Module 4: Capacity Planning

Foundations of Operations Management - Module 4: Capacity Planning

What is Capacity?

• Capacity is defined as the ability to hold, receive, absorb, process, or transform resources within a system.
• There are two types of measures for capacity:
  • Output measures: Units or resources exiting a process or system.
  • Input measures: Units or resources that enter the process or system.

Measures of Capacity

• Capacity measures must be tailored to specific situations. Examples include:
  • Restaurant: Number of meals produced in a day.
  • Amusement Park: Number of customers who visit in a day.
  • Delivery Company: Number of packages delivered per hour.
  • Customer Service Center: Calls answered per hour.
  • Auto Manufacturer: Number of vehicles built in a day.
• Note: Capacities are always measured using a unit of measure over some time interval.

If Capacity Does Not Equal Demand

• Issues arise when capacity does not meet demand:
  • Identifies potential operational problems that could result from insufficient capacity.
  • Determine measures for improvement in operations to meet demand effectively.

Capacity Planning Concepts

• Peak Capacity:
  • Maximum rate that a process or system can achieve in the short term under ideal conditions.
• Effective Capacity:
  • Sustainable output over a prolonged period under normal circumstances.
• Utilization:
  • The proportion of time a resource is utilized based on total available time.
• Productivity:
  • The ratio of outputs to inputs indicating the efficiency of resource use.
• Yield:
  • Usable output derived from input resources.

Differences Between Peak and Effective Capacity

• The difference between peak and effective capacity often arises due to several assumptions:
  • Availability of equally skilled workers working at full productivity.
  • Assumption of 100% yield rates, with no defects in production.
  • Absence of time loss due to product changeovers or variations in products.
  • No operational interruptions caused by equipment failures or workforce issues.
  • Proper scheduling without unexpected maintenance or planned downtime.
  • Lack of variability in orders or resource availability.

Economies of Scale

• Economies of Scale:
  • Reduction in average unit cost achieved by spreading fixed costs over a larger volume of production.
• Diseconomies of Scale:
  • Increase in average cost per unit that occurs when production volume rises beyond optimal capacity.

Capacity Cushion

• Capacity Cushion defines the difference between maximum capacity utilization (100%) and actual utilization.
  • Formula:
    $\text{Capacity Cushion} = 100\% - \text{Utilization Rate (\%)}$
• Factors determining necessary capacity cushion:
  • Customer expectations.
  • Variability in demand and supply.
  • Cost implications of lost business versus idle capacity.
  • Characteristics of process attributes and linkages.
  • Competitive priorities in the market.

Capacity Strategies

• Refers to various aspects of capacity management including:
  • Timing for expansion or contraction of capacity.
  • Measurement of capacity cushion size.
  • Facility sizing considerations.
  • Aligning capacity with marketing and business strategies.
  • Meeting competitive priorities.

Wait-and-See Strategy

• Involves delaying decisions on expansions or resource acquisition until after demand surpasses current capacity.
• Advantages:
  • Mitigates large capital investments until necessary.
• Disadvantages:
  • May lead to low or no cushion, risking lost sales and potentially compromising overall responsiveness and product quality.
• Best applicable in slow-growth industries where unused capacity is costly.

Aggressive Expansion Strategy

• Involves increasing capacity ahead of projected demand, leading to short-term excess.
• Advantages:
  • Can achieve economies of scale.
  • Offers higher service and volume flexibility.
• Disadvantages:
  • Risk of having higher installed capacity than actual demand.
  • Potential for technological obsolescence if not managed.
• This strategy is most effective in expanding markets where gaining market share is critical due to first-mover advantages.

Improving Capacity

• Strategies for enhancing capacity within existing constraints:
  • Increase Utilization: Focus on maximizing up-time and reducing changeover/setup times.
  • Improve Efficiency: Optimize processes and layouts that minimize bottlenecks and variations.
  • Increase Yield: Incorporate customer feedback mechanisms (Voice of the Customer), implement Poka-Yoke systems to prevent errors, and improve material quality.

Estimating Capacity Requirements

• Formula for calculating capacity requirements: $M = \Sigma [D_p + (\frac{D}{Q})s] N [1 - (\frac{C}{100})]$ Where:
  • $M$: Number of resources required for necessary capacity.
  • $D$: Annual demand forecast.
  • $p$: Processing time per unit.
  • $Q$: Lot or batch size.
  • $s$: Set-up time per lot.
  • $N$: Total operational hours per year.
  • $C$: Desired capacity cushion percentage.

Bottleneck Analysis

• Definition: A Bottleneck is a step in a process with the slowest cycle time that limits overall system productivity.
• Objective of process design: Maximize output relative to input.

Bottleneck Identification and Analysis Example

• Consider a claims processing scenario with four claim types (A, B, C, D) that differ in volume and profitability, processed through multiple workflows with significant material expenses and labor.
  • To analyze:
  1. Identify the bottleneck process by determining capacity versus demand.
  2. Evaluate which claim is the most profitable in terms of processing times and revenues.
  3. Utilize a bottleneck-based approach to optimize product mix based on profitability during constrained resources.

Profitability Calculation Under Different Strategies

1. Traditional Method:
   • Determine mix based on highest overall profit margins and available capacity for each product type.
2. Bottleneck-based Approach:
   • Calculate the profit margin per minute for each type and prioritize production based on bottleneck utilization.