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Capacity Planning Overview

This section provides an in-depth analysis of capacity planning as part of operations management, covering definitions, strategies, effects on supply chain management, and methods for measuring and improving capacity.

1. Definitions

  • Capacity: The maximum rate of output of a process or a system. It is crucial for managers to ensure the firm has sufficient capacity to meet current and future demands.

2. Capacity Management

  • Capacity management is not just about modifying capacity; it's ensuring the entire supply chain, from order entry to delivery, is designed effectively.

  • Key considerations for capacity decisions:

    • Economies or diseconomies of scale

    • Capacity cushions

    • Timing and sizing strategies

    • Trade-offs between customer service and capacity utilization

  • Long-term decisions will be discussed throughout the chapter, with short-term decisions covered in the subsequent chapter.

3. Long-Term Capacity Planning

  • Focuses on investment in new facilities and equipment, with plans typically looking at least two years ahead.

  • Managers must consider:

    • Required cushion to manage unpredictable demand

    • Timing for capacity expansion (whether to expand ahead of or in response to demand)

4. Measures of Capacity and Utilization

  • Output Measures of Capacity: Best applied to individual processes, such as the number of cars manufactured per day.

  • Input Measures of Capacity: Useful in low-volume, flexible processes like a furniture manufacturer assessing worker hours as capacity.

  • Utilization: The extent to which resources are being used, calculated by:

    utilization= average output rate/ maximum capacity *100%

  • Methods to raise capacity include overtime, increased shifts, reduced maintenance, overstaffing, and outsourcing.

5. Economies of Scale

  • Economies of Scale: Occur when increasing output leads to a decrease in average unit costs.

  • Reasons for Economies of Scale:

    • Spreading fixed costs over a larger output reduces average costs.

    • Construction costs do not double with the doubling of facility size; fixed costs associated with permits and design remain constant.

    • Increased purchase power lowers raw material costs due to bulk buying.

    • Higher production rates allow for more efficient processes, reducing transition times and improving overall productivity.

6. Diseconomies of Scale

  • Diseconomies of Scale: A phenomenon where average unit costs increase as production scales up, often due to inefficiencies and complexity.

  • Potential causes include organizational bureaucracy, loss of managerial oversight, reduced agility, and higher operational costs.

7. Capacity Timing and Sizing Strategies

  • Three dimensions should be considered:

    • Sizing Capacity Cushions

    • Timing and Sizing Expansion

    • Linking Process Capacity with Other Decisions

7.1 Sizing Capacity Cushions

  • Capacity Cushions: The reserve capacity a process has to accommodate unexpected demand spikes or production losses.

    • Formula:
      ext{Capacity Cushion} = 100 ext{ ext{%}} - ext{Average Utilization Rate ( ext{percent})}

    • Average utilization rates should ideally remain below 100% to signal the need for capacity adjustments.

7.2 Factors Influencing Capacity Cushions

  • Large Capacity Cushions:

    • Unpredictable demand

    • High customer service expectations

    • Large increments in capacity addition

    • Uncertain availability of materials or workforce

  • Small Capacity Cushions:

    • Excess capacity leads to unnecessary costs.

    • Unused capacity can expose inefficiencies.

    • Availability of subcontractors during peak demand enables smaller cushions.

7.3 Capacity Timing Strategies

  • Expansionist Strategy: Increase capacity in anticipation of demand increases, allowing for economies of scale.

  • Wait-and-See Strategy: Adaptation to demand using short-term options and maintaining lower financial risk but risking market share.

  • Middle Ground Strategy: More frequent, small-scale expansions rather than waiting for demand surges or overextending capacity, balancing risk and flexibility.

  • Following the Leader: Expanding when competitors do to share the benefits and costs of expanded capacity.

8. Linking Capacity Decisions to Other Operations

  • Capacity decisions should not be made in isolation; they must consider process design, resource flexibility, inventory strategies, and the overall implications of capacity decisions on the organization.

9. Systematic Approach to Long-Term Capacity Decisions

  1. Estimate future capacity requirements.

  2. Identify gaps between current capability and future needs.

  3. Develop alternative plans to close these gaps.

  4. Evaluate alternatives qualitatively and quantitatively.

10. Estimating Capacity Requirements

10.1 Basic Formula

  • For a service/product with a one-year period: M = rac{D_p}{N imes (1 - rac{C}{100})}

    • Where:

    • D = demand forecast (units)

    • p = processing time (in hours)

    • N = operating hours available annually

    • C = desired capacity cushion (percent)

10.2 Example of Capacity Requirement Calculation

  • Given demand forecasts and time standards for client projects, the total capacity requirement can be calculated, considering processing time, setup time, and lot sizes.

    • Formula for multiple products:
      M = rac{ ext{Total Requirements across products}}{N imes (1 - rac{C}{100})}

11. Application Problem: Surefoot Sandal Company

  • Given three product types: men's, women's, and children's sandals, managers must calculate capacity needs based on time standards and demand forecasts to determine machine requirements and capacity gaps using a systematic approach.

12. Steps for Calculating Capacity Needs

  1. Determine the total hours required for each product, including process and setup times.

  2. Calculate total machine hours available and required based on cycle times and lot sizes.