Capacity Planning

What is Capacity?
The work that the system is capable of doing in a
period of time.

It must be determined at different levels:
Plant
Department
Work Center

It is normally stated in standard hours of work.

Capacity = Work + Waste
Definition Manufacturing Unit

Capacity is the limiting capability of a
productive unit to produce within a stated time
period, normally expressed in terms of output
units per unit of time.
Definition - Service Unit

Sustainable practical capacity in a service
organization can be defined as the greatest
level of output that cab be provided with a
given level of resources under sustainable
operating conditions.

Measures of Capacity - Examples
Type of Organization Capacity Measures
Auto plant Number of autos
Power plant Megawatts
Airline Available seat miles (ASMs)
Hospital Available bed-days
Restaurant No. of people that can be
served
Business School Number of students
Paint factory Litters of paint
What is Capacity?
Capacity = (no. of machines or workers) x (no. shifts) x

(utilization) x (efficiency)


Where Efficiency = Actual output / Effective capacity
and Utilization = Actual output / Design capacity






Capacity Planning
Capacity planning is the process of identifying the
capacity of a production unit that is required for
producing so as to meet the current and future
demands.
Capacity planning decisions
1. Assessing exiting capacity
2. Forecasting capacity need
3. Identifying alternative way to modify
capacity
4. Evaluating financial, economical, and
technological capacity alternatives
5. Selecting a capacity alternative most suited to
achieving strategic issues

Methods of Capacity Build-up
Reactive mode / capacity lag strategy
In this the firm wait until the demand materializes
sufficiently before they modify the capacity into
the system
Adopted in monopoly situation

Proactive mode / capacity lead strategy
In this the firm add up the capacity in anticipation
of future demand
Adopted in highly competitive market
The Time Horizon in Capacity
Planning
Long term planning - 2-5 Yrs
Medium term planning - 1 yr
Short term planning - One week three months
Capacity Planning Framework
Capacity planning framework consist of three important
steps:
1. Estimate the capacity requirements for the planning
horizon
2. Compute the available capacity and identify quantum of
capacity to be improved
3. Identify available alternatives and select the best one for
capacity improvement
Methods to Modify Capacity
Short-term response:
Inventories
Labor
Sub-contracting
Job rotation
Ways of Changing Long-Term Capacity
Type of Capacity
Change
Ways of Accommodating Long Range Capacity change
Expansion 1. Subcontract with other companies.
2. Acquire the facilities or resources from other company.
3. Develop sites, build buildings, buy equipments.
4. Expand, update, or modify existing plant.
5. Reactivate facilities on standby status.
Reduction 1. Sell off existing facilities, inventories; lay off or transfer
employees.
2. Mothball facilities
3. Develop & phase in new product as other product is phased
out.
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



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 normally outsourced
Capacity Planning Modeling
1. Linear programming
2. Computer simulation used to evaluate
capacity
3. Decision tree analysis applied to capacity
expansion
Estimating Total Requirements
Estimating Labor and Machine Requirements
Labor capacity requirements =

Machine capacity requirements =

Where D = Projected demand per unit time during planning phase
S
L
= Standard labor hour required per unit of product
E
L
= Efficiency of labor
L
L
E
S D
M
M
E
S D
Example 1
A manufacturer of medium voltage circuit breakers is
planning for a capacity build up of 8 cubicles and 13 circuit
breakers per day. A year is made of 305 working days. The
fabrication division is responsible for manufacturing metal
sheet components that are welded together to form the
cubicle. Further, some metal sheet components also are
welded to host the circuit breaker inside the cubicle. The
components are painted after welding. While the fabrication
uses a CNC press, painting is a manual job. The standard
time required at the CNC press for fabricating a cubicle is 150
min and the time for the breaker is 36 min. A cubicle requires
43 square meters of area to be painted and the breaker requires
2.60 square meters of painting. The standard time required to
paint one square meter of area is 18 minutes. The machine
works at 80% efficiency and the labor works at 90%
efficiency. Compute the required labor hours and machines
hours requirement.
Compute Capacity Availability
System Availability (hours) = N
d
X h
N
d
= number of working days
h = number of working hours per day

5/5/2014
Compute Capacity Availability
Capacity Available in the system
Machine = N
d *
h
*
N
m *
(1-b/100)
Where b= Time lost in break down
Labor = N
d*
h
*
N
L*
(1-a/100)
a= Labor absenteeism

Example 1 cont.
Suppose the factory works on a two-shift basis with
six workers in the paint shop. There is only one CNC
press currently available. Suppose prior data shows
that the equipment at the shop have a downtime of
12% and the absenteeism rate of the employees is
5%, assess the impact of the capacity expansion
initiative in the plant.
Alternatives for Capacity Improvement
Waste Elimination:
Multi-skilled workers
Sub-contracting / Outsourcing
Question 1
A product line manufacturing shoes has five station in
series whose individual capacities per shift are stated in
the following table. The actual output of the line is 500
pairs per shift. Find
(a) the system capacity
(b) the system efficiency


Station No. 1 2 3 4 5
Individual capacity/ shift 600 650 650 550 600
Question 2
An automobile component manufacturer has the plan of
buying a moulding machine which can manufacture
170,000 good parts per year. The moulding machine is a
part of a product line. The system efficiency of the
product line is 85%
(a) What is the required system capacity
(b) assume that it takes 100 seconds to mould each part
and the plant operates 2000 hours per year. If the
moulding machine are used only 60% of the times and
are 90% efficient, what is the actual output of the
moulding machine per hour?
(c) How many moulding machine would be required.
Decision Tree for capacity Planning
A manufacturer of electronics accessories for use in computers
currently has a capacity of 40,000 pieces per month. The
business strategy group for the company recently performed a
forecasting exercise to assess the emerging demand for the
accessories in the next five years. The study reveled that there
is a 40% probability that the growth in demand for the
accessories will be strong during this planning horizon and a
60% probability that the growth in demand will be moderate.
The study identify three opinions for the manufacturer to
augment capacity.
Option 1 is to expand the capacity by adding one new capacity
to meet the demand. Option two is to augment capacity in the
existing factory itself by some debottlenecking operations ( in
this case there will be limitations in capacity expansion.
Option three is to go for subcontracting . If there is a strong
growth in the demand, then the new capacity could be added a
year later. The study reveled the following additional
information about the emerging scenario and the cost and
benefits of each of the alternatives:


the cost of adding new capacity is Rs 750,000. this cost goes
up by 5% if it is deferred by a year.
Cost of expanding in the existing factory itself is Rs 275,000
The cost of subcontracting is negligible
The revenue accruing from new capacity is as follows: if it is a
strong growth, the revenue will be Rs 850,000 and in case of
moderate growth , the revenue will be Rs 400,000 . These
figures will not change even if the units came into operations a
year later.





The revenue accruing from expansion of the existing capacity
is as follows: it is a strong growth, the revenue will be Rs
550,000 and in case of moderate growth, the revenue will be
Rs 300,000.
The revenue accruing from the existing factory with
subcontracting is as follows : if there is strong growth, the
revenue will be Rs 350,000 and in case of moderate growth,
the revenue will be Rs 180,000.
Arrive at an appropriate capacity planning strategy using a
decision tree.