Operations management 12th stevenson ch05 strategic capacity planning for products and services

Chapter 5
Strategic
Capacity
Planning for
Products and
Services

McGraw-Hill/Irwin

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.


Learning Objective: Chapter 5
You should be able to:
1. Summarize the importance of capacity
2.
3.
4.
5.

planning
Discuss ways of defining and measuring
capacity
Describe the determinants of effective
capacity
Discuss the major considerations related to
developing capacity alternatives
Briefly describe approaches that are useful for
evaluating capacity alternatives

Instructor Slides

5-2


Capacity Planning
Capacity
 The upper limit or ceiling on the load that an

operating unit can handle
 Capacity needs include
Equipment
Space
Employee skills

Instructor Slides

5-3


Strategic Capacity Planning
Goal
 To achieve a match between the long-term

supply capabilities of an organization and the
predicted level of long-term demand
Overcapacity operating costs that are too high
Undercapacity strained resources and possible loss

of customers

Instructor Slides

5-4


Capacity Planning Questions
 Key Questions:
 What kind of capacity is needed?
 How much is needed to match demand?
 When is it needed?
 Related Questions:
 How much will it cost?
 What are the potential benefits and risks?
 Are there sustainability issues?
 Should capacity be changed all at once, or through
several smaller changes
 Can the supply chain handle the necessary changes?

Instructor Slides

5-5


Production Capacity Planning
Labor
Capacity

Equipment
Capacity

Packaging
Capacity

Material
Receiving
Capacity

Production
Capacity

Equipment
Maintenance
Capacity

Facility
Capacity

Inventory
Storage
Capacity

Sales Force
Capacity


Measures of Capacity


We measure the capacity of a plant,
machine department, worker,

hospital, etc., either





in terms of output (number of units or
number of pounds manufactured) or
in terms of input (e.g. number of machine
hours, machines, labor hours, …).

A major function of capacity planning
is to match the capacity of the
machine or facility with the demand
for the products of the firm.


Capacity Planning Horizons


Capacity planning can be classified into
three planning horizons:
 Long range planning horizons of one year or
longer to provide sufficient time to build a
new facility, to expand the existing facility or
to move to a new facility due to expected
changes in demand.
 Medium range planning horizon ranges
approximately from one month and less than
a year. At this level of planning, decisions or

activities include acquisition of a major piece
of machinery and subcontracting.
 Short range planning horizon covers capacity
planning activities on a daily or a weekly
basis and are generated as a result of
disaggregation of the long or medium range
capacity plans. These activities include
machine loading and detailed production


Capacity Planning
Output rate is uncertain because:
 Employee absences
 Equipment breakdown
 Vacations
 Material delivery delays and shortages
 Quality problems and rework


Capacity Decisions Are Strategic
 Capacity decisions
1. impact the ability of the organization to meet future
demands
2. affect operating costs
3. are a major determinant of initial cost
4. often involve long-term commitment of resources
5. can affect competitiveness
6. affect the ease of management
7. have become more important and complex due to
globalization

8. need to be planned for in advance due to their
consumption of financial and other resources

Instructor Slides

5-10


Capacity
Design capacity


Maximum output rate or service capacity an operation,
process, or facility is designed for

Effective capacity


Design capacity minus allowances such as personal time,
maintenance, and scrap

Actual output


Rate of output actually achieved--cannot
exceed effective capacity.

Instructor Slides

5-11

Defining and Measuring Capacity
 Measure capacity in units that do not

require updating
 Why is measuring capacity in dollars problematic?

 Two useful definitions of capacity
 Design capacity
 The maximum output rate or service capacity an
operation, process, or facility is designed for
 Effective capacity
 Design capacity minus allowances such as personal
time and maintenance

Instructor Slides

5-12


Measuring System Effectiveness
Actual output
 The rate of output actually achieved
 It cannot exceed effective capacity

Efficiency

Utilization

actual output
Efficiency 
effective capacity
actual output
Utilization 
designcapacity
Measured as percentages

Instructor Slides

5-13


Example– Efficiency and Utilization
Design Capacity = 50 trucks per day
Effective Capacity = 40 trucks per day
Actual Output = 36 trucks per day

actual output
36
Efficiency 
 90%
effective capacity 40
actual output
36
Utilization 
 72%
designcapacity 50
Instructor Slides

5-14


Determinants of Effective Capacity
Facilities
Product and service factors
Process factors
Human factors
Policy factors
Operational factors
Supply chain factors
External factors

Instructor Slides

5-15


Capacity Strategies
 Leading
 Build capacity in anticipation of future demand increases

 Following
 Build capacity when demand exceeds current capacity

 Tracking
 Similar to the following strategy, but adds capacity in

relatively small increments to keep pace with increasing
demand

Strategy Formulation
Strategies are typically based on

assumptions and predictions about:
 Long-term demand patterns
 Technological change
 Competitor behavior

Instructor Slides

5-17


Capacity Cushion
Capacity Cushion
 Extra capacity used to offset demand

uncertainty
 Capacity cushion = 100% - Utilization
 Capacity cushion strategy
Organizations that have greater demand

uncertainty typically have greater capacity cushion
Organizations that have standard products and
services generally have greater capacity cushion

Instructor Slides

5-18


Steps in Capacity Planning
1.

Estimate future capacity requirements

2.

Evaluate existing capacity and facilities; identify gaps

3.

Identify alternatives for meeting requirements

4.

Conduct financial analyses

5.

Assess key qualitative issues

6.

Select the best alternative for the long term

7.

Implement alternative chosen

8.

Monitor results

Instructor Slides

5-19


Forecasting Capacity Requirements
Long-term considerations relate to overall

level of capacity requirements
 Require forecasting demand over a time horizon

and converting those needs into capacity
requirements
Short-term considerations relate to probable

variations in capacity requirements
 Less concerned with cycles and trends than

with seasonal variations and other variations
from average

Instructor Slides

5-20

Calculating Processing
Requirements
Calculating processing requirements requires

reasonably accurate demand forecasts,
standard processing times, and available work
time k

pD
i

N R  i 1

i

T

where
N R number of required machines
pi standard processingtime for product i
Di demand for product i during the planning horizon
T processingtime available during the planning horizon
Instructor Slides

5-21


Calculating Processing Requirements

Standard
processing time
per unit (hr.)

Product

Annual
Demand

Processing time
needed (hr.)

#1

400

5.0

2,000

#2

300

8.0

2,400

#3

700

2.0

1,400
5,800

If annual capacity is 2000 hours, then we need three machines to handle the
required volume: 5,800 hours/2,000 hours = 2.90 machines
5-22


Calculating Processing
Requirements
If a department works one eight hour

shift, 250 days per year how many
machines are needed?
(5,800)/(8 X 250) = 2.9 or 3 machines


Service Capacity Planning
Service capacity planning can present a

number of challenges related to:
 The need to be near customers
Convenience
 The inability to store services
Cannot store services for consumption later
 The degree of demand volatility

Volume and timing of demand
Time required to service individual customers

Instructor Slides

5-24


Demand Management Strategies
Strategies used to offset capacity limitations

and that are intended to achieve a closer
match between supply and demand
 Pricing
 Promotions
 Discounts
 Other tactics to shift demand from peak

periods into slow periods

Instructor Slides

5-25