Capacity

Planning in
Operations
Management

Manufacturing Resources Planning

Week-13
 Capacity Planning and Management

Capacity planning and management addresses

two managerial problems:
Matching capacity to plans—by either providing
sufficient capacity to execute the plan or
adjusting the plan to meet available capacity.
Consider the marketplace implications of faster
throughput times—at the expense of reduced
capacity utilization.

2
 Role of Capacity Planning in MPC

• The primary objective of capacity planning

techniques is to estimate capacity requirements
early enough to be able to meet those requirements
• Flawless execution of the capacity plan allows the
firm to avoid unpleasant surprises
— Insufficient capacity leads to deteriorating
delivery performance
— Excess capacity may be a needless expense

3
 Capacity Planning in the MPC
System

- Short-term capacity planning problems can be

reduced by well-executed production and
resource planning
- Efficient use of sufficient capacity by a good
shop- floor system reduces capacity issues

25
 Links to other MPC System Modules

Capacity
Resouce Rough-cut Requirement Finite Loading Input/Output
Planning Planning Planning Analysis
• Linked • Linked to • Linked to • Linked to • Linked
to sales Master material material to shop
and Production requirements planning and floor
operations Schedule planning shOp floor control
planning (MPS) (MRP) control • Monitors
(soP) • Estimates • Prepares • Considers actual
• COnverts capacity detailed adjustment consumption
SOP data requirements capacity plan of of capacity
to of MPS based on plans due to during
aggregate time-phased capacity execution of
resource material utilization detailed
units plans material
planning

5
 Capacity Planning Using Overall
Factors (CPOF)
• Simplest rough-cut capacity planning approach
• Data inputs from master production schedule
• Based on planning factors from historical data
(work center utilization, production standards)
• Overall labor- or machine-hour capacity requirements
are estimated from MPS data
— Estimate is allocated to work centers based on
historical workloads
• Inherent inaccuracies may limit usefulness
CPOF Example
Master produccion schedule t‹n units):
Perlod
End Product t 2 3 4 S 6 7 8 9 10 11 12 13 Total
A 33 33 33 40 40 40 30 30 30 37 37 37 37 437
1 17 17 13 13 13 2S 25 2S 27 27 27 27 273
7

End Product

Work Hlstorlcal Period Total

Center Percentage 1 2 S G 7 8 9 \0 1\ \2 I3 Hours
00 603 3T87 3787 37.1\ 37.41 45.07 45.07 45.07 S i . 32 5 I . 3* S! . 32 S . 32 Só6.33

S 84 S 84 37.4I
S 78 S 78 S 78 6 +6 6 86 6 .86 7 91 7 01 7,9T 7 0 t 87 38
OO Total 50a 19.09 I.^ 0.^ 18 8ó 18 8 18 8 22 72 22 72 22 72 25 87 25 87 25 87 2'i 87 285 4.^
required EapaCir\ 62 80 62 80 6fl.80 62 05 67.OS 62 03 74 73 74 73 74 75 85. T0 85. T 0 85. 10 85 939 20
T0

8
 Capacity Bills
• Rough-cut capacity planning method that provides
more direct link to individual end products
- Bill of capacity indicates total standard time to
produce one unit of an end product (by work center)
• Master production schedule data is then used to
estimate capacity requirements for each work center
• Requires more data than CPOF procedure

9
 Capacity Bill ExamDle
Master production schedule (In units):
Peñod
End Product 1 2 3 4 5 6 7 8 9 10 11 T2 13 Total
33 33 33 40 IO 40 30 30 30 37 37 37 37 457
17 17 17 13 13 13 25 JS 25 27 27 27 27 273

MPS quantities are Btil of Capadty: End Product

multiplied by bill of
capacity to determine
work center capacity Work Center Total Time/Urgt TotAI Time/Unit
requirements by 0.05 1.30
period 200
300 0.20 0.PO
Total time/unit 0.95 1.85

Bills

ToM Work Ceraer

Centec 9 10 Has
00 23.75” J3.75 23.75 \ 8.90 18.90 \ 8.90 M.00 M.00 34.¢€I 36.95 36.95 36.95 36.95 Pementage 409e
377.75
200 32.'45 32.45 32.45 35. IS 3S.15 35.15 M. ZS M.75 34.75 40.75 40.75 40. ZS ID.75 470.OF TO
300 6.60 6.60 6.60 8.00 8.00 8.00 6.00 6.@ 6.00 7.40 7.40 7.40 7.40 9\ .40 10
T‹›uł G‹.a0 62.S0 6‹.S0 6‹.o5 62.05 6‹.0s 7‹.rs 7‹.7s 7‹.7s «s.1o «s. i 0 8s.1o 8s.1o 939.‹0 looss

1
 Capacity Bill ExamDle
Master production schedule (In units):
Peñod
End Product 1 2 3 4 5 6 7 8 9 10 11 T2 13 Total
33 33 33 40 IO 40 30 30 30 37 37 37 37 457
17 17 17 13 13 13 25 JS 25 27 27 27 27 273

MPS quantities are Btil of Capadty: End Product

multiplied by bill of
capacity to determine
work center capacity Work Center Total Time/Urgt TotAI Time/Unit
requirements by 0.05 1.30
period 200
300 0.20 0.PO
Total time/unit 0.95 1.85

Bills

ToM Work Ceraer

Centec 9 10 Has
00 23.75” J3.75 23.75 \ 8.90 18.90 \ 8.90 M.00 M.00 34.¢€I 36.95 36.95 36.95 36.95 Pementage 409e
377.75
200 32.'45 32.45 32.45 35. IS 3S.15 35.15 M. ZS M.75 34.75 40.75 40.75 40. ZS ID.75 470.OF TO
300 6.60 6.60 6.60 8.00 8.00 8.00 6.00 6.@ 6.00 7.40 7.40 7.40 7.40 9\ .40 10
T‹›uł G‹.a0 62.S0 6‹.S0 6‹.o5 62.05 6‹.0s 7‹.rs 7‹.7s 7‹.7s «s.1o «s. i 0 8s.1o 8s.1o 939.‹0 looss

11
Resource Profiles

• Rough-cut capacity planning technique

that includes production lead time
information
• Provides time-phased projections of
capacity requirements for
individual work centers
• More sophisticated approach but requires
tracking of relatively short time periods
(< 1 week)

12
 Resource Profile
Req
Example
7imr regulrW during prerodlng periods for one and pror/Ur[ assembled in period S.
Time Perlocl ements (by
5 work center
End product and period) fOr
A \Vork center 100 0 0 0.05
one unit
\Vork center 200 0.60 0.10 0
\Vork center 300 0 0.20 0 of end
End product B
vorL center 100 0 0 1 product are
\Vork center 20O 0.25 0.30 30 multiplied by the
0
Time-phaseâ capacity reqU/rvmenh goneraled trom MPA /or 40 és onr/ 13 Be In lime MPS plan to
perlock S determine
Time4 Perlocl capacity
40 As requirements
\Vork center 100 0 0 2
\Vork center 200 24 4 0 These
\vork center 300 0 0 requirements are
13 Bs
\vork center I o0 0 0 18.9
then summed
\Vork center 200 3.2S 3. 0 , over all periods to
\Vork center 300 0 9 0
Tofat from per IocI 0 finalize the
5 process
M PS 0 0 18.9
\\lark cen\er 2 7.2 7.9 0
lVoicenter
100 300 S0 8. 0
\Vork center 0
20O 14
 Resource Profile
Req
Example
7imr regulrW during prerodlng periods for one and pror/Ur[ assembled in period S.
Time Perlocl ements (by
5 work center
End product and period) fOr
A \Vork center 100 0 0 0.05
one unit
\Vork center 200 0.60 0.10 0
\Vork center 300 0 0.20 0 of end
End product B
vorL center 100 0 0 1 product are
\Vork center 20O 0.25 0.30 30 multiplied by the
0
Time-phaseâ capacity reqU/rvmenh goneraled trom MPA /or 40 és onr/ 13 Be In lime MPS plan to
perlock S determine
Time4 Perlocl capacity
40 As requirements
\Vork center 100 0 0 2
\Vork center 200 24 4 0 These
\vork center 300 0 0 requirements are
13 Bs
\vork center I o0 0 0 18.9
then summed
\Vork center 200 3.2S 3. 0 , over all periods
\Vork center 300 0 9 0
Tofat from per IocI 0
to
5 finalize the
M PS 0 0 18.9
\\lark cen\er 2 7.2 7.9 0 process
100 S 8. 0
\Vork center 0 0
20O 14
 Capacity Requirements Planning
(CRP)

• Capacity requirements planning differs from the

rough-cut planning procedures
— Utilizes time-phased material plan from MRP
— Takes into account materials in inventory
— Accounts for the current status of work-in-process
— Accounts for service parts and other demands
not accounted for in the MPS
• Requires more inputs and more
computational
resources
15
 Capacity Requirements Planning
Example

1 2 3 4 5 6 7 B 9 10 11 12 13
Product A MPA 33 33 33 40 40 40 30 30 30 37 37 37 37
Component C
Lot size - 40 Period
Lead time = 1 2 3 4 5 6 7 8 9 10 11 12 13
2
Detailed MRP

40 10 40 30 30
GrosS
r9€jUlremenb
Data

Scheduled receipts IB 18 28 Scheduled/planned

Projected 1B 3B quantity multiplied
avallablo balance 40 40 t
Planned 0
by processing time
M›r£ canter 3o0 Copoc/ty 8equ/rerr›ents Using
oMWnebaWs for work center
CMP efio
d B 9
Houn of capacIty• 8 8 8 8 8 8 8 010 8 8 8 8
Total = 88

This process is repeated for each work center to complete the plan
16
 Scheduling Capacity and
Materials Simultaneously

• Capacity requirements planning doesn't

consider capacity when planning materials
— Assumes that capacity can be adjusted, given
sufficient warning
• Planning capacity and materials at the same
time allows construction of a plan that works
within current capacity constraints

17
 Finite Capacity Scheduling
• The FCS plan is a simulation
• Randomness leads to actual times that don't
match scheduled times
Should the work center wait for a job that isn't available
on time (idleness = lost capacity)
• Over time, the acsuracy of the plan deteriorates
• Frequent rescheduling may be needed to maintain
accuracy
- Rescheduling process is computationally
expensive
21
 Finite Capacity Scheduling
• The FCS plan is a simulation
• Randomness leads to actual times that don't
match scheduled times
Should the work center wait for a job that isn't available
on time (idleness = lost capacity)
• Over time, the acsuracy of the plan deteriorates
• Frequent rescheduling may be needed to maintain
accuracy
- Rescheduling process is computationally
expensive
21
 Work Center Scheduling

• Vertical Loading—each work center is scheduled job

by job without consideration of other work centers
— Increases capacity utilization but may result in more
partial job completion
• Horizontal Loading—jobs are scheduled through
all work centers in order
of priority
— Lower capacity utilization but generally a higher
proportion of jobs are completed in a shorter time span
(higher customer service levels)
20
 Finite Capacity Scheduling
• The FCS plan is a simulation
• Randomness leads to actual times that don't
match scheduled times
Should the work center wait for a job that isn't available
on time (idleness = lost capacity)
• Over time, the acsuracy of the plan deteriorates
• Frequent rescheduling may be needed to maintain
accuracy
- Rescheduling process is computationally
expensive
21
 AdvancedProduction Scheduling
(APS)

• Expands Finite Capacity Scheduling to the entire

product structure (end products and sub-assemblies)
• Can lead to a significant reduction in lead times
• Requires accurate scheduling parameters, flawless
execution, and prompt recovery from any problems

22
Capacity Management
 Capacity Monitoring with
Input/Output Control
• Planned inputs are determined by the capacity
planning process
• Planned outputs depend upon the nature of the
work center
— Capacity-constrained—planned output is determined by the
processing rate of the work center
—Non-capacity-constrained—planned outputs match planned
inputs
- Differences between plan and actual must be
addressed (management by exception)
24
 Capacity Planning in the MPC
System

- Short-term capacity planning problems can be

reduced by well-executed production and
resource planning
- Efficient use of sufficient capacity by a good
shop- floor system reduces capacity issues

25
 Choosing the Measure of
Capacity
• Capacity can be measured in many ways
Labor hours, machine hours, physical units, monetary units
• The firm's needs and constraints should determine
the capacity measure
• Trends
— Shrinking portion of direct labor
— Less clear distinctions between direct and indirect
labor Reduced ability to change labor capacity
Outsourcing
Flexible automation/cellular technologies

26
 Using the Capacity Plan

• Two broad choices are available when actual capacity

and plan are mismatched
— Change capacity—reduce or increase capacity as indicated
(within constraints)
— Revise material plan—change requirements and/or timing to
match available capacity
• The amount of material that can be produced is
limited by the available capacity, regardless of the
material plan

2
 Principles

• More detailed capacity planning systems demand

more data and database maintenance.
• When capacity does not match the requirements, it
isn't
always capacity that should change.
• Capacity must be planned, but use of capacity must also
be monitored and controlled.
• Capacity planning techniques can be applied to selected
key resources.
- Capacity measures should reflect reasonable levels of
30
 Principles

• More detailed capacity planning systems demand

more data and database maintenance.
• When capacity does not match the requirements, it
isn't
always capacity that should change.
• Capacity must be planned, but use of capacity must also
be monitored and controlled.
• Capacity planning techniques can be applied to selected
key resources.
- oCapacity measures should reflect reasonable levels of
u t p u t froIIl
30
 Capacity
Planning
For Products
and Services
 Capacity is the upper limit or

Capacity
ceiling on the load that an
operating unit can handle.
The basic questions in capacity
handling are:

Planning What kind of capacity is

needed?
How much is needed?
When is it needed?
 1. Impacts ability to meet future
demands

Importance 2.
3.
Affects operating costs
Major determinant of initial costs
of Capacity 4.
5.
Involves long-term commitment
Affects competitiveness
Decisions 6. Affects ease of management
7. Globalization adds complexity
8. Impacts long range planning
Capacity

Design capacity
maximum output rate or service capacity an operation, process, or facility is
designed for
Effective capacity
Design capacity minus allowances such as personal time, maintenance, and scrap
Actual output
rate of output actually achieved--cannot
exceed effective capacity.
Efficiency and Utilization

Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity

Both measures expressed as percentages

Efficiency/Utilization Example

Design capacity = 50 trucks/day

Effective capacity = 40 trucks/day
Actual output = 36 units/day

Actual output = 36 units/day

Efficiency = =
90%
Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day = 72%

Design capacity 50 units/day
Determinants of Effective Capacity

Facilities
Product and service factors
Process factors
Human factors
Operational factors
Supply chain factors
External factors
Strategy Formulation
Capacity strategy for long-term demand
Demand patterns
Growth rate and variability
Facilities
Cost of building and operating
Technological changes
Rate and direction of technology changes
Behavior of competitors
Availability of capital and other inputs
 Key Decisions of Capacity Planning
1. Amount of capacity needed
2. Timing of changes
3. Need to maintain balance
4. Extent of flexibility of facilities

Capacity cushion – extra demand intended to offset uncertainty

 Steps for Capacity Planning
1. Estimate future capacity requirements
2. Evaluate existing capacity
3. Identify alternatives
4. Conduct financial analysis
5. Assess key qualitative issues
6. Select one alternative
7. Implement alternative chosen
8. Monitor results
Make or Buy

1. Available capacity
2. Expertise
3. Quality considerations
4. Nature of demand
5. Cost
6. Risk
Developing Capacity Alternatives

1. Design flexibility into systems

2. Take stage of life cycle into account
3. Take a “big picture” approach to capacity changes
4. Prepare to deal with capacity “chunks”
5. Attempt to smooth out capacity requirements
6. Identify the optimal operating level
Economies of Scale

Economies of scale
If the output rate is less than the optimal level, increasing output rate results in
decreasing average unit costs
Diseconomies of scale
If the output rate is more than the optimal level, increasing the output rate results in
increasing average unit costs
Evaluating Alternatives
Figure 5.3
Production units have an optimal rate of output for minimal cost.
Average cost per unit

Minimum average cost per unit

Minimum
cost

0 Rate of output
Evaluating Alternatives
Figure 5.4
Minimum cost & optimal operating rate are
functions of size of production unit.
Average cost per unit

Small
plant Medium
plant Large
plant

0 Output rate
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
Cost-Volume Relationships
Figure 5.5a

FC
+
Amount ($)

VC C)
= t (V
o st os
l c e c
t a b l
To ri a
va
t al
To
Fixed cost (FC)

0
Q (volume in units)
Cost-Volume Relationships
Figure 5.5b

u e
en
Amount ($)
ev
l r
t a
To

0
Q (volume in units)
Cost-Volume Relationships
Figure 5.5c

u e
e n f i t
Amount ($)

ev P r o
l r
t a st
To l c o
t a
To

0 BEP units
Q (volume in units)
Assumptions of Cost-Volume Analysis

1. One product is involved

2. Everything produced can be sold
3. Variable cost per unit is the same regardless of volume
4. Fixed costs do not change with volume
5. Revenue per unit constant with volume
6. Revenue per unit exceeds variable cost per unit
Financial Analysis

Cash Flow - the difference between cash received from

sales and other sources, and cash outflow for labor,
material, overhead, and taxes.
Present Value - the sum, in current value, of all future
cash flows of an investment proposal.
Calculating Processing Requirements

S ta n d a rd
Annual p r o c e s s i n g t im e P r o c e s s in g tim e
P ro d u c t Dem and p e r u n it ( h r .) n e e d e d (h r.)

#1 400 5 .0 2 ,0 0 0

#2 300 8 .0 2 ,4 0 0

#3 700 2 .0 1 ,4 0 0
5 ,8 0 0
Location/Criteria

PS11
Guitar site location
Capacity/Design

STA11
Demand/ patients/ staffing/ variation at St. Alexius Hospital
Process Flow Improvement

SU6
Redesign of layout at Toyota