Operations Strategy OPSRH12-2

Session 3 Capacity Planning (Book Ch. 5)

What is Capacity?

Capacity is the capability of a worker, machine, work center, plan or organization to produce output per period of time APICS Dictionary How to measure the inputs and outputs? Car manufacturing/ Hospital/ Airline/ Pizza parlor/ Retail store/ Theater/ Restaurant Basic questions What type of capacity is needed? How much is needed? When is it needed?
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Examples of Capacity Types and Measures

Types Design Capacity/Best operating level System capacity/Effective capacity Actual output

Measure Throughput Utilization Efficiency

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Capacity Management Types

Long term capacity management Intermediate capacity management Capacity Requirements Planning Short term capacity control and execution

When compared to expected change in demand Lead (Expansionist)/ Lag (Wait & See)/ Track

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Capacity and Production Planning

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Capacity and Planning Continued

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Some Important Terms

Economies of scale Diseconomies of scale Economics of scope Learning curve Focused factories Plant within a plant (PWP) Subcontractor networks Capacity cushions

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Steps for Capacity Planning

1. 2. 3. 4. 5. 6. 7. Estimate future capacity requirements Evaluate existing capacity Identify alternatives Evaluate alternatives Select one alternative Implement alternative chosen Monitor results

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Evaluating Capacity Requirements Bread Making on Two Lines

CTL = Cycle Time/ 100 loaves, Daily available time = 8 hours

Mix CTL = hrs

Proof CTL = hrs

Bake CTL = 1 hr

Raw Materials

Work in Process

Pack CTL = hrs

Finished Goods

Mix CTL = hrs

Proof CTL = hrs

Bake CTL = 1 hr

Q. What is bakerys overall daily capacity?

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Evaluating Capacity Requirements Croissant Manufacturing

CTC = Cycle Time/ 50 croissants, Daily available time = 8 hours
Raw Materials: Dough Work in Process: Dough

Mix CTC = 5 min

Proof CTC = 15 min

Bake CTC = 5 min

Fill & Fold Raw Materials: Fillings Work in Process: Filling CTC = 5 min

Bake CTC = 20 min

Pack CTC = 10 min

Finished Goods

Mix Filling CTC = 10 min

Q. What is bakerys overall daily capacity of croissants? Q. What is Manufacturing Lead Time of the process?
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Evaluating Capacity Requirements Example

Current situation 3 flexible machines for Type X with 150,000/year for each machine Requires 2 operators/Machine No extra operator 5 flexible machines for Type Y with 250,000/year for each machine Requires 3 operators/Machine 5 extra operator Demand Forecast (In Thousands)
Product Product A Product B Type Year 1 Year 2 Year 3 Year 4 Year 5

Type X
Type Y Type X Type Y

60
100 75 200

100
200 85 400

150
300 95 600

200
400 105 700

250
500 120 900

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Ways to Develop Capacity Alternatives

Design flexibility into system Take stage of life cycle into account Take System Approach to capacity planning Prepare to deal with capacity chunks Attempt to smooth out capacity requirements Identify the optimal operating level Choose a strategy if expansion is involved

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Develop Alternatives Breakeven Analysis Assumptions

One product is involved Everything produced can be sold Variable cost per unit is the same regardless of volume Fixed costs do not change with volume Revenue per unit constant with volume Revenue per unit exceeds variable cost per unit

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Breakeven Analysis Example

ABC Manufacturing intends to increase capacity by overcoming a bottleneck operation through the addition of new equipment. Two vendors have presented proposals as follows:
Proposal Fixed cost Variable cost

A
B

50,000
70,000

12
10

The price for each product is 20.

What is the breakeven quantity for each proposal? At what capacity would both plans incur the same cost?
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Some Short-Term Capacity Options

Lease extra space temporarily Authorize overtime Staff second or third shift with temporary workers Add weekend shifts Alternate routings, using different work stations that may have excess capacity Schedule longer runs to minimize capacity losses Level output by building up inventory in slack season Postpone preventive maintenance (risky) Use multi-skilled workers to alleviate bottlenecks Allow backorders to increase, extend due date promises, or have stock-outs Subcontract work Dipankar Bose - XLRI