capacity and facility strategy

8/3/2019 Capacity and Facility Strategy

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Capacity and Facility

Strategy


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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.


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Capacity

The basic questions in capacity planning are:

What kind of capacity is needed?

How much is needed?

When is it needed?


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Capacity

Capacity and facility in manufacturing decision areasincludes:

1. Timing

2. Amount

3. Type

4. Location

5. Size

6. Focus


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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.


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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


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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


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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


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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


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In the real world, we need to manage this

capacity

but this is too complex to

start out with


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How to learn capacity management by

meditating about

Funnel Sand


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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


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Creating a balanced production system can be fairly

easy in simple systems

200 grains/minute

200 grains/minute

each100 grains/minute

200 grains/minute


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Bottleneck processing stage is defined by

400 grains/minute

200 grains/minute

100 grains/minute100

100

100

200

200

200

400

400400


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Easy to identify the bottleneck stage(s) by

observing where inventory builds up

200

200

200

400

100

100

400

100

400


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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?


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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


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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?


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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


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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


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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.


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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


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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.


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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)


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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


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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.


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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


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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.


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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.


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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?


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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





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Engineering Calculations (Load)

Project 1 = 30 x 4 hours per mile = 120 hours

(start by February 15th must be completed by March 15th)


(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)


(start by May 2nd must be completed by May 23rd)


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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.


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Solutions to Overloaded Conditions

Eliminate unnecessary requirements.

Reroute jobs or labor.

Splitting the job between two systems.

Increase normal capacity. Subcontract.

Increase efficiency.


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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


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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)


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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


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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.


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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


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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


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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.


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Tools for Capacity Planning

Quantitative Approaches

Break-even Analysis Decision Tree Analysis

Present-value Analysis

Computer Simulation

Waiting Line Analysis

Linear Programming.


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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").


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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.


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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


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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.


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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.


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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


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Decision Tree Analysis

Ref word file.

capacity and facility strategy

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