production capacity
TRANSCRIPT
-
8/8/2019 Production Capacity
1/23
Production Capacity.
PRODUCTION CAPACITY
The maximum rate of output of a process or a
system.
Volume of products that can be generated by a
production plant or enterprise in a given period by
using current resources.
Capacity
The maximum level of output.
The amount of resource inputs available
relative to output requirements at aparticular time.
Capacity is the upper limit or ceiling on the
load that an operating unit can handle.
Examples of Capacity Measures
-
8/8/2019 Production Capacity
2/23
CAPACITY PLANNING.
Design of the production system involves
planning for the inputs, conversion process
and outputs of production operation.
The effective management of capacity is the
most important responsibility of production
management.
The objective of capacity management (i.e.,
planning and control of capacity) is to matchthe level of operations to the level of demand.
Capacity planning is to be carried out keeping in
mind future growth and expansion plans, market
trends, sales forecasting, etc.
It is a simple task to plan the capacity in case
of stable demand.
But in practice the demand will be seldom
stable.
The fluctuation of demand creates problems
regarding the procurement of resources to
meet the customer demand.
Capacity decisions are strategic in nature.
-
8/8/2019 Production Capacity
3/23
Capacity is the rate of productive capability of
a facility.
Capacity is usually expressed as volume of
output per period of
time
Production managers are more concerned
about the capacity for
the following reasons:
Sufficient capacity is required to meet the
customers demand in time.
Capacity affects the cost efficiency of
operations.
Capacity affects the scheduling system.
Capacity creation requires an investment
Capacity planning is the first step when an
organization decides to produce more or new
products.
Capacity Planning
The basic questions in capacity planning are:
What type of capacity is needed?
How much is needed?
-
8/8/2019 Production Capacity
4/23
When is it needed?
How does productivity relate to capacity?
Measurement of Capacity Planning
Design capacity
maximum obtainable output
System capacity
Maximum capacity given product mix,
scheduling difficulties, and other doses ofreality.
Actual output
rate of output actually achieved--cannot
exceed effective capacity.
Capacity and output relationship.
-
8/8/2019 Production Capacity
5/23
Measurement of Capacity Planning
The capacity of the manufacturing unit can be
expressed in number of units of output per
period.
In some situations measuring capacity is more
complicated when they manufacture multiple
products.
In such situations, the capacity is expressed as
man-hours or machine hours.
1.Design capacity:
Designed capacity of a facility is the planned
or engineered rate of output of goods or
-
8/8/2019 Production Capacity
6/23
services under normal or full scale operating
conditions. For example, the designed capacity
of the cement plant is 100 TPD (Tonnes per
day). Capacity of the sugar factory is 150tonnes of sugarcane crushing per day.
2. System capacity:
System capacity is the maximum output of the
specific product or product mix the system of
workers and machines is capable of producing
as an integrated whole.
System capacity is less than design capacity or
at the most equal, because of the limitation of
product mix, quality specification, breakdowns.
The actual is even less because of many
factors affecting the output such as actualdemand, downtime due to machine/equipment
failure, unauthorized absenteeism.
he system capacity is less than design capacity
because of long range uncontrollable factors.
The actual output is still reduced because of
short-term effects such as, breakdown of
equipment, inefficiency of labor.
-
8/8/2019 Production Capacity
7/23
The system efficiency is expressed as ratio of
actual measured output to the system
capacity.
System Efficiency (SE) = Actual output /
System capacity
3 Licensed capacity:
Capacity licensed by the various regulatory
agencies or government authorities. This is the
limitation on the output exercised by the
government.
4. Installed capacity:
The capacity provided at the time of
installation of the
plant is called installed capacity.
5. Rated capacity: Capacity based on the
highest production rate established by actual
trials is referred to as rated capacity
Effective utilization of Capacity.
Capacity Utilization
Capacity used_
-
8/8/2019 Production Capacity
8/23
rate of output actually achieved
Best operating level_
capacity for which the process wasdesigned (effective or maximum capacity)
Average output or Capacity
Used Utilization =
________________________________ X 100%
Maximum capacity or Best
Operating Level
Utilization is a measure of ratio of average
output rate to maximum
capacity(expressed in percentage).
The Average output or capacity used and
maximum capacity must be measured in the
same terms.
The utilization rate indicate the need for adding
extra capacity or eliminating unused capacity.
For example, if a firm could produce 1200 unitsper month, but is actually producing 600 per
month, its capacity utilization is as follows:
-
8/8/2019 Production Capacity
9/23
Capacity utilization % = 600 units per month x
100% / 1200 units per month
= 50%
A firms level of capacity utilization determines
how much fixed costs should be allocated per
unit, so as a firms capacity utilization
increases, the fixed costs (and therefore also,
total costs) per unit will decrease.
If a firm is running at full capacity, there area number of potential drawbacks :
There may not be enough time for routine
maintenance, so machine breakdowns
may occur more frequently and orders will be
delayed .
It may not be possible to meet new or
unexpected orders so the business cannot
grow without expanding its scale of
production .
Staff may feel under excessive pressure,
leading to increased mistakes, absenteeism
and labor turnover.
-
8/8/2019 Production Capacity
10/23
If the factory space is overcrowded, work may
become less efficient due to the untidy working
conditions .
It may be necessary to spend more on staff
overtime to satisfy orders, increasing labor
costs .
In general, businesses would feel most
comfortable at something between 80 to 90%
capacity utilization because fixed costs per unit
are relatively low and there is some scope to
meet new orders or carry out maintenance and
training.
A firm that has just invested in major new
facilities in anticipation of major growth could
take some time before reaching a good level ofutilization, so it is important to consider sales
trends when discussing capacity utilization.
Causes of under-utilization of capacity.
There are a number of reasons why a firm might be
experiencing low capacity utilization, including the
following:
New competitors taking market share or
causing over-supply in the market.
-
8/8/2019 Production Capacity
11/23
Fall in market demand due to changes in
consumer tastes or fashion .
Unsuccessful marketing one or more aspect
of the marketing mix may simply mean that
the firm is not successful .
Seasonal demand this is especially apparent
in the tourist industry where firms like hotels
and leisure parks are full in the summer but
see much lower utilization at other times of the
year .
Problems arising from low capacity utilization
:
Higher fixed costs per unit mean reduced
profitability; if prices were raised to cover
these costs, this would probably lead toreduced sales unless the product was price
inelastic .
Spare capacity can portray a negative image,
particularly in a business where it can be seen
that it is no longer busy such as a shop or a
health club - signifying loss of popularity
Staff can become bored and demoralized if
they dont have as much to do, especially if
they fear losing their jobs .
-
8/8/2019 Production Capacity
12/23
Benefits of low capacity utilization.
Low capacity utilization is unlikely to be desirable
in the long term as the higher unit costs will make
it difficult to compete.
However it is not all bad , and possible short term
benefits include:
A firm may have more time for maintenance
and repairs and for staff training, to prepare for
an upturn in trade.
There may be less stress for employees than if
they were working at full capacity .
The firm can cope with new orders; firms in
expanding markets may expect to have low
utilization whilst they build their sales.
Dealing with high capacity utilization .
If a firm is struggling to keep up with demand, it
could use the following approaches:
Extra shifts or longer opening hours - using
extra labor in the form of staff overtime or
additional staff.
As long as it doesnt go on for too long, staff
may welcome the extra pay which is usually
at a higher rate.
-
8/8/2019 Production Capacity
13/23
There will be an increase in labor and other
fixed costs such as extra heating and lighting
- and the firm might find there is insufficient
time for maintenance and training.
It is nevertheless a suitable approach to meet
increased demand while the firm determines
whether there will be a longer term need for
extra capacity.
In some industries, local residents might object
to additional noise and traffic caused by
night or weekend working.
Seasonal workers if the capacity shortage
is seasonal, then temporary staff may be taken
on to meet the need.
This is common in industries such as retail atChristmas, and farming in the summer.
The main problem is finding enough good
temporary workers who have the right skills to
maintain the firms levels of service and
quality.
Outsourcing or subcontracting this means
passing one or more aspect of the production
process to another firm.
-
8/8/2019 Production Capacity
14/23
For example an engineering firm could send
components to another specialist firm for
plating and concentrate itself on the other
aspects of production.
Motor manufacturers have increasingly
sourced bodywork panels and other
components through subcontractors,
concentrating on assembly and finishing of
vehicles.
Expansion investment in larger or additional
factories, new machinery, further shops or offices.
This will involve recruitment and training of
new employees.
Although there is considerable expense
involved, this may be an appropriate strategy ifdemand is growing steadily and is expected to
be sustained.
Dealing with low capacity utilization .
If a firm cannot find enough orders, it will be
suffering from increased fixed costs, or
overheads, per unit of production.
Some possible solutions include:
-
8/8/2019 Production Capacity
15/23
New business - of course, the most obvious
solution is to try and find new business or
change the marketing proposition so that the
firms product or service is more competitive!
However, if this is not successful, other measures
may have to be taken to cut overheads, such as:
Rationalization or downsizing - this
means shutting down or selling off parts of the
business. Staff may have to be made
redundant, losing skilled and trained staff, so
long term expectations must be taken into
account before taking such drastic measures.
Short-time working cutting out a shift or
reducing working hours. This will mean eitherreducing the workforce, or asking them to
accept reduced wages and/or a loss of
overtime. Obviously, this is likely to damage
staff morale but might be preferable to
permanent job losses as long as there is the
possibility of an upturn in trade. Laying off workers this will reduce labor
costs but not other fixed costs unless other
actions are also taken.
-
8/8/2019 Production Capacity
16/23
Method of Capacity Planning.Capacity Planning Environment
Process of Capacity Planning
Capacity planning is concerned with defining
the long-term and the short-term capacityneeds of an organization and determining how
those needs will be satisfied.
Capacity planning decisions are taken based
upon the consumer demand and this is merged
with the human, material and financial
resources of the organization.
Capacity requirements can be evaluated from
two perspectives
long-term capacity strategies and
short-term capacity strategies.
1. LONG-TERM CAPACITY STRATEGIES .
Long-term capacity requirements are more
difficult to determine because the future
demand and technology are uncertain.
-
8/8/2019 Production Capacity
17/23
Forecasting for five or ten years into the future
is more risky and difficult.
Even sometimes companys todays products
may not be existing in the future.
Long range capacity requirements are
dependent on marketing plans, product
development and life- cycle of the product.
Long-term capacity planning is concerned with
accommodating major changes that affectoverall level of the output in long-term.
Marketing environmental assessment and
implementing the long-term capacity plans in a
systematic manner are the major
responsibilities of management.
Following parameters will affect long range
capacity decisions.
1.Multiple products:
Companys produce more than one product
using the same facilities in order to increase
the profit.
The manufacturing of multiple products will
reduce the risk of failure.
-
8/8/2019 Production Capacity
18/23
Having more than one product helps the
capacity planners to do a better job.
Because products are in different stages of
their life-cycles, it is easy to schedule them to
get maximum capacity utilization.
2. Phasing in capacity:
In high technology industries, and in industries
where technology developments are very fast,
the rate of obsolescence is high.
The products should be brought into the
market quickly.
The time to construct the facilities will be long
and there is no much time as the products
should be introduced into the market quickly.
Here the solution is phase in capacity on
modular basis.
Some commitment is made for building funds
and men towards facilities over a period of 35
years.
This is an effective way of capitalizing ontechnological breakthrough.
3.Phasing out capacity:
-
8/8/2019 Production Capacity
19/23
The outdated manufacturing facilities cause
excessive plant closures and down time.
The impact of closures is not limited to only
fixed costs of plant and machinery.
Thus, the phasing out here is done with
humanistic way without affecting the
community.
The phasing out options makes alternative
arrangements for men like shifting them toother jobs or to other locations, compensating
the employees, etc.
SHORT-TERM CAPACITY STRATEGIES.
Managers often use forecasts of productdemand to estimate the short-term workload
the facility must handle.
Managers looking ahead up to 12 months,
anticipate output requirements for different
products, and services.
Managers then compare requirements with
existing capacity and then take decisions as to
when the capacity adjustments are needed.
-
8/8/2019 Production Capacity
20/23
-
8/8/2019 Production Capacity
21/23
1. Inventories: Stock of finished goods during
slack periods to meet the demand during peak
period.
2. Backlog: During peak periods, the willing
customers are requested to wait and their
orders are fulfilled after a peak demand period.
3. Employment level (hiring or firing): Hire
additional employees during peak demand
period and layoff employees as demand
decreases.
4. Employee training: Develop multi-skilled
employees through training so that they can be
rotated among different jobs. The multi-skilling
helps as an alternative to hiring employees.
5. Subcontracting: During peak periods, hirethe capacity of other firms temporarily to make
the component parts or products.
6. Process design: Change job contents by
redesigning the job.
Strategic Capacity Planning.
Strategic Capacity Planning .
-
8/8/2019 Production Capacity
22/23
Capacity Utilization & Best Operating Level.
Economies & Diseconomies of Scale.
The Experience Curve.
Capacity Focus, Flexibility & Planning.
Determining Capacity Requirements.
Decision Trees.
Planning Over a Time Horizon
Two Capacity Strategies
-
8/8/2019 Production Capacity
23/23
Pla