Capacity Capacity PlanningPlanning

CapacityCapacity CapacityCapacity (A): (A): is the upper limit on the load that is the upper limit on the load that

an operating unit can handle.an operating unit can handle. CapacityCapacity (B): (B): the upper limit of the quantity of a the upper limit of the quantity of a

product (or product group) that an operating unit product (or product group) that an operating unit can produce can produce (= the maximum level of output)(= the maximum level of output)

CapacityCapacity (C): t (C): the amount of resource inputs he amount of resource inputs available relative to output requirements at a available relative to output requirements at a particular timeparticular time

The basic questions in capacity handling are:The basic questions in capacity handling are: What kind of capacity is needed?What kind of capacity is needed? How much is needed?How much is needed? When is it needed?When is it needed? How does productivity relate to capacity?How does productivity relate to capacity?

1.1. Impacts ability to meet future Impacts ability to meet future demandsdemands

2.2. Affects operating costsAffects operating costs3.3. Major determinant of initial costsMajor determinant of initial costs4.4. Involves long-term commitmentInvolves long-term commitment5.5. Affects competitivenessAffects competitiveness6.6. Affects ease of managementAffects ease of management7.7. Impacts long range planningImpacts long range planning

Importance of Capacity Importance of Capacity DecisionsDecisions

Examples of Capacity Examples of Capacity MeasuresMeasures

Type of Measures of CapacityOrganization Inputs Outputs

Manufacturer Machine hoursper shift

Number of unitsper shift

Hospital Number of beds Number ofpatients treated

Airline Number of planesor seats

Number ofseat-miles flown

Restaurant Number of seats Customers/timeRetailer Area of store Sales dollarsTheater Number of seats Customers/time

CapacityCapacity DesignDesigneded capacity capacity

maximum output rate or service capacity maximum output rate or service capacity an operation, process, or facility is an operation, process, or facility is designed fordesigned for

= = maximum obtainable outputmaximum obtainable output = best operating level= best operating level

Effective capacityEffective capacity Design capacity minus allowances such as Design capacity minus allowances such as

personal time, maintenance, and scrappersonal time, maintenance, and scrap Actual outputActual output = Capacity used = Capacity used

rate of output actually achievedrate of output actually achieved. It . It cannot cannot exceed effective capacity.exceed effective capacity.

Capacity Capacity Efficiency and Efficiency and Capacity Capacity UtilizationUtilization

Actual outputEfficiency =

Effective capacity

Actual outputUtilization =

Design capacity

Actual output Actual output 6 6 tons/week

EfficiencyEfficiency = = == = = 7575%%

Effective capacity Effective capacity 8 8 tons/week

Actual outputActual output 6 6 tons/week UtilizationUtilization = = ==

= = 6060%% Design capacity Design capacity 10 10 tons/week

Numeric Numeric ExampleExample

Design capacity = 10 tons/week

Effective capacity = 8 tons/week

Actual output = 6 tons/week

Determinants of Determinants of Effective CapacityEffective Capacity

FacilitiesFacilities Product and service factorsProduct and service factors Process factorsProcess factors Human factorsHuman factors Operational factorsOperational factors Supply chain factorsSupply chain factors External factorsExternal factors

Key Decisions of Key Decisions of Capacity PlanningCapacity Planning

1.1. Amount of capacity neededAmount of capacity needed

2.2. Timing of changesTiming of changes

3.3. Need to maintain balanceNeed to maintain balance

4.4. Extent of flexibility of facilitiesExtent of flexibility of facilities

Capacity CushionCapacity Cushion level of capacity in excess of the average

utilization rate or level of capacity in excess of the expected demand.

extra demand intended to offset uncertainty Cushion = (designed capacity / capacity used) -

1 High cushion is needed:

service industries service industries high level of uncertainty in demand (in terms of both volume and high level of uncertainty in demand (in terms of both volume and

product-mix)product-mix) to permit allowances for vacations,to permit allowances for vacations, holidays, supply of materials holidays, supply of materials

delays, equipment breakdowns, etc.delays, equipment breakdowns, etc. if subcontracting, overtime, or the cost of missed demand is very if subcontracting, overtime, or the cost of missed demand is very

highhigh

Steps for Capacity Steps for Capacity PlanningPlanning

1.1. Estimate future capacity Estimate future capacity requirementsrequirements

2.2. Evaluate existing capacityEvaluate existing capacity

3.3. Identify alternativesIdentify alternatives

4.4. Conduct financial analysisConduct financial analysis

5.5. Assess key qualitative issuesAssess key qualitative issues

6.6. Select one alternativeSelect one alternative

7.7. Implement alternative chosenImplement alternative chosen

8.8. Monitor resultsMonitor results (feedback) (feedback)

Sources of UncertaintySources of Uncertainty

ManufacturingManufacturing Customer deliveryCustomer delivery Supplier performanceSupplier performance Changes in demandChanges in demand

The „The „Make or BuyMake or Buy” ” problemproblem

1.1. Available capacityAvailable capacity

2.2. ExpertiseExpertise

3.3. Quality considerationsQuality considerations

4.4. Nature of demandNature of demand

5.5. CostCost

6.6. RiskRisk

Developing Capacity Developing Capacity AlternativesAlternatives

1.1. Design flexibility into systemsDesign flexibility into systems

2.2. Take stage of life cycle into accountTake stage of life cycle into account ((complementary productcomplementary product))

3.3. Take a “big picture” approach to Take a “big picture” approach to capacity changescapacity changes

4.4. Prepare to deal with capacity “chunks”Prepare to deal with capacity “chunks”

5.5. Attempt to smooth out capacity Attempt to smooth out capacity requirementsrequirements

6.6. Identify the optimal operating levelIdentify the optimal operating level

Economies of ScaleEconomies of Scale Economies of scaleEconomies of scale

If the output rate is less than the If the output rate is less than the optimal level, increasing output rate optimal level, increasing output rate results in decreasing average unit costsresults in decreasing average unit costs

Diseconomies of scaleDiseconomies of scale If the output rate is more than the If the output rate is more than the

optimal level, increasing the output rate optimal level, increasing the output rate results in increasing average unit costsresults in increasing average unit costs

Evaluating AlternativesEvaluating AlternativesProduction units have an optimal rate of output for minimal cost.

Minimum cost

Av

era

ge

co

st

per

un

it

0 Rate of output

Minimum average cost per unit

Evaluating AlternativesEvaluating Alternatives II.II.

Minimum cost & optimal operating rate are functions of size of production unit.

Av

era

ge

co

st

per

un

it

0

Smallplant Medium

plant Largeplant

Output rate

Need to be near customersNeed to be near customers Capacity and location are closely tiedCapacity and location are closely tied

Inability to store servicesInability to store services Capacity must be matched with timing Capacity must be matched with timing

of demand of demand Degree of volatility of demandDegree of volatility of demand

Peak demand periods Peak demand periods

Planning Service Planning Service CapacityCapacity

Some examples Some examples ofof

demand / demand / capacitycapacity

Adapting capacity to Adapting capacity to demand through changes in demand through changes in

workforceworkforceDEMAND

PRODUCTION RATE (CAPACITY)

Adaptation with Adaptation with inventoryinventory

DEMAND

CAPACITY

Inventory accumulation

Inventory reduction

Adaptation with Adaptation with subcontractingsubcontracting

DEMAND

PRODUCTION (CAPACITY)

SUBCONTRACTING

Adaptation with Adaptation with complementary productcomplementary product

DEMAND

PRODUCTION (CAPACITY)

DEMANDPRODUCTION (CAPACITY)

Seminar exercisesSeminar exercisesHomogeneous Machine

Designed capacity in calendar Designed capacity in calendar timetime

CCDD= N ∙ s= N ∙ snn ∙ s ∙ shh ∙ m ∙ mnn ∙ 60 ∙ 60 (mins / planning (mins / planning periodperiod) )

CCDD= designed capacity (mins / planning period)= designed capacity (mins / planning period) NN = number of = number of calendarcalendar days days in the planning period in the planning period

(≈(≈ 250 250 wwdaysdays//yr)yr) ssnn= = maximum maximum number of shiftsnumber of shifts in a day in a day (= 3 if dayshift (= 3 if dayshift

+ swing shift + nightshift)+ swing shift + nightshift) sshh= number of hours in a shift = number of hours in a shift (in a 3 shifts system, it (in a 3 shifts system, it

is 8)is 8) mmnn= number of homogenous machine groups= number of homogenous machine groups

Designed capacity in working Designed capacity in working minutes minutes

(machine minutes)(machine minutes),, with given with given work schedulework schedule

CCDD= N ∙ s= N ∙ snn ∙ s ∙ shh ∙ m ∙ mnn ∙ 60 ∙ 60 (mins / planning (mins / planning periodperiod) )

CCDD= designed capacity (mins / planning period)= designed capacity (mins / planning period) NN = number of = number of working daysworking days in the planning period in the planning period

(≈ 250 wdays/yr)(≈ 250 wdays/yr) ssnn= = number of shiftsnumber of shifts in a day (= 3 if dayshift + swing in a day (= 3 if dayshift + swing

shift + nightshift)shift + nightshift) sshh= number of hours in a shift (in a 3 shifts system, it = number of hours in a shift (in a 3 shifts system, it

is 8)is 8) mmnn= number of homogenous machine groups = number of homogenous machine groups

Effective capacityEffective capacity in working in working minutesminutes

CCEE = = CCDD - t- tallowancesallowances (mins / planning (mins / planning period) period)

CCDD= designed capacity= designed capacity

ttallowancesallowances = allowances such as personal = allowances such as personal time, maintenance, and scrap (mins / time, maintenance, and scrap (mins / planning period)planning period)

The resources we can count The resources we can count with in product mix with in product mix

decisionsdecisionsb = b = ∙ ∙ CCEE

bb = expected capacity = expected capacityCCEE = effective capacity= effective capacity

= performance= performance percentagepercentage

Produktumok

Erőforrások

T1 Ti Tn Erőforrások nagysága

(kapacitás) óra/időszak

E1 a11 a1i a1n b1 E2 a21 a2i a2n b2 Ei a i1 a i i a i n b i Em am1 am i amn bm erőforrás felhasználási

koeficiensek

Product types

Resources

Expected Capacities

Resource utilization coefficients

ExerciseExercise 1.1 1.1Set up the product-resource matrix using the following data!Set up the product-resource matrix using the following data!

RU coefficients: aRU coefficients: a1111: 10, a: 10, a2222: 20, a: 20, a2323: 30, a3: 30, a344: 10: 10 The planning period is 4 weeks (there are no holidays in it, The planning period is 4 weeks (there are no holidays in it, and no work on weekends) and no work on weekends) Work schedule: Work schedule:

EE11 and E and E22: 2 shifts, each is 8 hour long: 2 shifts, each is 8 hour long EE33: 3 shifts: 3 shifts

Homogenous machines: Homogenous machines: 1 for E1 for E11 2 for E2 for E22 1 for E1 for E33

Maintenance time: only for EMaintenance time: only for E33: 5 hrs/week: 5 hrs/weekPerformance rate: Performance rate:

90% for E90% for E11 and E and E33 80% for E80% for E22

Solution (bSolution (bii) )

EEii = = N ∙ sN ∙ snn ∙ s ∙ shh ∙ m ∙ mnn ∙ 60 ∙ 60 ∙ ∙ N=(number of weeks) N=(number of weeks) ∙ ∙ (working days per week)(working days per week)

EE11 = 4 = 4 weeksweeks ∙ ∙ 5 5 working daysworking days ∙ ∙ 2 2 shiftsshifts ∙ ∙ 8 8 hours per shifthours per shift ∙ ∙ 60 60 minutes per hourminutes per hour ∙ ∙ 1 1 homogenous machinehomogenous machine ∙ ∙ 0,9 0,9 performance performance = = = 4 = 4 ∙ ∙ 5 5 ∙ ∙ 2 2 ∙ ∙ 8 8 ∙ ∙ 60 60 ∙ ∙ 1 1 ∙ ∙ 0,9 = 17 280 0,9 = 17 280 minutes per minutes per planning periodplanning period

EE22 = 4 = 4 ∙ ∙ 5 5 ∙ ∙ 2 2 ∙ ∙ 8 8 ∙ ∙ 60 60 ∙ ∙ 2 2 ∙ ∙ 0,8 = 38 720 0,8 = 38 720 minsmins

EE33 = (4 = (4 ∙ ∙ 5 5 ∙ ∙ 3 3 ∙ ∙ 8 8 ∙ ∙ 60 60 ∙ ∙ 1 1 ∙ ∙ 0,9) – (5 0,9) – (5 hrs per weekhrs per week maintenancemaintenance ∙ ∙ 60 60 minutes per hourminutes per hour ∙ ∙ 4 4 weeksweeks) = 25 920 – ) = 25 920 – 1200 = 24 720 1200 = 24 720 minsmins

SolutionSolution (RP matrix) (RP matrix)

   TT11 TT22 TT33 TT44 b (b (mins/ymins/y))

EE11 1010 17 28017 280

EE22 2020 3030 30 72030 720

EE33 1010 24 72024 720

ExerciseExercise 1.2 1.2 Complete the corporate system matrix with the Complete the corporate system matrix with the

following marketing data:following marketing data: There are long term contract to produce at least:There are long term contract to produce at least:

50 T150 T1 100 T2100 T2 120 T3120 T3 50 T450 T4

ForForeecasts says the upper limit of the market is:casts says the upper limit of the market is: 10 000 units for T110 000 units for T1 1 500 for T21 500 for T2 1 000 for T31 000 for T3 3 000 for T43 000 for T4

Unit prices: T1=100, T2=200, T3=3Unit prices: T1=100, T2=200, T3=3330, T4=1000, T4=100 Variable costs: E1=5/min, E2=8/min, E3=11/minVariable costs: E1=5/min, E2=8/min, E3=11/min

SolutionSolution (CS matrix) (CS matrix)

   TT11 TT22 TT33 TT44 b (mins/y)b (mins/y)

EE11 1010 17 28017 280

EE22 2020 3030 30 72030 720

EE33 1010 24 72024 720

MIN (MIN (pcs/ypcs/y)) 5050 100100 120120 5050

MAX (pcs/y)MAX (pcs/y)

10 10 000000 1 5001 500 1 0001 000 3 0003 000

pp 100100 200200 330330 100100

ff 5050 4040 9090 -10-10

What is the optimal product What is the optimal product mix to maximize revenues?mix to maximize revenues?

TT11= = 17 280 / 10 = 1728 < 10 00017 280 / 10 = 1728 < 10 000

TT22: 200/20=10: 200/20=10

TT33: 330/30=11: 330/30=11

TT44=24 720/10=2472<3000=24 720/10=2472<3000

TT22= 100= 100 TT33= = (30 720-100∙20-120∙30)/30= 837<MAX(30 720-100∙20-120∙30)/30= 837<MAX

What if we want to What if we want to maximize profit?maximize profit?

The only difference is in TThe only difference is in T44 because because of its negative contribution margin.of its negative contribution margin.

TT44=50=50

ExerciseExercise 2 2

   TT11 TT22 TT33 TT44 TT55 TT66 b (hrs/y)b (hrs/y)

EE11 66                2 0002 000

EE22    33 22          3 0003 000

EE33          44       1 0001 000

EE44             66 33 6 0006 000

EE55             11 44 5 0005 000

MIN (pcs/y)MIN (pcs/y) 00 200200 100100 250250 400400 100100

MAX (pcs/y)MAX (pcs/y) 2000020000 500500 400400 10001000 20002000 200200

p (HUF/pcs)p (HUF/pcs) 200200 100100 400400 100100 5050 100100

f (HUF/pcs) f (HUF/pcs) 5050 8080 4040 3030 2020 -10-10

SolutionSolution

Revenue max.Revenue max. TT11=333=333

TT22=500=500

TT33=400=400

TT44=250=250

TT55=900=900

TT66=200=200

Contribution max.Contribution max. TT11=333=333

TT22=500=500

TT33=400=400

TT44=250=250

TT55=966=966

TT66=100=100