snack Strips are made from a mixture of

dried fruit, food coloring, preservatives, and glucose.
The mixture is pressed out into a thin sheet, imprinted
with various shapes, rolled and packaged. The
precedence and time requirement for each step in the
assembly process are given below . To meet demand,
Real Fruit needs to produce 6000 fruit strips every 40
hour week. Design an assembly line with the fewest
number of workstations that will achieve the production
quota without violating precedence constraints.

40
 Line Balancing

WORK ELEMENT PRECEDENCE TIME (MIN)

A Press out sheet of fruit — 0.1
B Cut into strips A 0.2
C Outline fun shapes A 0.4
D Roll up and package B, C 0.3

41
 Line Balancing
WORK ELEMENT PRECEDENCE TIME (MIN)
A Press out sheet of fruit — 0.1
B Cut into strips A 0.2
C Outline fun shapes A 0.4
D Roll up and package B, C 0.3

0.2
B

0.1 A D 0.3

C
0.4
42
 Line Balancing
WORK ELEMENT PRECEDENCE TIME (MIN)
A Press out sheet of fruit — 0.1
B Cut into strips A 0.2
C Outline fun shapes A 0.4
D Roll up and package B, C 0.3

0.2
B
40 hours x 60 minutes / hour 2400
Cd = = = 0.4 minute
6,000 units 6000
0.1 A D 0.3
0.1 + 0.2 + 0.3 + 0.4 1.0
N= = = 2.5 workstations
0.4 0.4
C
0.4
43
 Line Balancing
WORK ELEMENT PRECEDENCE TIME (MIN)
A Press out sheet of fruit — 0.1
B Cut into strips A 0.2
C Outline fun shapes A 0.4
D Roll up and package B, C 0.3

0.2
B
40 hours x 60 minutes / hour 2400
Cd = = = 0.4 minute
6,000 units 6000
0.1 A D 0.3
0.1 + 0.2 + 0.3 + 0.4 1.0
N= = = 2.5 workstations
0.4 0.4
C 3
0.4 workstations44
 Line Balancing
WORK ELEMENT PRECEDENCE TIME (MIN)
A Press out sheet of fruit — 0.1
B Cut into strips A 0.2
C Outline fun shapes A 0.4
D Roll up and package B, C 0.3

Cd = 0.4
0.2
B N = 2.5

0.1 A D 0.3

C
0.4
45
 Line Balancing
REMAINING REMAINING
WORKSTATION ELEMENT TIME ELEMENTS

Cd = 0.4
0.2
B N = 2.5

0.1 A D 0.3

C
0.4
46
 Line Balancing
REMAINING REMAINING
WORKSTATION ELEMENT TIME ELEMENTS
1 A 0.3 B, C

Cd = 0.4
0.2
B N = 2.5

0.1 A D 0.3

C
0.4
47
 Line Balancing
REMAINING REMAINING
WORKSTATION ELEMENT TIME ELEMENTS
1 A 0.3 B, C
B 0.1 C, D

Cd = 0.4
0.2
B N = 2.5

0.1 A D 0.3

C
Example 5.2 0.4
48
 Line Balancing
REMAINING REMAINING
WORKSTATION ELEMENT TIME ELEMENTS
1 A 0.3 B, C
B 0.1 C, D
2 C 0.0 D

Cd = 0.4
0.2
B N = 2.5

0.1 A D 0.3

C
Example 5.2 0.4
49
 Line Balancing
REMAINING REMAINING
WORKSTATION ELEMENT TIME ELEMENTS
1 A 0.3 B, C
B 0.1 C, D
2 C 0.0 D
3 D 0.1 none

Cd = 0.4
0.2
B N = 2.5

0.1 A D 0.3

C
0.4
50
 Line Balancing
REMAINING REMAINING
WORKSTATION Work
ELEMENT Work
TIME Work
ELEMENTS
station 1 station 2 station 3
1 A 0.3 B, C
B A, B C
0.1 D C, D
2 C 0.0 D
0.3 0.4 0.3
3 D minute 0.1
minute minute
none

Cd = 0.4
0.2
B N = 2.5

0.1 A D 0.3

C
0.4
51
 Line Balancing
REMAINING REMAINING
WORKSTATION Work
ELEMENT Work
TIME Work
ELEMENTS
station 1 station 2 station 3
1 A 0.3 B, C
B A, B C
0.1 D C, D
2 C 0.0 D
0.3 0.4 0.3
3 D minute 0.1
minute minute
none

Cd = 0.4
0.2
B N = 2.5

0.1 + 0.2 + 0.3 + 0.4 1.0

E= 0.1 A = D 0.3
= 0.833 = 83.3%
3(0.4) 1.2

C
0.4
52
Facility Location

53
 A Sequence of Decisions

Political, social, economic stability;

National Decision Currency exchange rates; . . . . .

Climate; Customer concentrations;

Regional Decision
Degree of unionization; . . . . .

Transportation system availability;

Community Decision
Preference of management; . . . . .

Site size/cost; Environmental impact;

Site Decision
Zoning restrictions; . . . . .

54
 Factors
FactorsAffecting
Affecting
the
the Location
Location Decision
Decision

Economic

Site acquisition, preparation and construction costs

Labor costs, skills and availability

Utilities costs and availability

Transportation costs

Taxes

55
 Factors
FactorsAffecting
Affecting
the
the Location
Location Decision
Decision

Non-economic

Labor attitudes and traditions

Training and employment services

Community’s attitude

Schools and churches

Recreation and cultural attractions

Amount and type of housing available

56
 Facility Types and Their
Dominant Locational Factors

Mining, Quarrying, and Heavy Manufacturing

Near their raw material sources

Abundant supply of utilities

Land and construction costs are inexpensive

Light Manufacturing

Availability and cost of labor

Warehousing

Proximity to transportation facilities

Incoming and outgoing transportation costs

. . . more
57
 Facility Types and Their
Dominant Locational Factors

R&D and High-Tech Manufacturing

Ability to recruit/retain scientists, engineers, etc.

Near companies with similar technology interests

Retailing and For-Profit Services

Near concentrations of target customers

Government and Health/Emergency Services

Near concentrations of constituents

58
 Some Reasons the
Facility Location Decision Arises

Changes in the market

Expansion

Contraction

Geographic shift

Changes in inputs

Labor skills and/or costs

Materials costs and/or availability

Utility costs

. . . more

59
 Some Reasons the
Facility Location Decision Arises

Changes in the environment

Regulations and laws

Attitude of the community

Changes in technology

60
 Analyzing Service Location Decisions

Consumer Behavior Why do customers buy our

Research products and services?

Who are our customers?

Market Research
What are their characteristics?

Data Gathering for Where are our customers concentrated?

Each Location Alternative What are their traffic/spending patterns?

Revenue Projections for What are the economic projections?

Each Location Alternative What is the time-phased revenue?

Profit Projections for What are the projected revenues

Each Location Alternative less time-phased operating costs?
61
 Analyzing Industrial Facility Locations

Factors that tend to dominate the industrial-facility

location decision are:

Transportation costs

Labor cost and availability

Materials cost and availability

Utilities cost

62
 Analyzing Industrial Facility Locations


Locating a Single Facility

A simple way to analyze alternative locations is
conventional cost analysis
Pros – ease of communication and understanding


Cons – time value of money ignored and



qualitative factors not considered


Locating Multiple Facilities

More sophisticated techniques are often used:
Linear programming, computer simulation,


network analysis, and others

63
 Qualitative Factors in Location Decisions

Often-important qualitative factors include


Housing

Climate

Community activities

Education and health services

Recreation

Churches

Union activities

Community attitudes

64
Integrating Qualitative & Quantitative Factors


Managers often wrestle with the task of trading off
qualitative factors against quantitative ones

Methods for systematically displaying the relative
advantages and disadvantages, both qualitative and
quantitative, of each location alternative have been
developed

The relative-aggregate-scores approach is one such
method

65
 Relative-Aggregate-Scores Approach
Quantitative and Qualitative Factors
Location A Location B
Econ. Wgt. Econ.
Wgt.
Factor Weight Data Score Score Data Score Score
Prod.cost/ton .45 $65 .923 .415 $60 1.000 .450
Transp.cost/ton .35 $18 1.000 .350 $21 .857 .300
Labor Avail. .15 .700 .105 .500 .075
Union Activity .05 .450 .023 .750 .038
Total Score .893 .863

66