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 DepartmentWork 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 OrganizationCapacity MeasuresAuto plantNumber of autosPower plantMegawatts AirlineAvailable seat miles (ASMs)HospitalAvailable bed-daysRestaurantNo. of people that can be servedBusiness SchoolNumber of studentsPaint factoryLitters 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 Assessing exiting capacityForecasting capacity needIdentifying alternative way to modify capacityEvaluating financial, economical, and technological capacity alternativesSelecting a capacity alternative most suited to achieving strategic issues

Methods of Capacity Build-upReactive mode / capacity lag strategyIn this the firm wait until the demand materializes sufficiently before they modify the capacity into the systemAdopted in monopoly situation

Proactive mode / capacity lead strategyIn this the firm add up the capacity in anticipation of future demandAdopted in highly competitive market

The Time Horizon in Capacity PlanningLong term planning - 2-5 YrsMedium term planning - 1 yr Short term planning - One week three months

Capacity Planning FrameworkCapacity planning framework consist of three important steps:Estimate the capacity requirements for the planning horizonCompute the available capacity and identify quantum of capacity to be improvedIdentify available alternatives and select the best one for capacity improvement

Methods to Modify CapacityShort-term response: InventoriesLaborSub-contractingJob rotation

Ways of Changing Long-Term Capacity

Type of Capacity ChangeWays of Accommodating Long Range Capacity changeExpansion1. 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.Reduction1. 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 CapacityIncrease capacity by:Adding extra shiftsScheduling overtime or weekendsAdding equipment and/or personnelReduce load by:Reducing lot sizesHolding work in production controlSubcontracting work to outside suppliers

Adjustments to CapacityReduce capacity by:Temporarily reassigning staffReducing the length of shiftsEliminating shifts Increase load by:Releasing orders earlyIncreasing lot sizesMaking items normally outsourced

Capacity Planning Modeling Linear programming Computer simulation used to evaluate capacityDecision tree analysis applied to capacity expansion

Estimating Total RequirementsEstimating Labor and Machine RequirementsLabor capacity requirements =

Machine capacity requirements =

Where D = Projected demand per unit time during planning phase SL = Standard labor hour required per unit of product EL = Efficiency of labor

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 AvailabilitySystem Availability (hours) = Nd X h Nd = number of working days h = number of working hours per day

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Compute Capacity AvailabilityCapacity Available in the systemMachine = Nd * h *Nm * (1-b/100) Where b= Time lost in break downLabor = Nd* h* NL* (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 ImprovementWaste Elimination:Multi-skilled workersSub-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 the system capacity the system efficiency

Station No. 1 2 3 4 5Individual capacity/ shift600 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%What is the required system capacity 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?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 275,000The cost of subcontracting is negligibleThe 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.

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