SOM Capacity lecture

Capacity in Operations

Definition of Capacity
- Capacity is the maximum production level a company can sustain to meet demand. It can be broken down into two types:
  - Design Capacity: Ideal production rate under normal conditions (e.g., 100 parts per hour = 800 parts per day).
  - Effective Capacity: Actual achievable production rate taking into account various operational realities (e.g., after breaks and setups, assessed at 650 parts per day).
Factors Affecting Capacity
- Equipment, workforce skills, processes, space, and interruptions (like breaks, maintenance, and meetings) play a vital role in determining effective capacity.

Design Capacity Calculation
- Calculated based on ideal conditions (e.g., production lines running at ideal speeds).
Effective Capacity Calculation:
- Takes operational constraints into consideration (e.g., actual working hours available minus all downtime factors).

Time Allocations
- Daily interruptions include:
  - Morning setups.
  - Breaks (e.g., coffee breaks, lunches).
  - Staff meetings (project updates, client meetings, etc.), which need to be averaged out to understand their impact on capacity.

Efficiency:
- Comparison of actual output to effective capacity:
  - Formula: Efficiency = Actual Output / Effective Capacity.
Utilization:
- Comparison of actual output to design capacity:
  - Formula: Utilization = Actual Output / Design Capacity.
Relationship: Efficiency is often higher than utilization due to the way these calculations are structured.

Managing Overcapacity:
- Solutions include:
  - Selling or renting excess equipment.
  - Adjusting production schedules.
  - Seeking more sales opportunities to utilize excess capacity.
Managing Undercapacity:
- Solutions include:
  - Hiring additional staff.
  - Collaborating with partners or subcontractors.
  - Adjusting shifts to maximize equipment utilization.

Leading: Adding capacity before demand exceeds supply.
Following: Adding capacity only as demand requires it.
Tracking: Incremental adjustments in capacity to match actual production needs closely.

Concept of Capacity Cushion:
- Companies usually operate below full capacity (80-85% of effective capacity) to allow for hiccups and unexpected demands while maintaining operational flexibility.

Definition: A bottleneck is a stage in a production process that slows down the overall operation due to an imbalance in capacity between stages.
Example: If one step in production is limited to producing 8 parts an hour while other steps can produce 10 parts, the slower step becomes a bottleneck affecting the entire production line.

Economies of Scale: Cost advantages gained when production becomes efficient as the number of goods being produced increases. Fixing costs are spread more thinly across larger volumes.
Diseconomies of Scale: Occurs when costs per unit increase as production scales, often due to increased complexity or inefficiencies in operations.

Continuous Improvement: Organizations should regularly assess their capacity utilization and efficiency metrics to implement improvements, ensure better workflow balance, and predict stakeholder needs proactively, helping in strategic planning.