Capacity Planning
Capacity is the maximum rate of output for a facility.
Capacity planning considers questions such as:
What should be the balance between long-term and short-term capacity?
Should we expand capacity before the demand is there or wait until demand
is more certain?
What facility size is optimal?
Capacity decisions follow from a firm’s operations strategy and forecasted
demand pattern.
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Measuring Capacity
Type
Output measures
Input measures
Utilization
Average output rate/maximum capacity
Maximum capacity – effective or design capacity?
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Pressures for a Large Cushion
Uneven demand
Uncertain demand
Uncertain supply
Changing product mix
Capacity comes in large increments (economies of scale)
Pressures for a Small Cushion
Capital costs
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Links with Other Operational Characteristics and Priorities
Operational
Characteristic/Priority Cushion
Faster delivery times Larger
High quality levels Smaller
Higher capital intensity Smaller
Less worker flexibility Larger
More stable schedules Smaller
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Optimal Operating Level
Average cost per unit
Optimal rate at minimum cost Rate of output
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Steps in the Capacity Planning Process
1. Estimate capacity requirements
2. Identify gaps
3. Develop alternatives
4. Evaluate the alternatives
5. Select an alternative and implement
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Make or Buy Decision Problem
Hahn Manufacturing has been purchasing a key component
of one of its products from a local supplier. The current
purchase price is $1,500 per unit. Efforts to standardize
parts have succeeded to the point that this same component
can now be used in five different products. Annual
component usage should increase from 150 to 750 units.
Management wonders whether it is time to make the
component in-house, rather than to continue buying it from
the supplier. Fixed costs would increase by about $40,000
per year for the new equipment and tooling needed. The
cost of raw materials and variable overhead would be about
$1,100 per unit, and labor costs would go up by another
$300 per unit produced.
a. Should Hahn make rather than buy?
b. What is the break-even quantity?
c. What other considerations might be important?
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Resource Capacity Problem
You have been asked to put together a capacity plan for a
critical bottleneck operation at the Surefoot Sandal
Company. Your capacity measure is number of machines.
Three products (men’s women’s, and kid’s sandals) are
manufactured. The time standards (processing and setup),
lot sizes, and demand forecasts are given in the following
table. The firm operates two 8-hour shifts, 5 days per
week, 50 weeks per year. Experience shows that a capacity
cushion of 5 percent is sufficient.
Time Standards
Demand
Processing Setup Lot Size Forecast
Product (hr/pair) (hr/lot) (pairs/lot) (pairs/yr)
Men’s sandals 0.05 0.5 240 80,000
Women’s 0.10 2.2 180 60,000
sandals
Kid’s sandals 0.02 3.8 360 120,000
a. How many machines are needed at the bottleneck?
b. If the operation currently has two machines, what is the
capacity gap?
c. If the operation can not buy any more machines, which
products can be made?
d. If the operation currently has five machines, what is the
utilization?
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Resource Capacity Problem
Solution
Total time available per machine per year:
(2 shifts/day)(8 hours/shift)(5 days/week)(50 weeks/year)
= 4000 hours/machine/year
With a 5% capacity cushion, the hours/machine/year that are
available are:
4000(1-0.05) = 3800 hours/machine/year
Total time to produce the yearly demand of each product:
(This is equal to the processing time plus the setup time.)
Men’s =(0.05)(80,000)+(80,000/240)(0.5)= 4167 hrs
Women’s =(0.10)(60,000)+(60,000/180)(2.2)= 6733 hrs
Kid’s =(0.02)(120,000)+(120,000/360)(3.8)= 3667 hrs
Total time for all products =4167+6733+3667= 14567 hrs
a. Machines needed = (14,567/3800) = 3.83 = 4 machines
b. Capacity gap is 4 - 2 = 2 machines
c. With two machines, we have (3800)(2) = 7600 hours of
machine capacity. We can make all of the women’s sandals
(6733 hours) and some of the men’s sandals, for example.
d. With five machines, (5)(4000) = 20,000 machine-hours/year are
available. The total number of machine-hours/year needed for
production are 14,567.
Utilization = (14,567/20,000)(100%) = 73%. Thus, the capacity
cushion is (100% - 73%) = 27%.
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Process Management and Major Process Decisions
Process management is the selection of the inputs, operations, work flows, and methods
that transform inputs into outputs.
Major process decisions:
Process selection: A process decision that determines whether resources are
organized around products or processes.
Vertical integration: The degree to which a firm’s own production system or service
facility handles the entire supply chain.
Resource flexibility: The ease with which employees and equipment can handle a
wide variety of products, output levels, duties, and functions.
Customer involvement: The ways in which customers become part of the process
and the extent of their participation.
Capital intensity: The proportion of production costs that consists of capital stock.
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Layout Types
Process
Product
Fixed-position
Combination
Cellular
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Product Layout
Although product layouts often follow a straight line, a straight line is not
always the best, and layouts may take an L, O, S, or U shape. Why?
L:
O:
S:
U:
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Location Decisions
Labor climate
Quality of life
Utilities, taxes and real estate costs
Factors emphasized in manufacturing
Proximity to suppliers and resources
Proximity to markets
Transportation costs
Plant focus (product, market, or process)
Site-specific factors
Factors emphasized in services
Proximity to customers
Location of competitors
Site-specific factors
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Breakeven Location Problem
By chance, the Atlantic City Community Chest has to close
temporarily for general repairs. They are considering four
temporary office locations:
Property Address Move-in Costs Monthly Rent
Boardwalk
$400 $50
Marvin Gardens $280 $24
St. Charles Place $350 $10
Baltic Avenue $60 $60
a. Can any of these addresses be immediately eliminated
from consideration if the goal is to minimize total
costs?
b. Use the graph on the next page to help determine for
what length of lease each location would be favored.
Calculate the breakeven lease lengths between
addresses.
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Breakeven Location Problem
$600
$500
$400
Total Cost
$300
$200
$100
$0
0 2 4 6 8 10 12
Months
Breakeven calculations:
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