CAPACITY MANAGEMENT
OPM545: ARLIZA ABDULLAH
▪ Concepts and capacity
planning
CONTENTS ▪ Strategis in capacity
planning
▪ Measurement of capacity
2
CAPACITY
▪ The throughput, or the number of units a
facility can hold, receive, store, or produce in a
period of time
▪ Determines fixed costs
▪ Determines if demand will
be satisfied
▪ Three time horizons
PLANNING OVER A TIME HORIZON
Options for Adjusting
Capacity
Long- Add facilities
range
planning
Add long lead time
equipment *
Intermedia Subcontract Add personnel
te-range Add equipment Build or use inventory
planning Add shifts
Schedule
Short-
range
planning *personnel
jobs
Schedule
Allocate
Modify machinery
Use
capacity capacity
* Difficult to adjust capacity as limited
options exist
DESIGN AND EFFECTIVE CAPACITY
▪ Design capacity is the maximum theoretical
output of a system
▪ Normally expressed as a rate
▪ Effective capacity is the capacity a firm expects
to achieve given current operating constraints
▪ Often lower than design capacity
OPM545 5
UTILIZATION AND EFFICIENCY
Utilization is the percent of design
capacity achieved
Utilization = Actual output/Design
capacity
Efficiency is the percent of effective
capacity achieved
Efficiency = Actual output/Effective
capacity
BAKERY EXAMPLE
Actual production last week =
148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per
hour
Bakery
Designoperates
capacity7 days/week,
= (7 x 3 x 38)- 8
x
hour shifts
(1,200)
= 201,600 rolls
Utilization = 148,000/201,600
= 73.4%
Efficiency = 148,000/175,000
= 84.6%
BAKERY EXAMPLE
Actual production last week =
148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per
hour
Bakery operates 7 days/week, 3 - 8
hour shifts
Efficiency = 84.6%
Expected Output = (Effective Capacity)
Efficiency of new line = 75%
(Efficiency)
= (175,000)(.75) =
131,250 rolls
CAPACITY AND STRATEGY
▪ Capacity decisions impact all 10 decisions of
operations management as well as other functional
areas of the organization
▪ Capacity decisions must be integrated into the
organization’s mission and strategy
CAPACITY CONSIDERATIONS
1. Forecast demand accurately
2. Understand the technology and capacity
increments
3. Find the optimum operating level (volume)
4. Build for change
MANAGING DEMAND
▪ Demand exceeds capacity
▪ Curtail demand by raising prices, scheduling
longer lead time
▪ Long term solution is to increase capacity
▪ Capacity exceeds demand
▪ Stimulate market
▪ Product changes
▪ Adjusting to seasonal demands
▪ Produce products with complementary demand
patterns
TACTICS FOR MATCHING CAPACITY TO
DEMAND
▪ Making staffing changes
▪ Adjusting equipment
▪ Purchasing additional machinery
▪ Selling or leasing out existing
equipment
▪ Improving processes to increase
throughput
▪ Redesigning products to facilitate more
throughput
▪ Adding process flexibility to meet changing
product preferences
▪ Closing facilities
DEMAND AND CAPACITY MANAGEMENT IN THE SERVICE SECTOR
▪ Demand management
▪ Appointment, reservations, FCFS
rule
▪ Capacity management
▪ Full time, temporary, part-time staff
BOTTLENECK ANALYSIS AND THEORY OF CONSTRAINTS
▪ Each work area can have its own unique capacity
▪ Capacity analysis determines the throughput capacity of
workstations in a system
▪ A bottleneck is a limiting factor or constraint
▪ A bottleneck has the lowest effective capacity in a system
PROCESS TIMES FOR STATIONS, SYSTEMS, AND
CYCLES
▪ The process time of a station is the time to produce a
unit at that single workstation
▪ The process time of a system is the time of the longest
process in the system … the bottleneck
▪ The process cycle time is the time it takes for a product
to go through the production process with no waiting
A THREE-STATION ASSEMBLY LINE
A B C
2 4 3
min/uni min/uni min/uni
t t t
PROCESS TIMES FOR STATIONS, SYSTEMS, AND CYCLES
▪ The system process time is the process time of the
bottleneck after dividing by the number of parallel
operations
▪ The system capacity is the inverse of the system process
time
▪ The process cycle time is the total time through the
longest path in the system
CAPACITY ANALYSIS
▪ Two identical sandwich lines
▪ Lines have two workers and three operations
▪ All completed sandwiches are wrapped
Bread Fill Toast
15 20 40
Order sec/sandwic sec/sandwic sec/sandwic Wrap
h h h
30 37.5
sec/sandwic Bread Fill Toast sec/sandwich
h
15 20 40
sec/sandwic sec/sandwic sec/sandwic
h h h
CAPACITY ANALYSIS
◆ Toast work station has the longest processing
time – 40 seconds
◆ The two lines each deliver a sandwich every 40
seconds so the process time of the combined
lines is 40/2 = 20 seconds
◆ At 37.5 seconds, wrapping and delivery has the
Br To
longest processing time and is the bottleneckOr ea
d
Fil
l
as
t W
15 20 40
de ra
◆ Capacity per hour is 3,600 seconds/37.5 30
r
sec
Br
ea
sec
Fil
sec
To
as
p
37.5
sec l sec
seconds/sandwich = 96 sandwiches per hour 15
d
sec
20
sec
40
sec
t
◆ Process cycle time is 30 + 15 + 20 + 40 + 37.5
= 142.5 seconds
CAPACITY ANALYSIS
▪ Standard process for cleaning teeth
▪ Cleaning and examining X-rays can happen simultaneously
Clean
ing
Devel 24 Chec
Chec Takes Denti
ops min/unit k
k in X-ray st
X-ray out
2 2 4 X-ray 8 6
min/uni min/uni min/uni exam min/uni min/uni
t t t t t
5
min/uni
t
CAPACITY ANALYSIS
▪ All possible paths must be compared
▪ Cleaning path is 2 + 2 + 4 + 24 + 8 + 6 = 46
minutes
▪ X-ray exam path is 2 + 2 + 4 + 5 + 8 + 6 = 27
minutes
▪ Longest path involves the hygienist cleaning
the teeth
Cle
De ani
Ta
vel ng Ch
Ch ke
op De ec
ec s 24
▪ Bottleneck is the hygienist at 24 minutes
s nti k
k X- min/unit
X- X- st ou
in ra
ra ra t
2 2 y 4 y y 8 6
min/uni min/uni min/uni ex min/uni min/uni
▪ Hourly capacity is 60/24 = 2.5 patients t t t
5
am
min/uni
t t
▪ Patient should be complete in 46 minutes
THEORY OF CONSTRAINTS
Five-step process for recognizing and managing limitations
Step 1: Identify the constraint
Step 2: Develop a plan for overcoming the
constraints
Step 3: Focus resources on accomplishing Step 2
Step 4: Reduce the effects of constraints by
offloading work or expanding capability
Step 5: Once overcome, go back to Step 1 and
find new constraints
BOTTLENECK MANAGEMENT
1. Release work orders to the system at the pace of set by
the bottleneck
2. Lost time at the bottleneck represents lost time for the
whole system
3. Increasing the capacity of a non-bottleneck station is a
mirage
4. Increasing the capacity of a bottleneck increases the
capacity of the whole system
BREAK-EVEN ANALYSIS
▪ Technique for evaluating process and equipment
alternatives
▪ Objective is to find the point in dollars and units
at which cost equals revenue
▪ Requires estimation of fixed costs, variable
costs, and revenue
BREAK-EVEN ANALYSIS
▪ Fixed costs are costs that continue even if no units
are produced
▪ Depreciation, taxes, debt, mortgage payments
▪ Variable costs are costs that vary with the volume
of units produced
▪ Labor, materials, portion of utilities
▪ Contribution is the difference between selling price
and variable cost
BREAK-EVEN ANALYSIS
Assumptio
ns
▪ Costs and revenue are linear functions
▪ Generally not the case in the real world
▪ We actually know these costs
▪ Very difficult to verify
▪ Time value of money is often ignored
BREAK-EVEN ANALYSIS
–
Total revenue
900 line
–
Break-even point o fit or Total cost
800 Total cost = Total Pr rid line
revenue r
co
–
Cost in
dollars
700
Variable
– cost
600
oss do
– L r ri
co r
500 Fixed
cost
| | | | | |
– | | | | | |
400 0 Volume
100 (units
200 per300 400
500 600 period)
700 800 900 1000
–
1100
BREAK-EVEN ANALYSIS
BEPx = x =
break-even point number of units
in units produced
BEP$ = TR = total
break-even point revenue = Px
in dollars F = fixed
P = costs
price per unit V =
Break-even
(after allpoint occurs variable cost per unit
when discounts) TC = total
TR = TC costs = F + Vx
Px = F + F
Vx BEPx
P-
Px – Vx = V
BREAK-EVEN ANALYSIS
x =
BEPx = number of units
break-even point produced
in units TR = total
BEP$ = revenue = Px
break-even point F = fixed
in dollars costs
P = V =
price per unit variable cost per unit
(after all Profit
TC = = TR total
BEP
discounts)
$ = costs = F + Vx
- TC
BEPx P = Px - (F
+ Vx)
= Px - F -
BREAK-EVEN EXAMPLE
Multiproduct F
Case BEP$
=
∑ 1-
V
i
x (Wi)
P
i
where V = variable cost per unit
P = price per unit
F = fixed costs
W = percent each product is of total
dollar sales
i = each product
REDUCING RISK WITH INCREMENTAL CHANGES
(a) Leading demand (c) Capacity lags demand
with incremental with incremental
expansion expansion
New
New
capacit capacit
y y Expecte
Dema Expecte
Dema
d d
nd demand
nd
demand
Time Time
(years) (years)
(b) Leading demand (d) Attempts to have an
with one-step average capacity with
expansion incremental expansion
New
capacit Expecte
Dema
Dema
Expecte y d
demand
nd
d
nd
demand
Time Time
(years) (years)
