UNIT - 4
Capacity & Location Planning
Introduction
Capacity Planning is vital in operations management. Capacity is the rate of productive
capability of a facility. Capacity decisions need acute and careful attention by concerned
persons as almost everything of the operations is related with capacity. It is important as it
determines the optimal level of production and uninterrupted production run. There are several
other important causes, for which the entrepreneurs and managers must address capacity
decisions. In this unit it has been tried deliberately to introduce important notions regarding
these issues. Therefore this unit includes capacity, capacity planning and importance of capacity
decision; capacity requirement, effective capacity determinants; capacity strategy.
Capacity Planning
Capacity Planning or Aggregate Planning is defined as the process of aggregating (i.e.,
consolidating or grouping) all the requirements for fulfilling capacity requirements for each
period in the intermediate horizon and determining the best way to provide the needed capacity.
The objectives of capacity planning are feasibility i.e., the internal needs must be within the
capability of the operations system and optimality i.e., it is desirable to determine the least
costly way to meet the capacity needs.
Importance of Capacity Decision
For a number of reasons, capacity decisions are among the most fundamental of all the design
decisions that managers must make. These include:
• The importance of capacity decisions relates to their potential impact on the ability of the
organization to meet future demand for products and services; capacity essentially limits the rate
of output possible.
• The importance of capacity stems from the relationship between capacity and operating costs.
Ideally, capacity and demand requirements will be matched, which will tend to minimize
operating costs.
• The importance of capacity decisions also lies in the initial cost involved, of which capacity is
usually a major determinant. Typically the greater the capacity of a productive unit, the greater
its costs. This does not necessarily imply a one-for-one relationship; larger units tend to cost
proportionately less than smaller units. • The importance of capacity decisions stems from the
often required long term commitment of resources and the fact that, once they are implemented,
it may be difficult or impossible to modify those decisions without incurring major costs.
Like many other things, managers have to take decisions regarding the capacity of
their operating units and these decisions are very important because:
• In today's competition, any profit-making organization would like to keep its existing
customers and have new ones as well. If capacity decision contains flaws, the sales team may
desperately want to take a particular order, while the operations team may struggle to meet the
demand. Hence it is very easy to lose customers if their demand is not fulfilled. For example,
think of a situation when you bring your car to a car service centre and learn that due to
equipment and staff limitations your car will be serviced in about a week.
• Capacity planning involves different cost considerations. One type of such cost is operating
cost. If, for example, the capacity of ABC footwear factory is 100,000 units per year and
demand for their product is 50,000 units for the same period, then their operating cost will be
higher than it would be if the capacity and demand were the same. Another type of cost is cost
of building the operating unit. Once this cost is decided upon and the unit is built there is no
turning back, it becomes fixed cost. So, if afterwards management finds out that capacity of the
unit is lower or higher than required, any modification is likely to incur major costs.
Defining and Measuring Capacity
What is Capacity?
The upper limit or ceiling on the load that an operating unit can handle is called its capacity.
Capacity is the rate of productive capability of a facility. The operating unit might be a plant,
department, machine, store, or worker. The load can be specified in terms of either inputs or
outputs. To understand these consider the following examples.
• Capacity in respect of capability: Airlines capacity measures their capacity in Available Seat
Miles (ASMs) over a year. Or hospitals may measure its capacity in number of beds available.
However this measure is incorrect, as it doesn’t consider outpatient treated by the hospital.
• Capacity in respect of inputs: A machine is able to process 120 pounds of raw materials in
every hour it works, so its input capacity is 120- pounds/hour.
• Capacity in respect of outputs: A machine can produce 20 units of finished goods in every
hour it works, so its output capacity is 20 units/hour.
Measuring Capacity
No single measure of capacity will be appropriate in every situation. Rather the measure of
capacity must be tailored to the situation. The following Table 8.1.1 provides some commonly
used measure of capacity.
Table. Common measures of capacity
Business Inputs Outputs
Auto manufacturer • Labour hours Number of cars per shift
• Machine hours
Steel mill • Furnace size Tons of steel per day
Oil refinery • Refinery size Gallons of fuel per day
• Number of acres Bushel of grain per acre per
Farming • Number of cows year, Gallons of milk per day
Restaurant • Number of tables Number of meals served per
• Seating capacity day
Theater • Number of seats Number of tickets Revenue generated per day
sold per performance Retail sales
• Square feet of floor space
Determinants of Effective Capacity
a) Facilities factors:
The design of facilities, including size and provision for expansion, is very important.
Location factors, such as transportation costs, distance to market, labour supply, energy
sources, and room for expansion, are also important.
b) Product/service factors:
Product and service design can have a tremendous influence on capacity. For example,
when items are similar, the ability of the system to produce those items is generally
much greater than when successive items differ. A restaurant that offers a limited menu
can usually prepare and serve meals at a faster rate than a restaurant with an extensive
menu.
Table. Factors that determine effective capacity
Factors Sub-factors
a) Facilities Design, Location, Layout
b) Product/Service Design, Product or service mix
c) Process Quantity capabilities, Quality capabilities
d) Human Factors Job content, Job Design, Training and experience, Motivation,
Compensation, Learning rates, Absenteeism and labor turnover
e) Operational Scheduling, Materials management, Quality assurance, Maintenance
politics, Quality assurance
f) External Factors Product Standards, Safety regulations, Unions, Pollution control
standards
c) Process factors:
The quantity capability of a process is an obvious determinant of capacity. A subtler
determinant is the influence of output quality. For instance, if quality of output does not
meet standards, the rate of output will be slowed by the need for inspection and rework
activities.
d) Human factors:
The tasks that make up a job, the variety of activities involved, and the training, skill,
and experience required to perform a job all have an impact on the potential and actual
output.
e) Operations factors:
Scheduling problems may occur when an organization has differences in equipment
capabilities among alternative pieces of equipment or differences in job requirements.
Inventory stocking decisions, late deliveries, acceptability of purchased materials and
parts, and quality inspection and control procedures also can have an impact on effective
capacity. Many decisions made concerning system design have an impact on capacity;
the same is true for operating decisions. Some of these factors that determine effective
capacity are summarized in the Table.
f) External Factors:
External factors like product standards, safety regulations, unions, pollution control
standards etc are also the determinant factors in the production operation efficiency of a
business organization
Capacity Requirement
Capacity planning decisions involve both long term and short-term considerations. Long-term
consideration relates to overall level of capacity, such as facility size; short-term consideration
relates to probable variations in capacity requirements created by things like seasonal, random,
and irregular fluctuations in demand. For long-term consideration some sorts of trend analyses
are required.
1. When trends are identified, the fundamental issues are: a) How long the trend might persist,
since few things last forever b) The slope of the trend
2. If cycles are identified, interest focuses on: a) The approximate length of the cycles, since
cycles are rarely uniform in duration, and b) The amplitude of cycles, (i.e., deviations from
average).
Develop Capacity Alternatives
Once a company has identified its capacity requirements for the future, the next step is to
develop alternative ways to modify its capacity. One alternative is to do nothing and revaluate
the situation in the future. With this alternative, the company would not be able to meet any
demands that exceed current capacity levels. Choosing this alternative and the time to revaluate
the company's needs is a strategic decision. The other alternatives require deciding whether to
purchase one large facility now or add capacity incrementally, as discussed earlier in the
chapter.
Capacity Alternatives: 1. Do nothing
2. Expand large now
3. Expand small now, with option to add later
Evaluate Capacity Alternatives
There are a number of tools that we can use to evaluate our capacity alternatives. Recall that
these tools are only decision-support aids. Ultimately, managers have to use many different
inputs, as well as their judgment, in making the final decision. One of the most popular of these
tools is the decision tree. In the next section we look more closely at how decision trees can be
helpful to managers at this stage.
Need for Location Decisions
Marketing Strategy
Cost of Doing Business
Growth
Depletion of Resources
Nature of Location Decisions
• Importance
• Long term commitment/costs
• Often difficult to reverse decision
• Transportation cost
• As much as 25% of product price
• Options
• Expand existing facilities
• Add new facilities
• Move
• Do nothing
Evaluating Location Decisions
There are three specific analytical techniques available to aid in evaluating location
alternatives:
Location Cost-Volume-Profit Analysis:
The Cost-Volume-Profit (CVP) Analysis can be represented either mathematically or
graphically. It involves three steps: 1) For each location alternative, determine the fixed and
variable costs, 2) For all locations, plot the total-cost lines on the same graph, and 3) Use the
lines to determine which alternatives will have the highest and lowest total costs for expected
levels of output. Additionally, there are four assumptions one must keep in mind when using
this method:
1. Fixed costs are constant.
2. Variable costs are linear.
3. Required level of output can be closely estimated.
4. There is only one product involved.
2. Total cost = FC = v(Q)
where FC=Fixed Cost, v=Variable Cost per Unit, Q=Number of Units (Also shown below but not in the same
format)
1. Factor Rating
1. This method involves qualitative and quantitative inputs, and evaluates alternatives based on
comparison after establishing a composite value for each alternative. Factor Rating consists of
six steps:
Determine relevant and important factors.
Assign a weight to each factor, with all weights totalling 1.00.
Determine common scale for all factors, usually 0 to 100.
Score each alternative.
Adjust score using weights (multiply factor weight by score factor); add up scores for
each alternative.
The alternative with the highest score is considered the best option.
2. Minimum scores may be established to set a particular standard, though this is not necessary.
2. Centre of Gravity Method:
This technique is used in determining the location of a facility which will either reduce
travel time or lower shipping costs. Distribution cost is seen as a linear function of the
distance and quantity shipped. The Center of Gravity Method involves the use of a
visual map and a coordinate system; the coordinate points being treated as the set of
numerical values when calculating averages. If the quantities shipped to each location
are equal, the center of gravity is found by taking the averages of the x and y
coordinates; if the quantities shipped to each location are different , a weighted average
must be applied (the weights being the quantities shipped).
Facility Layout
For an organization to have an effective and efficient manufacturing unit, it is important
that special attention is given to facility layout. Facility layout is an arrangement of
different aspects of manufacturing in an appropriate manner as to achieve desired
production results. Facility layout considers available space, final product, safety of
users and facility and convenience of operations.
An effective facility layout ensures that there is a smooth and steady flow of production
material, equipment and manpower at minimum cost. Facility layout looks at physical
allocation of space for economic activity in the plant. Therefore, main objective of the
facility layout planning is to design effective workflow as to make equipment and
workers more productive.
Need for Layout Decisions
A model facility layout should be able to provide an ideal relationship between raw material,
equipment, manpower and final product at minimal cost under safe and comfortable
environment. An efficient and effective facility layout can cover following objectives:
To provide optimum space to organize equipment and facilitate movement of goods and
to create safe and comfortable work environment.
To promote order in production towards a single objective
To reduce movement of workers, raw material and equipment
To promote safety of plant as well as its workers
To facilitate extension or change in the layout to accommodate new product line or
technology upgradation
To increase production capacity of the organization
An organization can achieve the above-mentioned objective by ensuring the following:
Better training of the workers and supervisors.
Creating awareness about of health hazard and safety standards
Optimum utilization of workforce and equipment
Encouraging empowerment and reducing administrative and other indirect work
Types of Facility Layout process
There are six types of facility layout, and they are as follows:
Line Layout
Functional Layout
Fixed Position Layout
Cellular Technology Layout
Combined Layout, and
Computerized Relative Allocation of Facility Technique
Question Bank
[Link] the various factors that influence the location of plants. Sketch and explain any two types
of layouts.
2. Define capacity and capacity planning and Explain long term capacity strategies.
[Link] individual component capacities (in units/day) for an assembly line that consists of five
activities are shown in the figure below Fig.
4. Explain i) what is the system capacity? ii) What is the efficiency of the system?
5. Distinguish between design capacity and system capacity
6. Explain the various factors that influence the location of plants
7. What is facility layout? What factors determines the type of layout used in organization?
8. A firm developing agency must determine how many photo enlarger cubicles are required to
maintain in output of 200 goods per hour. The set up and explosure time can theoretically be
done on 2 minutes per print, but operators are on the average only 90 percent efficient and in
addition 5 percent of print scrapped and redone. Also the cubicles can utilized for enlarging only
70 percent of the time.
i) What is the required system capacity in prints/hr?
ii) ii) What average output/hr can be expected [Link] each cubicles taking its use factor and
c, efficiency into account?
iii) How many enlarger cubicles are required?