8/3/2019 Capacity and Facility Strategy
1/53
Capacity and Facility
Strategy
8/3/2019 Capacity and Facility Strategy
2/53
Capacity
Capacity is the maximum output or volume a system canproduce, the maximum work that a system is capable ofdoing in a given period of time.
By calculating the capacity, the company can determineif they are capable of completing the project within thetimeframe required.
8/3/2019 Capacity and Facility Strategy
3/53
Capacity
The basic questions in capacity planning are:
What kind of capacity is needed?
How much is needed?
When is it needed?
8/3/2019 Capacity and Facility Strategy
4/53
Capacity
Capacity and facility in manufacturing decision areasincludes:
1. Timing
2. Amount
3. Type
4. Location
5. Size
6. Focus
8/3/2019 Capacity and Facility Strategy
5/53
Capacity
Design or total capacity
Maximum output rate or service capacity an operation,process, or facility is designed for
Effective capacity
Design capacity minus allowances such as meetings,maintenance and scrap
Actual output
Rate of output actually achieved, cannot exceedeffective capacity. It minus all avoidable losses.
8/3/2019 Capacity and Facility Strategy
6/53
Capacity
Capacity Cushion:
The amount of reserved capacity that a firmmaintains to handle sudden increases in demand
or temporary losses of production capacity.
Capacity Cushion = 1 - Utilization
8/3/2019 Capacity and Facility Strategy
7/53
Efficiency and Utilization
Efficiency: It is the measure of how well a facility ormachine is performing when used
Actual outputEfficiency =
Effective capacity
Utilization: It is the measure of planned or actual capacityusage of a facility, work center, or machine
Actual outputUtilization =Total capacity
Both measures are expressed as percentages
8/3/2019 Capacity and Facility Strategy
8/53
Efficiency Actual output
Effective capacity
37244134
90.08%
=
= =
Efficiency Actual output
Effective capacity
46225437
85.01%
=
= =
Ice Cream Division Canned Food Division
TotalCapacity
7896 hrs
PlannedLoss
3762 hrs
EffectiveCapacity
4134 hrs
ActualOutput
3724 hrs
AvoidableLoss
410hrs
TotalCapacity
7896 hrs
PlannedLoss
2459 hrs
EffectiveCapacity
5437 hrsActualOutput
4622 hrs.
AvoidableLoss
815hrs
Utilization Actual output
Total capacity
3724
789647.16%
=
= =
Utilization Actual output
Total capacity
4622
789658.54%
=
= =
Utilization and efficiency measures for two divisions of a
food processing company
8/3/2019 Capacity and Facility Strategy
9/53
Capacity Strategy Formulation
Capacity strategy for long-term demand will depend on ..
Expected demand patterns
Expected growth rate and variability of demands Facilities
Cost of building and operating
Technological changes
Rate and direction of technology changes Behavior of competitors
Availability of capital and other inputs
8/3/2019 Capacity and Facility Strategy
10/53
In the real world, we need to manage this
capacity
but this is too complex to
start out with
8/3/2019 Capacity and Facility Strategy
11/53
How to learn capacity management by
meditating about
Funnel Sand
8/3/2019 Capacity and Facility Strategy
12/53
8/3/2019 Capacity and Facility Strategy
13/53
What are the problems with these two
production systems?
200 grains/minute
100 grains/minute
DEMAND = 200 grains/minute
100 grains/minute
200 grains/minute
DEMAND = 100 grains/minute
8/3/2019 Capacity and Facility Strategy
14/53
Creating a balanced production system can be fairly
easy in simple systems
200 grains/minute
200 grains/minute
each100 grains/minute
200 grains/minute
8/3/2019 Capacity and Facility Strategy
15/53
Bottleneck processing stage is defined by
400 grains/minute
200 grains/minute
100 grains/minute100
100
100
200
200
200
400
400400
8/3/2019 Capacity and Facility Strategy
16/53
Easy to identify the bottleneck stage(s) by
observing where inventory builds up
200
200
200
400
100
100
400
100
400
8/3/2019 Capacity and Facility Strategy
17/53
Basic funnel management questions of
interest?
How much sand should we allow into the systemof funnels?
Should we limit the amount of sand that we
put in?
How many funnels should we have?
How big should our funnels be?
What kind of funnels should they be? When should we add funnels?
8/3/2019 Capacity and Facility Strategy
18/53
There are several ways to increase capacity
100 grains/minute
modify your funnel or
get a bigger funnel
400 grains/minute
scale up
4 funnels X 100 grains/minute = 400 grains/minute
scale out
get more funnels
change technology
to big-mouth funnel
400 grains/minute
8/3/2019 Capacity and Facility Strategy
19/53
Typical Questions to Adjust Capacity
How many machines should be purchased?
How many workers should be hired?
Consequences of a 20% increase in demand?
How many counters should be opened to maintaincustomer wait below 10 minutes?
How many assembly stations are needed to maintainbackorders below 20?
How often will all 6 operating rooms be full?
How will congestion at Jinnah International Airportchange if 10th runway is built?
8/3/2019 Capacity and Facility Strategy
20/53
Adjustments to Capacity
Increase capacity by:
Adding extra shifts
Scheduling overtime or weekends
Adding equipment and/or personnel
Reduce load by:
Reducing lot sizes
Holding work in production control
Subcontracting work to outside suppliers
8/3/2019 Capacity and Facility Strategy
21/53
Adjustments to Capacity
Reduce capacity by:
Temporarily reassigning staff
Reducing the length of shifts
Eliminating shifts
Increase load by:
Releasing orders early
Increasing lot sizes
Making items in the facility which is normally outsourced
8/3/2019 Capacity and Facility Strategy
22/53
Economies of Scale
Economies of scale is the best operating level.
It is the point where it costs less per unit to produce highlevels of output.
It occurs when fixed costs are spread over large number
of units The more products a work center can produce while not
increasing the fixed costs maximizes the profit.
8/3/2019 Capacity and Facility Strategy
23/53
23
Output rate (patients per week)
Economies & Diseconomies of
Scale
250-bed
hospital
A
verageunitco
st
(dollarsperpatient)
500-bed
hospital
Economies
of scale
750-bed
hospital
Diseconomies
of scale
8/3/2019 Capacity and Facility Strategy
24/53
Diseconomies of Scale
Diseconomies of scale occurs when fixed costs increasewith number of units being produced, examples:
Higher rework
More equipment breakdown
It occurs when higher production results in increasedcosts.
For example, by operating the machinery at 100% of thetime may increase profits for a period of time, if the
practice is continued the machinery will eventually breakdown which will ultimately increase costs.
8/3/2019 Capacity and Facility Strategy
25/53
Capacity Timing and Sizing
Following are the common capacity strategies:
1. Capacity Lead Strategy(Expansionist strategy)
2. Capacity Lag Strategy(Wait-and-see strategy)
3. Average Capacity Strategy
(Combination of strategies)
8/3/2019 Capacity and Facility Strategy
26/53
Capacity Lead Strategy
In anticipation of demand, capacity is increased. This is an aggressive strategy and is used to lure
customers away from competitors.
Units
Capacity
Time
Demand
Capacity lead strategy
8/3/2019 Capacity and Facility Strategy
27/53
Capacity Lead Strategy
For example, a hospital may decide to hire moreregistered nurses that is need in anticipation of increasedneed in the future. This strategy is used to lure customersaway from the competitors who may not be anticipating the
demand or who cannot meet the demand.
The hospital may decide to hire the registered nursesbefore a competing hospital hires them. The hospital wouldhave hire costs with the increased staff but they maydecide it is worth the higher costs to ensure the staff will bethere when needed.
8/3/2019 Capacity and Facility Strategy
28/53
Capacity Lag Strategy
Increase capacity after demand has increased.
This is a conservative strategy and may result in loss ofcustomers.
You assume customers will return after capacity hasbeen met.
Maintains little or no capacity cushion
Units
Capacity
Time
Demand
Capacity lag strategy
8/3/2019 Capacity and Facility Strategy
29/53
Capacity Lag Strategy
If the output of the company is unique and competition is veryweak, the company may choose to use this strategy. If competition is great and the customer would have other optionsto obtain the product from, the company would benefit fromusing a different strategy.
Example: If the hospital used this strategy they wouldnt hireregistered nurses until they had an increased census in patients.The hospital would save the money in salaries; however, theywould take a chance on not being able to hire any registered
nurses. They have to send patients to other facilities or admitthem and provide lesser quality care because they wouldnt havethe staff to care for the patients.
8/3/2019 Capacity and Facility Strategy
30/53
Average Capacity Strategy
Average expected demand is calculated and capacity isincreased accordingly.
This is the most moderate strategy.
Trying to match capacity and demand
Units
Capacity
Time
Demand
Average capacity strategy
Example: Using thisstrategy, the hospital wouldhire registered nurse
gradually as the patientcensus started to increases.
8/3/2019 Capacity and Facility Strategy
31/53
8/3/2019 Capacity and Facility Strategy
32/53
Example - 1
A local road construction company needs to develop engineeringspecifications prior to doing any pre-surfacing preparation. Thecompany has been awarded the bid on four projects. They have oneengineer. It takes 4 hours per mile to develop the engineeringspecifications. The first project is 30 miles long and must be completed
by March 15th. The second project is 20 miles long and must becompleted by April 1st. The third project is 5 miles long and must becompleted by May 1st. The fourth project is 15 miles long and must becompleted by May 23rd. It is now February 15th. The engineer works a40 hours week and is very experienced so he operates at 100%efficiency. Assume one project can not be started until the previous
project is completed.
Does the engineer have enough time to accomplish thespecifications on time?
8/3/2019 Capacity and Facility Strategy
33/53
Engineering Calculations (Capacity)
Numbers of hours = 40
Shifts = 1
Efficiency = 100%
Utilization = 4/5 = 80%Capacity = 40 x 1 x 0.8 x 1.00 = 32 hours
Project 1 capacity = 4 (weeks) x 32 = 128
Project 2 capacity = 2 (weeks) x 32 = 64
Project 3 capacity = 4 (weeks) x 32 = 128
Project 4 capacity = 3 (weeks) x 32 = 96
8/3/2019 Capacity and Facility Strategy
34/53
Engineering Calculations (Load)
Project 1 = 30 x 4 hours per mile = 120 hours
(start by February 15th must be completed by March 15th)
Project 2 = 20 x 4 hours per mile = 80 hours
(startM
arch 16th
must be completed by April 1st
)Project 3 = 5 x 4 hours per mile = 20 hours
(start April 2nd must be completed by May 1st)
Project 4 = 15 x 4 hours per mile = 60 hours
(start by May 2nd must be completed by May 23rd)
8/3/2019 Capacity and Facility Strategy
35/53
Engineering Calculations (Load %)
Project 1 = 120/128 = 94%
Can be completed
Project 2 = 80/64 = 125%
Can not be completed on schedule unless load/capacity
adjustments are made. Project 3 = 20/128 = 16%
Can be completed
Project 4 = 60/96 = 63%
Can be completed
Systems with a Load Percent over 100 will not completeassignments on time without adjustments to the system.
8/3/2019 Capacity and Facility Strategy
36/53
Solutions to Overloaded Conditions
Eliminate unnecessary requirements.
Reroute jobs or labor.
Splitting the job between two systems.
Increase normal capacity. Subcontract.
Increase efficiency.
8/3/2019 Capacity and Facility Strategy
37/53
Steps in the Capacity Planning
Process
1. Estimate capacity requirements
2. Evaluate capacity gaps
3. Identify alternatives4. Conduct financial analysis
5. Assess key qualitative issues
6. Select one alternative and implement7. Monitor results
8/3/2019 Capacity and Facility Strategy
38/53
Systematic Approach to Capacity
Decisions
For one service or product processed at one operationwith a one year time period, the capacity requirement, M,is
Capacityrequirement =
Processing hours required for years demand
Hours available from a single capacity unit(such as an employee or machine) per year,
after deducting desired cushion
M=Dp
N[1 (C/100)]
where
D = demand forecast for the year (number of customers serviced orunits of product)
p = processing time (in hours per customer served or unit produced)
N= total number of hours per year during which the process operates
C= desired capacity cushion (expressed as a percent)
8/3/2019 Capacity and Facility Strategy
39/53
Setup times may be required if multiple productsare produced
Capacityrequirement
=
Processing and setup hours required foryears demand, summed over all services
or productsHours available from a single capacity unitper year, after deducting desired cushion
M=
[Dp + (D/Q)s]product 1 +[Dp + (D/Q)s]product 1 +
+[Dp + (D/Q)s]product n
N[1 (C/100)]
where
Q = number of units in each lot
s = setup time (in hours) per lot
Systematic Approach to Capacity
Decisions
8/3/2019 Capacity and Facility Strategy
40/53
8/3/2019 Capacity and Facility Strategy
41/53
Estimate Capacity Requirements
Di = number of units forecast per year, item i
Pi = processing time (hours per unit orcustomer), item i
Qi = lot size, item i
Si = set-up time, item i
N = total number of hours per year during
which process operates,
C = desired capacity cushion.
8/3/2019 Capacity and Facility Strategy
42/53
8/3/2019 Capacity and Facility Strategy
43/53
Example-3: Identify Gaps
Arizona Grill is experiencing a boom in business. Theowner expects to serve a total of 80,000 meals this year.Although the kitchen is operating at 100% capacity, thedining room can handle a total of 105,000 diners/year.Forecasted demand for the next 5 years is as follows:
What are the capacity gaps in Arizona Grills kitchenand dining room through year 5?
Year 1 90,000 meals Year 4 120,000 mealsYear 2 100,000 meals Year 5 130,000 mealsYear 3 110,000 meals
8/3/2019 Capacity and Facility Strategy
44/53
Solution: The kitchen is currently the bottleneck at a capacityof 80,000 meals/year. Based on the forecast, the capacity gapfor the kitchen is:
Before year 3, the capacity of the dining room (105,000) isgreater than demand. In year 3 and subsequently, there are
capacity gaps for the dining room:
Year 1 90,000-80,000 =10,000 Year 4 120,000-80,000 =40,000
Year 2 100,000-80,000 =20,000 Year 5 130,000-80,000 =50,000Year 3 110,000-80,000 =30,000
Year 3 110,000-105,000 =5,000
Year 4 120,000-105,000 =15,000
Year 5 130,000-105,000 =25,000
Example-3: Identify Gaps
8/3/2019 Capacity and Facility Strategy
45/53
Develop Alternative
The next step is to develop alternative plans to
cope with projected gaps.
One alternative, called the base case, is to do
nothing and simply lose orders from any
demand that exceeds capacity.
Other alternatives are various timing and
sizing options for adding new capacity.
8/3/2019 Capacity and Facility Strategy
46/53
Tools for Capacity Planning
Quantitative Approaches
Break-even Analysis Decision Tree Analysis
Present-value Analysis
Computer Simulation
Waiting Line Analysis
Linear Programming.
8/3/2019 Capacity and Facility Strategy
47/53
Break-even Analysis
Break-even analysis is based on categorizing productioncosts between those which are "variable" (costs thatchange when the production output changes) and thosethat are "fixed" (costs not directly related to the volumeof production).
Total variable and fixed costs are compared with salesrevenue in order to determine the level of sales volumeor production at which the business makes neither a
profit nor a loss (the "break-even point").
8/3/2019 Capacity and Facility Strategy
48/53
Break-even Analysis
In this diagram, the line OArepresents the variation ofincome at varying levels of
production activity("output").
OB represents the totalfixed costs in the business.
8/3/2019 Capacity and Facility Strategy
49/53
Break-even Analysis
Fixed costs are those business costs that are not directlyrelated to the level of production or output. In other words,even if the business has a zero output or high output, thelevel of fixed costs will remain broadly the same. In thelong term fixed costs can alter.
Examples of fixed costs:
- Rent and rates
- Research and development- Marketing costs- Administration costs
8/3/2019 Capacity and Facility Strategy
50/53
Break-even Analysis
Variable costs are those costs which vary directly with thelevel of output. A distinction is often made between"Direct" variable costs and "Indirect" variable costs.
Direct variable costs are those which can be directly
attributable to the production of a particular product orservice and allocated to a particular cost centre. Rawmaterials and the wages those working on the productionline are good examples.
Indirect variable costs cannot be directly attributable toproduction but they do vary with output. e.g. machinehours, maintenance and certain labour costs.
8/3/2019 Capacity and Facility Strategy
51/53
Break-even Analysis
Break-even analysis is a useful tool to study the relationshipbetween fixed costs, variable costs and returns.
A break-even point defines when an investment will generate
a positive return.
Break-even analysis computes the volume of production at a
given price necessary to cover all costs.
8/3/2019 Capacity and Facility Strategy
52/53
Break-even Analysis
ExampleA farmer wants to buy a new combine rather than hire a customharvester. The total fixed costs for the desired combine are$21,270 per year. The variable costs (not counting theoperator's labor) are $8.75 per hour. The farmer can harvest 5
acres per hour. The custom harvester charges $16.00 per acre.How many acres must be harvested per year to break-even?
Fixed costs (F) = $21,270Savings (S) = $16/A
Variable costs (V) = $8.75/hr / 5 A/hr = $1.75/AB-E = $21,270 / ($16/A - $1.75/A) = $21,270 / $14.25/A = 1,493Acres
8/3/2019 Capacity and Facility Strategy
53/53
Decision Tree Analysis
Ref word file.
Top Related