Lecture # 10

Capacity Planning and Utilization

Capacity Planning and Facility Location

R. Dan Reid & Nada R. Sanders3rd Edition © Wiley 2007

Session 1 of 2

© 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 BusinessInput Measures of

CapacityOutput Measures

of Capacity

Car manufacturer Labor hours Cars per shift

Hospital Available beds Patients per month

Pizza parlor Labor hours Pizzas per day

Retail storeFloor 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:

Reduce transportation costs of perishable or bulky raw materials

Proximity to customers: 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:

Local community’s attitude toward the facility (e.g.: prisons, utility plants, etc.)

Site considerations: Local zoning & taxes, access to utilities, etc.

Quality-of-life issues: 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

THE CAPACITY MANAGEMENTIntroduction to Materials Management

Arnold, Chapman & Clive6th Edition © Pearson Education 2008

Session 2 of 2

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 PlanningInputs

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

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 Requirements PlanningInputs - Continued

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