capacity planning rmc

Operations Management

Capacity Planning

How much long-range capacity is needed

When more capacity is needed

Where facilities should be located (location)

How facilities should be arranged (layout)

Facility planning answers:

Facility Planning

Forecast

Demand

Compute

Needed

Capacity

Compute

Rated

Capacity

Evaluate

Capacity

Plans

Implement

Best Plan

Qualitative

Factors

(e.g., Skills)

Select Best

Capacity

Plan

Develop

Alternative

Plans

Quantitative

Factors

(e.g., Cost)

Capacity Planning Process

Types of Planning Over a Time Horizon

Add FacilitiesAdd long lead time equipment

Schedule JobsSchedule PersonnelAllocate Machinery

Sub-ContractAdd EquipmentAdd Shifts

Add PersonnelBuild or Use Inventory

Long Range Planning

Intermediate Range Planning

Short Range Planning

Modify Capacity Use Capacity

*

*

*Limited options exist

Definition and Measures of Capacity

Capacity: The “throughput,” or number of units a facility

can hold, receive, store, or produce in a period

of time.

Utilization: Actual output as a percent of design capacity.

Effective capacity:

Capacity a firm can expect to receive given its product mix, methods of scheduling, maintenance, and standards of quality.

Efficiency: Actual output as a percent of effective capacity.

Input measures of capacity

Firms operating in low volume, high variety situation

find it relevant

Refining capacity of BPCL refinery in Mumbai is 260,000

barrels of crude per day

Television manufacturer often measures its capacity by

millions of picture tubes that it produces

Tool room facility will measure its capacity in terms of

machine hours

A hospital will measure the capacity in terms of number of

beds.

Output measures of capacity

When the volume of production is high and the variety is relatively

low output measures are useful

Toyota Kirloskar Auto Parts measures it capacity in terms of number

of transmission gear boxes it can produce

Tata Bearings, a division of Tata Steel, has a capacity of 25 million

pieces per annum

MICO Bosch has an installed capacity of one lakh distributor pumps at

its Jaipur plant

An automated car wash facility’s capacity can be measured in terms of

number of cars serviced per day

Actual or Expected Output

Actual (or Expected) Output =

(Effective Capacity)(Efficiency)

Measure of planned or actual capacity usage of a

facility, work center, or machine

UtilizationActual Output

Design Capacity

Planned hours to be used

Total hours available

=

=

Utilization

Capacity Cushion

A capacity cushion is an additional amount of production

capacity added onto the expected demand. e.g. , if the

demand is 10 million pieces p/a and the design capacity is

that of 12 million pieces p/a. then there is a capacity

cushion of 20%.

Capacity utilization rate = capacity used / best operating

level

in the example given above the capacity utilization rate

or efficiency is 100/120 % i.e 83%

Measure of how well a facility or machine is

performing when used

EfficiencyActual output

Effective Capacity

Actual output in units

Standard output in units

Average actual time

Standard time

=

=

=

Efficiency

Determinants of Effective capacity

Facilities- design,location,layout,environmental

factors

Product/Services- product mix ,standardization

Process- quantity vs. quality

Human factors- job design, training, experience,

motivation,manager’s leadership style

Operational factors- scheduling, materials

mgmt.,maintenance.

External factors- product standard, pollution control

etc.

Importance of Capacity

Capacity indicates the ability of a firm to meet the market demand

Inadequate capacity -> may lose customers through slow service or by allowing competitors to enter the market

Excessive capacity -> machine inefficiencies and high cost of production. May reduce price to stimulate demand, under utilize the workforce,carry excessive inventory or seek additional less profitable products to stay in business.

Implications of Capacity Changes

Changes in:

• Sales

• Cash flow

• Quality

• Supply chain

• Human resources

• Maintenance

Special Requirements for Making Good Capacity Decisions

Forecast demand accurately

Understanding the technology and capacity

increments

Finding the optimal operating level (volume)

Build for change

Economies and Diseconomies of

Scale

The basic notion of economies of scale is that as a

plant gets larger and volume increases, the average

cost per unit of output drops. But if the plant is not

operated at its ‘best operating level’ ( either operated

at a higher or lower volume), the diseconomies of

scale results.

One of the major causes of over capacity in industry is

the argument for large facilities to achieve greater

economies of scale.

Output rate (patients per week)

Economies and

Diseconomies of Scale

Ave

rag

e u

nit

co

st

(ru

pe

es

pe

r p

ati

en

t)

250-bed

hospital


Economies and


Ave

rag

e u

nit

co

st

(ru

pe

es

pe

r p

ati

en

t)

Economies and


250-bed

hospital 500-bed

hospital


Ave

rag

e u

nit

co

st

(ru

pe

es

pe

r p

ati

en

t)

Economies and


250-bed

hospital 500-bed

hospital


Economies

of scale

Ave

rag

e u

nit

co

st

(ru

pe

es

pe

r p

ati

en

t)

Economies and


250-bed

hospital

750-bed

hospital 500-bed

hospital


Economies

of scale

Ave

rag

e u

nit

co

st

(ru

pe

es

pe

r p

ati

en

t)

Economies and


Ave

rag

e u

nit

co

st

(ru

pe

es

pe

r p

ati

en

t)


250-bed

hospital

750-bed

hospital 500-bed

hospital

Diseconomies

of scale

Economies

of scale

Economies of Scope

It refers to the ability to produce many product

models in one highly flexible production

facility more cheaply than in separate

production facilities.

Strategies for Matching Capacity

to Demand

Short Term Strategies

Long Term Strategies

Short Term StrategiesEmployment levels- hiring/layoff

Workforce utilization- overtime, motivating

Process design- methods improvement

Multiple job training

Maintenance- reduction in breakdown and scheduled maintenance

Minimizing changing over and setup times

Inventorising- carrying out the barest minimum and rest later

Advance preparation

Varying inventories to meet varying customer demand.

Long Term StrategiesIncreasing capacity

Single large step in capacity

Several incremental changes in capacity

Reducing capacity

Selling off existing facilities

Selling off inventory of materials

Retiring and severance of employees

Maintaining capacity at constant level

develop and phase in new products as other products decline

Outsourcing

Sharing capacity

Approaches to Capacity Expansion

Expected Demand

Time in Years

Dem

and

New Capacity

Capacity leads demand with an incremental expansion

Approaches to Capacity ExpansionExpected Demand

Time in Years

Dem

and

New Capacity

Capacity leads demand with a one-step expansion


Expected Demand

Time in Years

Dem

and

New Capacity

Capacity lags demand with an incremental expansion


Expected Demand

Time in Years

Dem

and

New Capacity

Attempts to have an average capacity, with an incremental

expansion


Expected Demand Expected Demand

Expected Demand Expected Demand

Time in Years Time in Years

Time in YearsTime in Years

Dem

and

Dem

and

Dem

and

Dem

and

New Capacity

New CapacityNew Capacity

New Capacity

Capacity leads demand with an incremental expansion Capacity leads demand with a one-step expansion

Capacity lags demand with an incremental expansionAttempts to have an average capacity, with

an incremental expansion

Capacity DecisionsDecision Trees


1


Low demand

Low demand

High demand

High demand

1


Low demand

Low demand

High demand

High demand

Don’t expand

Expand1

2


Low demand [0.40]

Low demand [0.40]

High demand [0.60]

High demand [0.60]

Don’t expand

Expand1

2


Low demand [0.40]

Low demand [0.40]

Rs.70K

Rs.220K

Rs.40K

High demand [0.60]

High demand [0.60]

Don’t expand

ExpandRs.135K

Rs.90K

1

2


Low demand [0.40]

Low demand [0.40]

Rs.70K

Rs.220K

Rs.40K

High demand [0.60]

High demand [0.60]

Rs.135K

Don’t expand

ExpandRs.135K

Rs.90K

1

2


Low demand [0.40]

Low demand [0.40]

Rs.70K

Rs.220K

Rs.40K

High demand [0.60]

High demand [0.60]

Rs.135K

Don’t expand

ExpandRs.135K

Rs.90K

1

2

Expected Payoff = Event * Event Probability


Low demand [0.40]

Low demand [0.40]

Rs.70k

Rs.220K

Rs.40K

High demand [0.60]

High demand [0.60]

Rs.135K

Don’t expand

ExpandRs.135K

Rs.90K

1

2


Small/Low = Rs.70K (0.40)


Low demand [0.40]

Low demand [0.40]

Rs.70K

Rs.220K

Rs.40K

High demand [0.60]

High demand [0.60]

Rs.135K

Don’t expand

ExpandRs.135K

Rs.90K

1

2


Small/Low = Rs.70K (0.40) = Rs.28K

Small/High = Rs.135K (0.60)


Low demand [0.40]

Low demand [0.40]

Rs.70K

Rs.220K

Rs.40K

High demand [0.60]

High demand [0.60]

Rs.135K

Don’t expand

ExpandRs.135K

Rs.90K

1

2


Small/Low = Rs.70K (0.40) = Rs.28K

Small/High = Rs.135K (0.60) = Rs.81K

Small = Rs.28K + Rs.81K = Rs.109K

Rs.109K


Low demand [0.40]

Low demand [0.40]

Rs.70K

Rs.220K

Rs.40K

High demand [0.60]

High demand [0.60]

Rs.135K

Don’t expand

ExpandRs.135K

Rs.90K

1

2


Large/Low = Rs.40K (0.40) = Rs.16K

Large/High = Rs.220K (0.60) = Rs.132K

Large = Rs.16K + Rs.132K = Rs.148K

Rs.109K

Rs.148K


Low demand [0.40]

Low demand [0.40]

Rs.70K

Rs.220K

Rs.40K

Rs.148K

Rs.109K

Rs.148K

High demand [0.60]

High demand [0.60]

Rs.135K

Don’t expand

ExpandRs.135K

Rs.90K

1

2

Capacity Bottlenecks

A bottleneck is an operation that has the

lowest effective capacity of any operation in

the process and thus limits the system’s

output.


InputsTo

customers

(a) Operation 2 a bottleneck

50/hr

1 2 3

200/hr 200/hr

(b) All operations bottlenecks

2 31InputsTo

customers200/hr 200/hr 200/hr


capacity planning rmc

Documents