Lecture # 10
Capacity Planning and
Utilization
Session 1 of
2
Capacity Planning and
Facility Location
R. Dan Reid & Nada R. Sanders
3rd Edition Wiley 2007
Capacity planning
Capacity is the maximum output rate of a facility
Capacity planning is the process of establishing
the output rate that can be achieved at a facility:
Capacity is usually purchased in chunks
Strategic issues: how much and when to spend
capital for additional facility & equipment
Tactical issues: workforce & inventory levels, &
day-to-day use of equipment
Wiley 2007
Measuring Capacity
Examples
There is no one best way to measure capacity
Output measures like kegs per day are easier to understand
With multiple products, inputs measures work better
Type of Business
Input Measures of
Capacity
Output Measures
of Capacity
Car manufacturer
Labor hours
Cars per shift
Hospital
Available beds
Patients per month
Pizza parlor
Labor hours
Pizzas per day
Retail store
Floor space in
square feet
Revenue per foot
Wiley 2007
Measuring Available
Capacity
Design capacity:
Maximum output rate under ideal
conditions
A bakery can make 30 custom cakes per
day when pushed at holiday time
Effective capacity:
Maximum output rate under normal
(realistic) conditions
On the average this bakery can make 20
custom cakes per day
Wiley 2007
How Much Capacity Is
Best?
The Best Operating Level is the output that results
in the lowest average unit cost
Economies of Scale:
Where the cost per unit of output drops as volume of output
increases
Spread the fixed costs of buildings & equipment over
multiple units, allow bulk purchasing & handling of material
Diseconomies of Scale:
Where the cost per unit rises as volume increases
Often caused by congestion (overwhelming the process with
too much work-in-process) and scheduling complexity
Wiley 2007
Making Capacity Planning
Decisions
The three-step procedure for
making capacity planning
decisions is as follows:
Step 1: Identify Capacity Requirements
Step 2: Develop Capacity Alternatives
Step 3: Evaluate Capacity Alternatives
Wiley 2007
Identifying capacity
requirements
Long-term capacity requirements based on
future demand
Identifying future demand based on forecasting
Forecasting, at this level, relies on qualitative
forecast models
Executive opinion
Delphi method
Forecast and capacity decision must included
strategic implications
Capacity cushions
Plan to underutilize capacity to provide
flexibility
Wiley 2007
Evaluating Capacity
Alternatives
Capacity alternatives include
Could do nothing,
Expand large now (may included
capacity cushion), or
Expand small now with option to
add later
Wiley 2007
Best Operating Level and
Size
Alternative 1: Purchase one large facility, requiring one large
initial investment
Alternative 2: Add capacity incrementally in smaller chunks as
needed
Wiley 2007
Factors Affecting Location
Decisions
Proximity to source of supply:
Proximity to customers:
Reduce transportation costs of perishable or
bulky raw materials
E.g.: high population areas, close to JIT
partners
Proximity to labor:
Local wage rates, attitude toward unions,
availability of special skills (e.g.: silicon valley)
Wiley 2007
Location Factors
Community considerations:
Site considerations:
Local zoning & taxes, access to utilities, etc.
Quality-of-life issues:
Local communitys attitude toward the facility
(e.g.: prisons, utility plants, etc.)
Climate, cultural attractions, commuting time, etc.
Other considerations:
Options for future expansion, local competition,
etc.
Wiley 2007
Capacity Planning and Facility
Location Across the
Organization
Capacity planning and location
analysis affect operations
management and are important to
many others
Finance provides input to finalize
capacity decisions
Marketing impacted by the
organizational capacity and location to
customers
Wiley 2007
Session 2 of
2
THE CAPACITY
MANAGEMENT
Introduction to Materials
Management
Arnold, Chapman & Clive
6th Edition Pearson Education 2008
Basic Capacity Definitions
Capacity Required capacity needed to
produce a desired output in a given time
period
Capacity Planning determining the
resources and methods needed to meet the
priority plan
Capacity Control monitoring production,
comparing with the capacity plan, and taking
appropriate corrective actions
Capacity Management determining
capacity needed as well as providing,
monitoring, and controlling the capacity
Capacity Planning Levels
Resource Planning Long range
resource requirements linked to the
production plan
Rough-cut Capacity Planning
Used to check feasibility of Master
Production Scheduling
Capacity Requirements Planning
Detailed work center capacity
plans linked to MRP
Capacity Planning Levels
Figure 5.2 Planning levels
Capacity Requirements
Planning
Inputs
Open Order File found as
scheduled receipts on MRP
Planned order releases from MRP
Potential future orders
Work Center file
Information on capacity in the work
center
Move, wait, and queue time information
Capacity Requirements
Planning
Inputs - Continued
Routing file the path that the
work will follow
Operations to be performed
Operation sequence
Work centers used
Potential alternative work centers
Tooling needed
Standard setup times and run times
Capacity Available
Impacted by:
Product specification
Product mix
Methods used to make product
Pace of work
Scheduling Orders
Back scheduling (the typical approach)
Start with the due date, use lead time
to find the proper start date for each
operation
Forward scheduling Launch the order
into the first (gateway) work center,
then use the lead times to find when
the order will be completed at each
work center
Managing the Plan
Adjusting Capacity
Use Overtime or Undertime
Adjust the number of workers
Shift workers from other work
centers
Use alternative work centers to
shift load
Subcontract work