CAPACITY PLANNING

• Production capacity is the maximum production rate of an organization. ( eg, no of units per day )

• To meet demand with supply at any point of time, is to be followed for producing products or services at minimum total cost.

• Utilisation of supply capacity of organisation is maximised to meet this objective.

• Capacity planning can include designing new system, expansion of exisiting facilities,

• Depends on the short term or long term managerial planning and control of resources.

Aspects of capacity planning.• 1. Large increments in capacity required for changes in

demand over long term. • For Certain technologies, capacity can be increased only in

large numbers. Though they may not be fully utilised. • Addition of productive capacity lead to step increases in

fixed costs, which are absorbed gradually, over the increase in demand in time.

• This decides the upper limit or system design capacity.• 2. with in constraints imposed by systems capacity, limited

adjustments can be made for periods upto a year or two, to cover seasonal fluctuations.

• The resulting aggregate planning relies on use of inventories, changes in size of work force through hiring and lay offs, use of overtime, subcontract orders.

• 3. finer adjustments in capacity needed to meet random short term demand. This is done weekly or daily basis ,

Evaluation of alternate plant size.• Plant size decide the production capacity.• Depends on technology. • Centralize or decentralized located in more

places. • Management don’t consider only production

or distribution costs but also effects of decision on competition, organizational structure.

• Flexiblity needed to accommodate future changes.

• While doing capacity studies, in selecting the option following points should be considered.

1. Increase in plant size require large investment, but can lead to significant economics of scale near full capacity production volume. Usually will help in savings in construction and equipment per unit of capacity

2. Smaller fixed costs.( means utilities, insurance, supervision are same for wide range of capacity)

3. Lower variable costs as will be distributed to more units.

4. Other variable costs like purchase, shipping etc., will be lowered. lower processing costs from specialised machines

Cost volume profit analysis done to select the best option.

Design and system capacity.• Planned rate of output of goods and services under

normal, full scale operating conditions.• Or it is the maximum production or service aimed at

when the plant was established or revamped.• Examples like no. of seats in theatre, no of seats in

college, etc.,• Although facilites are designed to a capacity, uncertainity

in demand makes to difficult for optimum utilisation.• Some management meets all demand and don’t mind

surplus capacity. Some may not go for excess and may not satisfy all customers. Best approach to have a balanced approach.

• System capacity ( Sustainable capacity) is the maximum output of a product than can be achieved in reality by a production system, within the frame work of a realistic work schedule, taking account of normal down time, and assuming sufficient availability of inputs to operate the machinery and equipments in place.

• It can be less than or equal to the design capacity. And due to following reasons.

1. Equipment breakdown2. Absenteesim of personnel.3. Product mix specification which do not use facilities

uniformly.4. Demand fluctuation5. Imbalances between equipment and labour6. Inefficiency on the part of managers, workers, sales man

etc.,

Measurement of capacity.

• For single or homogeneous products the units used to measure output rate capacity are clear. Like automobiles per day, tones of coal per day.

• For product mix, or firm producing wide range of products, aggregate unit of capacity to be established. Must allow to covert the output rates of products to common unit of output measures.

• Capacity planning in services, output measures are difficult. In these cases, input rate capacity measures may be used. Like hotels use no of rooms available for occupancy. Capacity utilization percentage relates output measures to inputs available.

SYSTEM CAPACITY = 800 TONS.

DESIGN CAPACITY = 1000 TONS.

ACTUAL CAPACITY = 850 TONS.

IDEAL CAPACITY

REAL CAPACITY

ACHIEVED OUTPUT.

SYSTEM EFFICIENCY = ACTUAL OUTPUT/ SYSTEM CAPACITY.

A foundry producing alloy castings wishes to install enough furnaces of a certain type to produce 5,00,000 kg of molten metal per year. Each furnace takes about 30 min to melt 50 kg. out put is typically 3% defective . How many furnaces will be required if each one is available for 2000 hrs per year.

• Actual output required = 5,00,000 kg.• System efficiency = 1- 0.03= 0.97.• Capacity of each furnace = 50 kg/ 30 min.• Annual capacity = 2000*2*50= 2,00,000 kg. • SE= Actual output/ system capacity• System capacity required = 500000/capacity of each furnace.

= 515464.• No furnace required = system capacity/ capacity of each

furnace. • 515464/200000 = 2.57 or can say 3 nos.

A Fabrication section must supply 4000 good parts daily to another department for assembly . Processing time is 3 min/unit. Efficiency of the equipment for two shift daily is estimated at 80%. Determine the number of equipments.

2. 2% defective units are assumed in production. Consider this to decide the number of units.

In addition calculation of requirement may include the workers fatigue, overtime, defective parts produced into consideration.

• STAGE EFFICIECY = H/D• H expected running time per period in hours.• D available running time per period in hours. • Time loss is set up time + down time. • So H = D – time lost.

• An assembly line has four work centre A,B,C,D in series , determine system capacity and system efficiency.

• Slowest one decides the output capacity , so system capacity is 360 units,

• System efficiency = actual output / system capacity

• SE = 306/360 = 0.85

390

A

400

B

450

D

360

C

308 UNITS

PER DAY

ACTUAL OUTPUT

Location A would result in annual fixed cost of Rs.3,00,000, variable costs of Rs.63 per unit and revenue Rs.68 per unit. Annual fixed cost of Location B is Rs.8,00,000 , and variable costs are Rs.32 per unit. And revenues are Rs.68 per unit. Sales volume is estimated to be 25000 units per year. Which location is attractive.

Empire glass company can produce a certain insulator on any three machines which have the following charges as shown below. The form has oppurtunity to accept order for either for 1) 50 units at Rs.20 / unit.

2) 150 units at Rs.12 /unit.

1. Which machine should be used if 50 units order is accepted and what profit will result.

2. Which machine for 150 units.3. Break even volume for machine B, when price is

Rs.12 per unit.

Machine. Fixed cost in Rs Variable cost in Rs.

A 50 4/ Unit

B 200 2/ unit

C 400 1/ unit.

Actual demand for a product is expected in mfg. company is as follows

Revenues are Rs.50 per unit. The existing mfg. facility has annual fixed operating costs of Rs.300000. Variable costs are Rs.7, Rs.8, Rs.6 and Rs. 9/ unit respectively for various demands listed above.

As expanded facility under consideration would require Rs.350000 fixed operating cost annually , variable cost would be Rs.11, Rs. 7, Rs.8, Rs.6 / unit at different demand levels respectively. To maximize net earning which facility should be selected.

Units demanded

6000 9000 16000 19000

Probability 0.4 0.2 0.3 0.1

1

b

a

21

22

23

24

c

d

p = 0.4

p = 0.6

p = 0.2

p = 0.8

p = 0.3

p = 0.7 p = 0.4

p = 0.6

Rs.800

Rs.700

Rs.900

Rs.1000

Rs.2000

Rs.1000

Rs.800

Rs.700

Rs.500

Rs.1000

Costs are shown and solve the decision tree.

ALTERNATIVES.INITITAL DEMAND PROBABILITIES PAY OFF ON HIGH.

LOW HIGH DEMAND

A 0.3 0.7 4 lakhs

B 0.5 0.5 6 lakhs.The first stage choice leads to further consequences and choices only when the demand turns out to be low.

A manufacturer of tools comes out with 2 alternatives A to modify product, B make and market a new product. Stage 1 is given below.

I stage Choice.

II stagealternative

Final demand.

probability Pay off. Lakhs.

AReduce price

LOW 0.2 0.2

HIGH 0.8 1.5

Increase price

LOW 0.9 0.4

HIGH 0.1 2.0

B

Reduce price.

LOW 0.2 0.3

HIGH 0.8 1

Increase price.

LOW 1.0 0.5

HIGH 0.0 3

Decision tree analysis• Decision about facility planning are complex. They are

often difficult to organise because they are multiphase decision.

• Interdependent decisions are made in a sequence. • it aids to analysts who must see clearly what

decisions must be made, in what sequence it should occur, and the interdependence of decisions.

• Direct way of dealing with uncertain events.• Objective way of determining the relative value of

each decision alternative. • Every decision point junction or nodes are marked

with square and circle for chance events.