Strategic Capacity Planning
Strategic Capacity Planning
Capacity
The maximum level of output
The amount of resource inputs available
relative to output requirements at a particular
time
Capacity is the upper limit or ceiling on the
load that an operating unit can handle.
Examples of Capacity Measures
Type of Measures of Capacity
Organization Inputs Outputs
Manufacturer Machine hours Number of units
per shift per shift
Hospital Number of beds Number of
patients treated
Airline Number of planes Number of
or seats seat-miles flown
Restaurant Number of seats Customers/time
Retailer Area of store Sales dollars
Theater Number of seats Customers/time
Capacity Planning
Thebasic questions in capacity
planning are:
What type of capacity is needed?
How much is needed?
When is it needed?
How does productivity relate to capacity?
Two Capacity Strategies
Planned unused Forecast of Forecast of
capacity Planned use of
capacity needed short-term options capacity needed
Capacity
Capacity
Time between
increments
Expansionist Strategy Wait-and-See Strategy
Capacity Utilization
Capacity used
rate of output actually achieved
Best operating level
capacity for which the process was designed
(effective or maximum capacity)
Capacity Used
Utilization = _______________
Best Operating Level
Utilization--Example
Best operating level = 120 units/week
Actual output = 83 units/week
Capacity used 83 units/wk
Utilization = .692
Utilization Best
= operating
? level 120 units/wk
Best Operating Level
Average
unit cost
of output
Underutilization Over-utilization
Best Operating
Level
Volume
Economies & Diseconomies of Scale
Long Run Average Cost Curve
100-unit
Average plant
unit cost 200-unit
of output plant 400-unit
300-unit
plant
plant
Volume
The Experience Curve
As plants produce more products, they
gain experience in the best production
methods and reduce their costs per unit.
Cost or
price
per unit
Total accumulated production of units
Capacity Flexibility: Having the ability
to respond rapidly to demand volume
changes and product mix changes.
Flexible plants
Flexible processes
Flexible workers
Capacity Bottlenecks
Operation 1 Operation 2 Operation 3
Raw 200/hour 75/hour 200/hour
material
Bottleneck
Operation
Determining Capacity
Requirements
Forecast sales within each individual
product line
Calculate
equipment and labor
requirements to meet the forecasts
Projectequipment and labor availability
over the planning horizon
Example--Capacity
Requirements
A manufacturer produces two lines of ketchup,
FancyFine and a generic line. Each is sold in
small and family-size plastic bottles.
The following table shows forecast demand for
the next four years.
Year: 1 2 3 4
FancyFine
Small (000s) 50 60 80 100
Family (000s) 35 50 70 90
Generic
Small (000s) 100 110 120 140
Family (000s) 80 90 100 110
Example of Capacity Requirements:
The Product from a Capacity Viewpoint
Question: Are we really producing
two different types of ketchup from
the standpoint of capacity
requirements?
Answer: No, it’s the same product just
packaged differently.
Example of Capacity Requirements:
Equipment and Labor Requirements
Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200
Three 100,000 units-per-year machines are available
for small-bottle production. Two operators required
per machine.
Two 120,000 units-per-year machines are available
for family-sized-bottle production. Three operators
required per machine.
21
Question: Identify the Year 1 values for capacity, machine, and labor?
Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200
Small Mach. Cap. 300,000 Labor 6
Family-size Mach. Cap. 240,000 Labor 6
150,000/300,000=50% At 1 machine for 100,000, it
Small takes 1.5 machines for 150,000
Percent capacity used 50.00%
Machine requirement 1.50
Labor requirement 3.00 At 2 operators for
Family-size 100,000, it takes 3
Percent capacity used 47.92% operators for 150,000
Machine requirement 0.96
Labor requirement 2.88
©The McGraw-Hill Companies, Inc.,
22
Question: What are the values for columns 2, 3 and 4 in the table below?
Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200
Small Mach. Cap. 300,000 Labor 6
Family-size Mach. Cap. 240,000 Labor 6
Small
Percent capacity used 50.00% 56.67% 66.67% 80.00%
Machine requirement 1.50 1.70 2.00 2.40
Labor requirement 3.00 3.40 4.00 4.80
Family-size
Percent capacity used 47.92% 58.33% 70.83% 83.33%
Machine requirement 0.96 1.17 1.42 1.67
Labor requirement 2.88 3.50 4.25 5.00
©The McGraw-Hill Companies, Inc.,
Capacity Cushion
Capacity Cushion = level of capacity in excess of the average
utilization rate or level of capacity in excess of the expected
demand .
Cushion = Best Operating Level - 1
Capacity Used
Large capacity cushion
Required to handle uncertainty in demand
service industries
high level of uncertainty in demand (in
terms of both volume and product-mix)
to permit allowances for vacations, holidays,
supply of materials delays, equipment
breakdowns, etc.
if subcontracting, overtime, or the cost of
missed demand is very high
Sources of Uncertainty
Manufacturing Customer Deliveries
•Process design •Transportation
•Product design •Location
•Capacity •Information
•Quality
Supplier Performance
•Responsiveness Customer Demand
•Transportation •Past performance
•Location •Market research
•Quality •Analytical techniques
•Information •Promotions / Incentives
Small capacity cushion
Unused capacity still incurs the fixed costs
highly capital intensive businesses
time perishable capacity
Example: Target 5% Cushion
cushion = Best Operating Level - 1
Capacity Used
.05 = (1800/x) - 1
1.05 = (1800/x) 1714.3/1800 = .9524
1.05x = 1800
x = 1714.3
Capacity Example
An automobile equipment supplier wishes to install a
sufficient number of ovens to produce 400,000 good
castings per year. The baking operation takes 2.0
minutes per casting, and management requires a
capacity cushion of 5%. How many ovens will be
required if each one is available for 1800 hours (of
capacity) per year?
Solution
Required system capacity =
400,000 good units per year
Number of oven minutes required =
400,000 x 2 min/unit = 800,000
Number of oven minutes available/oven =
(1800 hrs/oven) x(60 minutes/hour) (.9524) =
102,859 minutes/oven
Number of ovens required
= 800,000 min /102,859 min/oven
= 7.8 or 8 ovens
How does Quality affect
capacity?
Suppose a three operation process is
followed by an inspection. If the average
proportion of defectives produced at
operations 1, 2, and 3 are .04, .01,
and .02 respectively, and if the demand is
200 units, then what is the required
capacity for this operation?
Capacity requirements with
Yield Loss
Notation:
di = avg. proportion of defective units at operation i
n = number of operations in the production process
M= order quantity (good units only or desired yield)
B= avg. number of units at the start of the
production process
M
B =
[(1-d1)(1-d2)….(1-dn)]
Solution
Desired yield = 200
Operation Defective rate
1 .04
2 .01
3 .02
(1) What is the capacity required?
200
B= = 215
(1-.04)(1-.01)(1-.02)
Capacity and Quality
Suppose we have a 6 process assembly
line that must produce 1000 good
products. Each process produces only
1% defects. How is capacity affected?
1000
Capacity required =
(.99)6
= 1062 units
Decision Trees
A glass factory specializing in crystal is experiencing a
substantial backlog, and the firm's management is
considering three courses of action:
A) Arrange for subcontracting,
B) Construct new facilities.
C) Do nothing (no change)
The correct choice depends largely upon demand, which
may be low, medium, or high. By consensus,
management ranks the respective probabilities
as .10, .50, and .40. A cost analysis that reveals the
effects upon costs is shown in the following table.
Payoff Table
0.1 0.5 0.4
Low Medium High
A 10 50 90
B -120 25 200
C 20 40 60
We start with our decisions...
Subcontracting
A
B
Construct new facilities
C
Do nothing
Then add our possible states of
nature, probabilities, and payoffs
High demand (.4) $90k
Medium demand (.5) $50k
Low demand (.1) $10k
A High demand (.4) $200k
B Medium demand (.5) $25k
Low demand (.1) -$120k
C
High demand (.4) $60k
Medium demand (.5) $40k
Low demand (.1) $20k
Determine the expected value
of each decision
High demand (.4) $90k
Medium demand (.5) $50k
$62k Low demand (.1) $10k
EVA=.4(90)+.5(50)+.1(10)=$62k
Solution
High demand (.4) $90k
Medium demand (.5) $50k
$62k Low demand (.1) $10k
A High demand (.4) $200k
$80.5k
B Medium demand (.5) $25k
Low demand (.1) -$120k
C
High demand (.4) $60k
$46k Medium demand (.5) $40k
Low demand (.1) $20k
Planning Service Capacity
Time
Location
Volatility of Demand
Capacity Utilization &
Service Quality
Best
operating point is near 70% of
capacity
From 70% to 100% of service capacity,
what do you think happens to service
quality? Why?
Two Capacity Strategies
Planned unused Forecast of Forecast of
capacity Planned use of
capacity needed short-term options capacity needed
Capacity
Capacity
Time between
increments
Expansionist Strategy Wait-and-See Strategy
Advantages/Disadvantages of each strategy
Advantages Disadvantages
Expansionist • ahead of competition • risky if demand
• no lost sales changes
Wait-and-See • no unused capacity • rely on short-
• easier to adapt to term options
new technologies
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
Some Short-Term Capacity Options
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
