apacity planning is the process of determining the production capacity needed by an organization to meet changing demands for its

products.[1] In the context of capacity planning, "capacity" is the maximum amount of work that an organization is capable of completing in a given period. The phrase is also used in business computing as a synonym for Capacity Management. A discrepancy between the capacity of an organization and the demands of its customers results in inefficiency, either in under-utilized resources or unfulfilled customers. The goal of capacity planning is to minimize this discrepancy. Demand for an organization's capacity varies based on changes in production output, such as increasing or decreasing the production quantity of an existing product, or producing new products. Better utilization of existing capacity can be accomplished through improvements in overall equipment effectiveness (OEE). Capacity can be increased through introducing new techniques, equipment and materials, increasing the number of workers or machines, increasing the number of shifts, or acquiring additional production facilities. Capacity is calculated: (number of machines or workers) (number of shifts) (utilization) (efficiency). The broad classes of capacity planning are lead strategy, lag strategy, and match strategy.

Lead strategy is adding capacity in anticipation of an increase in demand. Lead strategy is an aggressive strategy with the goal of luring customers away from the company's competitors. The possible disadvantage to this strategy is that it often results in excess inventory, which is costly and often wasteful. Lag strategy refers to adding capacity only after the organization is running at full capacity or beyond due to increase in demand (North Carolina State University, 2006). This is a more conservative strategy. It decreases the risk of waste, but it may result in the loss of possible customers. Match strategy is adding capacity in small amounts in response to changing demand in the market. This is a more moderate strategy.

In the context of systems engineering, capacity planning[2] is used during system design and system performance monitoring. Capacity planning is long-term decision that establishes a firms' overall level of resources. It extends over time horizon long enough to obtain resources. Capacity decisions affect the production lead time, customer responsiveness, operating cost and company ability to compete. Inadequate capacity planning can lead to the loss of the customer and business. Excess capacity can drain the company's resources and

prevent investments into more lucrative ventures. The question of when capacity should be increased and by how much are the critical decisions. Capacity Available or Required? From a scheduling perspective it is very easy to determine how much capacity (or time) will be required to manufacture a quantity of parts. Simply multiply the Standard Cycle Time by the Number of Parts and divide by the part or process OEE %. If production is scheduled to produce 500 pieces of product A on a machine having a cycle time of 30 seconds and the OEE for the process is 85%, then the time to produce the parts would be calculated as follows: (500 Parts X 30 Seconds) / 85% = 17647.1 seconds The OEE index makes it easy to determine whether we have ample capacity to run the required production. In this example 4.2 hours at standard versus 4.9 hours based on the OEE index. Repeating this process for all the parts that run through a given machine, it is possible to determine the total capacity required to run production. Capacity Available If you are considering new work for a piece of equipment or machinery, knowing how much capacity is available to run the work will eventually become part of the overall process. Typically, an annual forecast is used to determine how many hours per year are required. It is also possible that seasonal influences exist within your machine requirements, so perhaps a quarterly or even monthly capacity report is required. To calculate the total capacity available, we can use the formula from our earlier example and simply adjust or change the volume accordingly based on the period being considered. The available capacity is difference between the required capacity and planned operating capacity.

CAPACITY PLANNING
LEARNING OBJECTIVE:

Contents
Measures
Increasing Capacity The Waiting Line Problem Performance Measures Queuing Formulas

Back to Index

Planning Production With forecasts for demand completed organizations must plan production to meet demand. They must ensure that sufficient capacity is available to actually meet production targets. Capacity/production decisions occur at three main levels: Long term - major decisions related to capacity changes by adding or eliminating capacity in the form of capital assets - manufacturing plants, new technology implementation Medium term - facility capacity is generally fixed but capacity can be changed by adding labour, subcontracting and it can be allocated to different periods through the use of inventory and backorders. Short term - smaller capacity changes may be made through the use of overtime and subcontracting but much of the focus is on efficient use and allocation of capacity already set. Measures:
Output: Capacity to produce specific products or provide specific services.

the number of units output per period, the number of customers who could be served per time period more difficult to measure as the variety of products increases since they may have very different manufacturing or service times measuring capacity is relatively straightforward in product focused firms where they produce many of the same type of product

Input: The ability to accept new customer business

in process focus firms where every job require different resources and times this may be a more meaningful measure ie. a specialty engineering firm may be able to accept a certain number of new jobs per month it is very difficult to state this capacity exactly

Maximum Capacity - We must differentiate between what a system is designed to do, the design capacity, and what it can actually do over a sustained period, the effective capacity. Utilization = Average Output Rate 100 Maximum Capacity

There is a tradeoff between having enough capacity to meet customer needs and having too much capacity resulting in low utilization of resources. Queuing Theory helps managers make capacity decisions. Increasing Capacity Most production service systems involve a series of production steps, each with its own capacity characteristics. Some will be at maximum capacity and will be limiting the output of the entire system. These are the bottleneck operations.
Bottleneck - the operation with the lowest effective capacity.

To increase capacity of the system bottleneck capacity must be increased. To understand how to deal with bottle necks we must understand queues

THE WAITING LINE PROBLEM: The Theory of Queues

Waiting lines are caused by capacity limitations in a service or manufacturing organization. Unless capacity is unlimited there will be times when the service provider is occupied and new arrivals will have to wait for service.

Components of a Waiting Line System: Arrivals - Inputs to the queue

Characteristics - Size of Arrival Population - often taken as infinite Pattern of Arrivals - Poisson distribution with rate lambda (exponential

interarrival times)

Waiting Line - Customers waiting for service

Characteristics - Line length - finite/infinite Queue discipline (priority) - rule used to determine who receives service next.

Service Facility - Service configuration - number of servers

number of steps in service single phase - multiple phases service time distribution - Exponential service time with mean =

Performance Measures for a Waiting Line System 1. 2. 3. 4. 5.

Average time in the queue for each customer, Average queue length, Average time in the system for each customer, Average number of customers in the system, Average server utilization, etc.

QUEUING FORMULAS
Waiting Line System:

Single server queue with Poisson arrivals, exponential service times and a FIFO priority (first-in, first-out). Queue length is infinite and customer population is infinite. All customers wait for service - no balking (leaving if the line is too long) Mean number of arrivals per period

- mean number served per period

Performance Measures for a Single-Server Model with Infinite Queue:

p = average utilization of the system = lambda/ L = average number of customers in the queuing system = lambda/(-lambda) Lq = average number of customers in the queue = L * p W = average time in the system = 1/(-lambda) Wq = average waiting time in the queue = W * p

example: Suppose customers to a bank arrive at a rate of 150/hour over the lunch hour. To make sure that their average waiting time is 5 minutes or less, how many tellers must be available. What is the average utilization in this situation?

Modeling more complex systems - Requires simulation software of some sort. These

allow managers to test the effect of process changes in the system inexpensively and quickly. Your text came with EXTEND simulation software that can perform complex simulations of production and service facilities. Back to Index
2.4.6. Determinants Of Capacity
Critical elements of most capacity plans include:

Set time and resource allocation to meet demand; Set strategies for meeting new requirements (new demand, competition, time changes for projects, etc.); and

Determine the cost of non-conformance to the plan (waste, time slippage, costs, variance in quality, etc.).

Table 4 Determinants of Effective Capacity

Factors Facilities Design Location Design Quantity capabilities Job content Job design Training and experience Motivation Scheduling Materials Management

Issues Layout

Product/Service Process Human Factors

Product or service mix Quality capabilities Compensation Learning rates Absenteeism and labour turnover Knowledge Quality Assurance Equipment breakdowns Pollution and environmental standards Stability of society/ government

Operational

External Factors Product standards Safety regulations Unions

2.4.1. Planning Capacity

Capacity Planning involves the long and short term planning of the systems potential for transforming resources into outputs demanded by customers within a set time period. The core questions capacity planning must resolve are:

What kind of capacity is required? How much capacity is required? When is the capacity required?

At each level of analysis the manager(s) must also review the feasibility of achieving the requirements and the ability to optimise existing organisational resource use. Note: Answers for the above Activity are A, C, B, B, A, B) Traditionally current capacity was determined by a simple formula identifying the average utilisation rate. Average Utilisation Rate (AUR) or the extent to which technology, space, or labour is being utilised) was derived from dividing average output rate by capacity.

2.4.2. Measuring Capacity

Measures of capacity will vary with the type of organisation. Table 3 Measures of Capacity

Type of Organisation Resource Inputs Truck Manufacturer Hospital Airline Retailer Theatre Car Manufacturer Steel Mill Restaurant Supermarket Farm Oil Refinery
Activity 4

Outputs Number of trucks per shift Number of patients treated per day Seat-miles flown per week Sales dollars per year Number of customers per week Number of cars produced per shift Tons of steel per week Customer served per day

Machine hours per shift Number of beds Number of planes Size of display area Number of seats Labour hours Size of furnace Number of seats

Number of checkout registers Items sold per day Number of cows per hectare Size of refinery Litres of milk per year Litres of fuel produced per day

(Table modified from Krajewski and Ritzman 1992:298 and Stevenson 1993:243)

For the first three types of organisations below provide some alternative Measures of Capacity that differ from those listed in the above table. For the last four types of organisations below provide some new Measures of Capacity. Measures of Capacity

Type of Organisation Car Manufacturer Dairy Farm Steel Mill Chemist/Pharmacist Bank (Online) Call centre General Practice clinic

Resource Inputs Outputs

If you have trouble refer to the chart on the previous page. The outputs should especially be something that would be measurable and identifiable.

2.4.3. Matching Operations Plans With Capacity

When planning operations ideally the organisation would like to have Capacity = Average Utilisation Rate However, where the amount by which the average utilisation rate falls below 100 percent is actually called the capacity cushion . In excess capacity may exist.

Capacity = 100 - Average Utilisation Rate However, where the amount by which the average utilisation rate rises above 100 percent a capacity deficiency , or too little capacity may exist. The overall efficiency of capacity planning may be set by determining the ratio of actual output to effective capacity. Efficiency = Actual Output / Effective Capacity Effective Capacity the maximum possible output given the product mix, scheduling difficulties, machine maintenance quality factors and so on (Stevenson 1993:242). Actual Output is the rate of output actually achieved. It cannot exceed effective capacity and is often less that effective capacity due to breakdowns, defective output, shortages of materials, and similar factors (Stevenson 1993:242). In simple terms Average Utilisation Rate can be now focussed down to determine utilisation as a ratio of actual output to design capacity. Utilisation = Actual Output / Design Capacity Designed Capacity the maximum output that can be attained (Stevenson 1993:242). For business, irrespective of size or goods and services, the aim is generally to ensure efficiency. Efficiency may exist in the operations but capacity planning suggests optimal long term output needs to be achieved. This is where planned capacity and allocation of resources matches needs. If it is too little, output targets cannot be reached and if it is too much, the cost of excess capacity detracts from operational efficiencies.

2.4.4. Capacity Analysis And Economies Of Scale

This analysis impacts two other terms you may encounter:

Economies of scale where total operating costs increase at a rate slower that the rate of increase in production volume; and Diseconomies of scale where total operating costs increase faster than does the rate of increase in production volume.

In effect efficiency of operations occurs where costs are controlled and fall within planned rates of increase in production volume.

Activity 5

1. Given the information below compute the efficiency and the utilisation of a restaurant: Design Capacity = 90 seats Effective Capacity = 70 Seats per day Actual Output = 68 Seats per day Work the Solution out below: Efficiency = Utilisation = 2. If you were managing this restaurant what sort of response can you make with such information? 3. Work through this exercise with care. Should you have any difficulties completing this exercise contact your facilitator. o Too little capacity may result in: Customers waiting Overwork Overtime Variable quality Inability to meet deadlines Continuing decrease in competence of staff (insufficient ability to set time aside to train staff) o Too much capacity may result in: Under utilised resources Additional costs (passed into per item costs) Empty buildings

Activity 6

Poor return on investment Payment for employment of people with knowledge that is not harnessed

Think of an organisation - one you may work for or an example picked randomly. Consider what may result from: Too little capacity Too much capacity

2.4.5. Capacity And Performance Effectiveness

While capacity planning varies with an organisation's two basic human resource strategies are discussed below to illustrate how resource management and capacity planning intersect. Performance effectiveness in any organisation requires not just capacity but also the availability of the skills and knowledge necessary to perform to optimal levels. The availability of competent labour can be used as a useful example of capacity planning. Chase Demand hire when demand is good, lay off when demand is poor.

Figure 2 Chase Demand Level Capacity try to retain people through thick and thin.

Figure 3 Level Capacity

Activity 7

Which strategy would be best for these two organisations facing fluctuating demand for their services or products that in turn impact labour requirements? Give two reasons to support your choice. 1. An organisation with specialist nursing expertise providing home care to HIV/AIDS patients. Circle Your Choice Chase Demand or Level Capacity Why? 2. A call centre completing telemarketing (promoting a product over the 'phone). Circle Your Choice Chase Demand orLevel Capacity

Why?