quality management ch 6 SOM

Capacity Planning - Summary Notes

1. Introduction to Capacity Planning

• Definition: Capacity planning determines the maximum output a system can sustain over time.

• Objective: Ensure the organization has enough capacity to meet demand efficiently while minimizing costs.

• Key Considerations:

  • Balancing supply and demand.

  • Managing resource utilization.

  • Avoiding undercapacity (leading to lost sales) and overcapacity (leading to increased costs).

2. Measuring Capacity

Capacity can be measured using two approaches:

A) Output-based Capacity Measures

• Used when a company produces a single standardized product.

• Example:

  • A factory can produce 240 units per day.

  • A restaurant can serve 500 customers per hour.

B) Input-based Capacity Measures

• Used when multiple products share resources.

• Example:

  • Machine hours available.

  • Number of available seats in an airplane.

3. Types of Capacity Planning

Capacity planning is categorized based on time horizons:

A) Long-Term Capacity Planning (>1 year)

• Focus: Major strategic decisions related to facilities, workforce, and large equipment.

• Examples:

  • Expanding production facilities.

  • Investing in new technology.

  • Entering new markets.

B) Intermediate-Term Capacity Planning (6–18 months)

• Focus: Adjustments to workforce and equipment to align with market demand.

• Examples:

  • Hiring or laying off employees.

  • Introducing new machinery.

  • Subcontracting production.

C) Short-Term Capacity Planning (<1 month)

• Focus: Immediate adjustments to meet fluctuating demand.

• Examples:

  • Overtime work.

  • Employee transfers.

  • Temporary outsourcing.

4. Capacity Utilization and Cushion

A) Capacity Utilization

• Definition: Measures how much of the available capacity is being used.

• Formula: Capacity Utilization=(Actual OutputMaximum Capacity)×100\text{Capacity Utilization} = \left( \frac{\text{Actual Output}}{\text{Maximum Capacity}} \right) \times 100

• Example:

  • If a factory produces 80 units/day but has a capacity of 100 units/day: 80100×100=80%\frac{80}{100} \times 100 = 80\%

B) Capacity Cushion

• Definition: The extra capacity available to handle sudden demand increases.

• Formula: Capacity Cushion=100%−Capacity Utilization\text{Capacity Cushion} = 100\% - \text{Capacity Utilization}

• Example:

  • If a company operates at 80% utilization, the capacity cushion is 20%.

  • Helps in managing demand fluctuations and unexpected breakdowns.

5. Economies and Diseconomies of Scale

A) Economies of Scale (Cost Reduction as Output Increases)

• Definition: As production volume increases, the average cost per unit decreases.

• Reasons:

  • Fixed costs (e.g., rent, salaries) are spread over more units.

  • Bulk purchasing reduces material costs.

  • Operational efficiencies improve as processes optimize.

• Example:

  • Fixed costs per day = $100, variable cost per unit = $10.

  • Producing 20 units/day: Cost per unit = (100/20) + 10 = $15.

  • Producing 50 units/day: Cost per unit = (100/50) + 10 = $12.

B) Diseconomies of Scale (Increasing Costs Beyond Optimal Level)

• Definition: Beyond a certain output level, the cost per unit increases due to inefficiencies.

• Reasons:

  • Complexity in managing large operations.

  • Coordination issues across departments.

  • Reduced employee productivity due to congestion and overwork.

6. Systematic Approach to Capacity Planning

Step 1: Determine Capacity Requirements

• Forecast demand for each product or service.

• Convert forecasted demand into capacity requirements.

Step 2: Identify Capacity Gaps

• Compare current capacity vs. future demand.

• If demand exceeds capacity → Expand.

• If demand is lower than capacity → Reduce resources.

Step 3: Develop Alternative Plans

• Options for expanding capacity:

  • Increasing shifts.

  • Buying new machines.

  • Subcontracting work.

Step 4: Evaluate and Select the Best Plan

• Consider cost, feasibility, and long-term impact.

• Choose the most cost-effective and flexible solution.

7. Example of Capacity Requirement Calculation

A factory produces two products (A & B) using the same type of machines.

Step 1: Calculate Total Production Hours Required

(0.4×3000)+(0.8×5000)=5200 hours(0.4 \times 3000) + (0.8 \times 5000) = 5200 \text{ hours}

Step 2: Determine Machine Requirements

• Each machine operates 8 hours/day for 250 days/year.

• Total machine hours per year = 2000 hours/machine.

• Machines required: 52002000=2.6 (round up to 3 machines)\frac{5200}{2000} = 2.6 \text{ (round up to 3 machines)}

8. Decision Trees in Capacity Planning

Using a Decision Tree for Capacity Decisions

• Decision trees help evaluate different capacity options when demand is uncertain.

Example: Expanding a Glass Factory

Options:
(A) Subcontracting
(B) Build a new facility
(C) Do nothing

Demand Probability:

• Low (10%)

• Medium (50%)

• High (40%)

• Decision: Building a new facility (Option B) is the best choice based on highest expected value ($80.5K).