Capacity Planning
Capacity Planning Supplement
Supplement Outline
Capacity: Introduction to the concept of capacity. (Page 1, 2)
Bottleneck Analysis and the Theory of Constraints: Analyzing bottlenecks and applying the theory of constraints to improve capacity. (Page 1, 5)
Break-Even Analysis: Performing break-even analysis to determine the point at which total revenue equals total costs. (Page 1, 8)
Reducing Risk with Incremental Changes: Implementing incremental changes to reduce risk in capacity planning. (Page 1)
Learning Objectives
LO1: Define Capacity: Understanding the basic definition of capacity. (Page 2)
LO2: Determine Design Capacity, Effective Capacity, and Utilization: Calculating different types of capacity and utilization rates. (Page 2, 3)
LO3: Perform Bottleneck Analysis: Identifying and analyzing bottlenecks in a system. (Page 2, 5)
LO4: Compute Break-Even: Calculating the break-even point for a business operation. (Page 2, 8)
Capacity
Definition: The 'throughput' or number of units a facility can hold, receive, store, or produce in a period of time. (Page 2)
Importance: Capacity decisions determine capital requirements and a large portion of fixed costs. They also determine whether demand will be satisfied or whether facilities will be idle. (Page 2)
Consequences of Imbalance: (Page 2)
Too large a facility results in unused portions and added costs.
Too small a facility results in lost customers and markets.
Time Horizons for Capacity Planning (Figure S7.1)
Long-Range Capacity (Greater than 1 Year): (Page 2)
Function of adding facilities and equipment with long lead times.
Intermediate-Range Capacity (3 to 18 Months): (Page 2)
Adding equipment, personnel, and shifts.
Subcontracting.
Building or using inventory (aggregate planning task).
Short-Run Capacity (Up to 3 Months): (Page 2)
Scheduling jobs and people.
Allocating machinery.
Modifying capacity is difficult due to existing constraints.
Design and Effective Capacity
Design Capacity: The theoretical maximum output of a system in a given period under ideal conditions. (Page 2)
Expressed as a rate (e.g., tons of steel per week).
Effective Capacity: The capacity a firm expects to achieve given current operating constraints. (Page 3)
Often lower than design capacity due to facility design or different product mix.
Measures of System Performance
Utilization
Definition: Percentage of design capacity actually achieved. (Page 3)
Utilization = \frac{Actual \ output}{Design \ Capacity} (S7-1)
Efficiency
Definition: Percentage of effective capacity actually achieved. (Page 3)
Efficiency = \frac{Actual \ output}{Effective \ Capacity} (S7-2)
Factors Affecting Efficiency
Correcting quality problems.
Effective scheduling.
Training.
Maintenance.
Example S1: Determining Capacity, Utilization, and Efficiency (Sara James Bakery)
Scenario: Sara James Bakery wants to understand the capability of its plant for producing Deluxe breakfast rolls. (Page 3)
Given: (Page 3)
Actual output: 148,000 rolls per week.
Effective capacity: 175,000 rolls per week.
Production line operates 7 days per week, three 8-hour shifts per day.
Designed rate: 1,200 rolls per hour.
Calculations: (Page 3)
Design capacity = (7 \ days \times 3 \ shifts \times 8 \ hours) \times (1,200 \ rolls \ per \ hour) = 201,600 \ rolls
Utilization = \frac{148,000}{201,600} = 73.4\%
Efficiency = \frac{148,000}{175,000} = 84.6\%
Options for Adjusting Capacity (Figure S7.1)
Long-Range Planning
Add long lead time equipment. (Page 3)
Add facilities.
Intermediate-Range Planning (Aggregate Planning)
Subcontract. (Page 3)
Add equipment.
Add shifts.
Add personnel.
Build or use inventory.
Short-Range Planning (Scheduling)
Schedule jobs. (Page 3)
Schedule personnel.
Allocate machinery.
Capacity Definitions
Design Capacity: Maximum output under perfect conditions, not typically applied to daily production. (Page 4)
Effective Capacity: Considers long-term operation, staffing, maintenance, and planned stoppages like shift changeovers, lunch breaks, and setup times (also known as available capacity). (Page 4)
Actual Capacity: Same as effective capacity but includes unplanned losses like poor work rate, absenteeism, or new staff training. (Page 4)
Efficiency and Utilization Calculations
Efficiency: Output as a percentage of available capacity.
Efficiency = \frac{Actual \ Output}{Effective \ Capacity}
Objective: Minimizing unplanned losses for efficient asset utilization. (Page 4)
Managing Demand
Demand Management Approaches: Various strategies to align demand with capacity. (Page 5)
Appointment Systems: Used in doctors' and lawyers' offices.
Reservation Systems: Used in rental car agencies, hotels, and restaurants to minimize waiting time.
First-Come, First-Served: Used in retail shops, post offices, and fast-food restaurants.
Discounts: 'Early bird' specials, discounts for matinee performances, or cheap weekend phone calls.
Capacity Management: Managing capacity through changes in full-time, temporary, or part-time staff.
Bottleneck Analysis and the Theory of Constraints
Capacity Analysis
Determining the throughput capacity of workstations in a system and the capacity of the entire system. (Page 5)
Bottleneck
Definition: The limiting factor or constraint in a system; the operation with the lowest effective capacity. (Page 5)
Process Times for Stations, Systems, and Cycles
Process Time of a Station: Time to produce a given number of units at that workstation. (Page 5)
Process Time of a System: Time of the longest (slowest) process (the bottleneck). (Page 5)
Process Cycle Time: Time it takes for a unit of product to go through the entire empty system from start to finish. (Page 5)
Figure S7.4: Three-Station Assembly Line
Illustrates a flowchart with process station times of 2, 4, and 3 minutes. (Page 6)
The process time for the system is 4 minutes because station B is the bottleneck.
The process cycle time is 2 + 4 + 3 = 9 minutes. (Page 5)
Example S3: Capacity Analysis with Parallel Processes (Yazeed's Sandwich Shop)
Scenario: Yazeed's sandwich shop has two identical sandwich assembly lines. (Page 6)
Process: (Page 6)
Order taking: 30 seconds.
Bread retrieval: 15 seconds.
Filling addition: 20 seconds.
Toasting: 40 seconds.
Wrapping: 37.5 seconds.
Solution: (Page 6)
Process time of each assembly line: 40 seconds (toasting time).
Process time of combined assembly lines: 20 seconds per sandwich.
Bottleneck: Wrapping operation at 37.5 seconds.
System process time: 37.5 seconds.
Capacity: 96 sandwiches per hour.
Process cycle time: 142.5 seconds.
Insight: Adding n parallel operations reduces the process time of the combined operation by a factor of 1 \div n. (Page 6)
Example S4: Capacity Analysis with Simultaneous Processes (Dr. Omar's Dentistry Practice)
Scenario: Basic dental cleaning process. (Page 7)
Process: (Page 7)
Check-in: 2 minutes.
X-rays: 2 minutes.
X-ray development: 4 minutes.
Dentist examines X-rays: 5 minutes.
Hygienist cleans teeth: 24 minutes.
Dentist checkup: 8 minutes.
Check-out: 6 minutes.
Solution: (Page 7)
Bottleneck: Hygienist at 24 minutes per patient.
System capacity: 2.5 patients per hour.
Process cycle time: 46 minutes (longest path).
Insight: With simultaneous processing, the longest path determines the process cycle time; not all process times are simply added together. (Page 7)
Theory of Constraints (TOC)
Definition: A body of knowledge that deals with anything that limits an organization's ability to achieve its goals. (Page 7)
Constraints: Can be physical (e.g., process or personnel availability, raw materials) or nonphysical (e.g., procedures, morale, and training). (Page 7)
TOC Process (Five Steps): (Page 7)
Identify the constraints.
Develop a plan for overcoming the identified constraints.
Focus resources on accomplishing the plan.
Reduce the effects of the constraints by offloading work or expanding capability.
When one set of constraints is overcome, go back to Step 1 and identify new constraints.
Solved Problem S7.3 (T. Smunt Manufacturing Corp.)
Scenario: A manufacturing process with sawing, grinding, drilling, welding, and assembly operations. (Page 8)
Solution: (Page 8)
Bottleneck: Drilling (27 minutes).
System process time: 27 minutes per unit.
Process cycle time: 133 minutes.
Monthly capacity: 391.11 units per month.
Problems Examples
S7.1: Calculate utilization given designed and limited production. (Page 8)
S7.2: Calculate efficiency given effective capacity and actual production. (Page 8)
S7.3: Calculate actual output given effective capacity and efficiency. (Page 8)
S7.4: Calculate efficiency given effective capacity and actual production with product mix. (Page 8)
S7.5: Calculate effective capacity given material delays and plant efficiency. (Page 9)
S7.6: Determine process time, bottleneck time, process cycle time, and weekly capacity for a three-station work cell. (Page 9)
S7.7: Identify bottleneck, process time, process cycle time, and monthly capacity for a work cell with parallel operations. (Page 9)
Case Study: Capacity Planning at Arnold Palmer Hospital
Scenario: Arnold Palmer Hospital experiences growth in demand, leading to capacity expansion planning. (Page 9)