capcity planning

8/2/2019 Capcity Planning

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Capacity planning

Capacity planning is the process of determining the productioncapacityneeded by an

organization to meet changingdemandsfor itsproducts. In the context of capacity planning,

"capacity" is the maximum amount of work that an organization is capable of completing in agiven period of time.

A difference between the capacity of an organization and the demands of its customers results ininefficiency, either in under-utilized resources or unfulfilled customers. The goal of capacity

planning is to minimize this difference. Demand for an organization's capacity varies based on

changes in production output, such as increasing or decreasing the production quantity of an

existing product, or producing new products. Better utilization of existing capacity can beaccomplished through improvements inoverall equipment effectiveness(OEE). Capacity can be

increased through introducing new techniques, equipment and materials, increasing the number

of workers or machines, increasing the number of shifts, or acquiring additional productionfacilities.

Kaen bubog: (number of machines or workers) (number of shifts) (utilization) (efficiency).

The broad classes of capacity planning are lead strategy, lag strategy, and match strategy.

Lead strategy is adding capacity in anticipation of an increase in demand. Lead strategy isanaggressive strategywith the goal of luring customers away from the company'scompetitors. The possible disadvantage to this strategy is that it often results in excess

inventory, which is costly and often wasteful.

Lag strategy refers to adding capacity only after the organization is running at full capacityor beyond due to increase in demand (North Carolina State University, 2006). This is a moreconservative strategy. It decreases the risk of waste, but it may result in the loss of possible

customers.

Match strategy is adding capacity in small amounts in response to changing demand in themarket. This is a more moderate strategy.

Capacity planning is long-term decision that establishes a firms' overall level of resources. Itextends over time horizon long enough to obtain resources. Capacity decisions affect the

production lead time, customer responsiveness, operating cost and company ability to compete.

Inadequate capacity planning can lead to the loss of the customer and business. Excess capacity

can drain the company's resources and prevent investments into more lucrative ventures. Thequestions of when capacity should be increased and by how much are the critical decisions.
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CapacityAvailable or Required?

From a scheduling perspective it is very easy to determine how much capacity (or time) will be

required to manufacture a quantity of parts. Simply multiply the Standard Cycle Time by the

Number of Parts and divide by the part or process OEE %.

If production is scheduled to produce 500 pieces of product A on a machine having a cycle timeof 30 seconds and the OEE for the process is 85%, then the time to produce the parts would be

calculated as follows:

(500 Parts X 30 Seconds) / 85% = 17647.1 seconds The OEE index makes it easy to determine

whether we have ample capacity to run the required production. In this example 4.2 hours at

standard versus 4.9 hours based on the OEE index.

Repeating this process for all the parts that run through a given machine, it is possible to

determine the total capacity required to run production.

Capacity Available

If you are considering new work for a piece of equipment or machinery, knowing how much

capacity is available to run the work will eventually become part of the overall process.

Typically, an annual forecast is used to determine how many hours per year are required. It isalso possible that seasonal influences exist within your machine requirements, so perhaps a

quarterly or even monthly capacity report is required.

To calculate the total capacity available, we can use the formula from our earlier example and

simply adjust or change the volume accordingly based on the period being considered. The

available capacity is difference between the required capacity and planned operating capacity.


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What is the Importance of Capacity Decisions

Capacity decisions impacts ability to meet future demands, affects operating costs.These decisions often act as a major determinant of initial costs, as they involvelong-term commitment. These decisions affect competitiveness and gives ease of

management. Capacity Decisions focus on globalization as it is more complex andimpacts long range planning. Impacts ability to meet future demands. Capacity essentially limits the rate ofpossible output. Having capacity to satisfy demand can allow a company of takingadvantage of tremendous opportunities. An international automobile manufacturerof good repute increased its production by working on its capacity decision after itsquality product received a lot more demand than it was originally anticipated. Affects operating costs. We already know that estimated or forecasted demanddiffers from actual demand, so the ideal concept of capacity matching demand isuntrue. Organizations should be willing to take a critical decision to balance the costof over and under capacity. Overcapacity reflects overkill of resources and under

capacity shows a weak management philosophy to make best use of an availablemarket. Acts as a major determinant of initial costs. It is typical to see that greater thecapacity of a productive unit, greater would be the cost...


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What is design capacity?

Design capacity is the total achievable capacity under perfect conditions. Normally,

perfect conditions are not achievable, and few organizations operate for any period of time at design

capacity. Furthermore, operating at designed capacity can cause rapid wear and breakdowns. Operating

at design capacity essentially means operating at the organization`s productive limits.

What is effective capacity or utilization?

Effective capacity or utilization is a ratio between the expected capacity of a firm and its design capacity.

It can be computed by the following formula:

EFFECTIVE CAPACITY OR UTILIZATION = EXPECTED CAPACITY/DESIGN CAPACITY

Effective capacity is affected by an organization`s product mix, production scheduling, age of equipment,

and maintenance standards.

EXAMPLE 1.21

A television manufacturing company has a design capacity of 50 televisions per hour, but due to

intensive quality control standards, it normally produces only 40 televisions per hour. The effective

capacity or utilization of the television manufacturing company is calculated in the following manner:

EFFECTIVE CAPACITY OR UTILIZATION = EXPECTED CAPACITY/DESIGN CAPACITY

EFFECTIVE CAPACITY OR UTILIZATION = 40/50 = 80%


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What is capacity efficiency?

Capacity efficiency is a ratio of production output to effective capacity. It is a measure of effective

management in utilizing effective capacity. It is calculated using the following formula:

EFFICIENCY = ACTUAL OUTPUT/EFFECTIVE CAPACITY

EXAMPLE 1.22

The effective capacity of a candy manufacturing company is 1,000 units of candy per hour; however, it

actually produces only 850 units per hour. The efficiency of the candy manufacturing company can be

computed in the following manner:

EFFICIENCY = ACTUAL OUTPUT/EFFECTIVE CAPACITY

EFFICIENCY = 850/1,500 = 85%

What is rated capacity?

Rated capacity is a determination of the maximum usable capacity of manufacturing capability. Rated

capacity can never exceed design capacity. It is a product of design capacity times effective capacity

times efficiency. The formula used to calculate rated capacity is:

Rated capacity = Design capacity x Effective capacity x Efficiency

EXAMPLE 1.23

A computer printer manufacturer has a manufacturing facility operating at an effective capacity of 80%

with 85% efficiency. It has two assembly lines operating five days a week with two shifts a day. Each

assembly line has a designed capacity of 40 printers per hour.

The rated capacity of the computer printer manufacturer is calculated by multiplying the design capacity

times the effective capacity times the efficiency of the plant. To determine the design capacity, the two

production lines have to be multiplied by the number of printers times the combined number of hours

of production.

Design Capacity = 40 printers/hour x 2 assembly lines x 80 hours = 6,400 `

Rated capacity = Design capacity x Effective capacity x Efficiency

Rated capacity = 6,400 x 0.8 x 0.85 = 4,352 printers per week


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What factors affect capacity?

Many factors affect an organization`s productive capacity. Some are within management`s control while

others are not. Factors within management`s control include the acquisition and supervision of land,

physical resources, and the utilization of labor.

Management challenges affecting organizational capacity include personnel issues, technological

maximization, and issues that are not directly controllable such as the impact of weather events,

political issues, or war.

What is the Efficiency and Utilization

Operations Manager should know what is Capacity? They should be able to identifythe terms Design Capacity and Effective capacity before they can understandanother important concept of Utilization. Design capacity is the maximum output rate or service capacity an operation,process, or facility. Organizations facility or operation is designed for Effective capacity which refersto Design capacity minus allowances such as personal time, maintenance, andscrap

Actual output is the rate of output actually achieved--cannot exceed effectivecapacity. Efficiency/Utilization Example Use the following data to determine theEfficiency and Utilization Design capacity = 100 trucks/day Effective capacity = 80trucks/day Actual output = 70 units/day


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Critical elements of most capacity plans include: Set time and resource allocation to meet demand;

Set strategies for meeting new requirements (new demand, competition, time changes for projects,

etc.); and

Determine the cost of non-conformance to the plan (waste, time slippage, costs, variance in quality,

etc.).

Table 4 Determinants of Effective Capacity

Factors

Issues

Facilities

Design

Location

Layout

Product/Service

Design

Product or service mix

Process

Quantity capabilities

Quality capabilities

Human Factors

Job content

Job design

Training and experience

Motivation

Compensation

Learning rates

Absenteeism and labour turnover

Knowledge

Operational

Scheduling

Materials Management

Quality Assurance

Equipment breakdowns

External Factors

Product standards

Safety regulations

Unions

Pollution and environmental standards

Stability of society/ government


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What are the Key Decisions of Capacity Planning?

It is important to identify the key decisions in order to carry out a correct capacity planning decision.

Some of the common key decisions are

1. Amount of capacity needed

2. Timing of changes

3. Need to maintain balance

4. Extent of flexibility of facilities Steps for Capacity Planning Strategy.

Steps for Capacity Planning

1. Estimate future capacity requirements2. Evaluate existing capacity3. Identify alternatives4. Conduct financial analysis5. Assess key qualitative issues6. Select one alternative7. Implement alternative chosen8. Monitor results

Forecasting Capacity Requirements

Long-term vs. short-term capacity needs

Long-term relates to overall level of capacity such as facility size, trends, and cycles

Short-term relates to variations from seasonal, random, and irregular fluctuations in demand


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Planning Service Capacity

Need to be near customers

Capacity and location are closely tied

Inability to store services

Capacity must be matched with timing of demand

Degree of volatility of demand

Peak demand periods

In-House or Outsourcing

Available capacity

Expertise

Quality considerations

Nature of demand

Cost

Risk


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Developing Capacity Alternatives

Design flexibility into systems

Take stage of life cycle into account

Take a big picture approach to capacity changes

Prepare to deal with capacity chunks

Attempt to smooth out capacity requirements

Identify the optimal operating level


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Bottleneck Operation

A bottleneck is a phenomenon where the performance or capacity of an entire system is limited by a

single or limited number of components or resources. The term bottleneck is taken from the 'assets are

water' metaphor. As water is poured out of a bottle, the rate of outflow is limited by the width of the

conduit of exitthat is, bottleneck. By increasing the width of the bottleneck one can increase the rateat which the water flows out of the neck at different frequencies. Such limiting components of a system

are sometimes referred to as bottleneck points


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Economies of Scale

When more units of a good or a service can be produced on a larger scale, yet with (on average) less

input costs,economies of scale(ES) are said to be achieved. Alternatively, this means that as a company

grows and production units increase, a company will have a better chance to decrease its costs.

According to theory, economic growth may be achieved when economies of scale are realized.

Adam Smith identified the division of labor and specialization as the two key means to achieve a larger

return on production. Through these two techniques, employees would not only be able to concentrate

on a specific task, but with time, improve the skills necessary to perform their jobs. The tasks could then

be performed better and faster. Hence, through such efficiency, time and money could be saved while

production levels increased.

Just like there are economies of scale,diseconomies of scale(DS) also exist. This occurs when production

is less than in proportion to inputs. What this means is that there are inefficiencies within the firm or

industry resulting in rising average costs.

Optimal Rate of Output
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