Capacity Planning

Planning Capacity
• Capacity is the maximum rate of output of a
process or system
• Capacity decisions are very crucial for long term
growth and success of a firm
• Capacity planning is done in the long-term and
the short-term
 Planning Capacity
• Questions involve the amount of capacity
cushion and expansion strategies
• Finance, marketing, operations, purchasing,
and human resources all need capacity
information to make decisions
Long term (Strategic level)
 At least 2 years ex new plants and equipment
 Top management involvement

Short term (Operational level)

 Use short term options ex: workforce, OT,
extra inventory
 Operational or middle management
involvement
Finance : Performs the financial analysis of proposed
capacity expansion investments and raises funds to support
them
Marketing : Provides demand Forecast required to identify
capacity gaps
MIS : Designs the electronic infrastructure that is required to
make data such as cost information, financial performance,
measures, demand forecasts, and work standards available
to those needing it to analyze capacity options
Operations : Is involved in the selection of capacity
strategies that can be implemented to effectively meet future
requirements.
Purchasing : Facilitates acquisition of outside capacity from
suppliers
 Bottleneck Operation
Bottleneck

Operation 1 Operation 2 Operation 3

10/hr.
20/hr. 10/hr. 20/hr.

Maximum output rate

limited by bottleneck

Bottleneck is an operation that has the lowest capacity of

any operation and thus limits the system’s output
5-6
Capacity measurement can be done in 2 ways
1. Use output measures (such as number of units per
day) when
 High volume less flexible process (the output has
fewer varieties)
 Firms provide small number of products and services
Ex: a particular manufacturing firm producing products

2. Use input measures (such as meat used, electricity)

when
 Low volume very flexible process (Output has
several Varieties)
Ex : Input measures : High end restaurant
Measures of Capacity Utilization
• Output measures of capacity
• Input measures of capacity
• Utilization
Average output rate
Utilization =  100%
Maximum capacity

Average hours worked

Utilization =  100%
Hours available
 Capacity and Scale

250-bed 750-bed
hospital hospital
500-bed
(dollars per patient)
Average unit cost

hospital

Economies Diseconomies
of scale of scale

Output rate (patients per week)

  Complexity
 Spreading fixed costs
 Reducing construction cost  Loss of focus
 Finding process advantages
 Inefficiencies

250-bed 750-bed
hospital hospital
500-bed
(dollars per patient)
Average unit cost

hospital

Economies Diseconomies
of scale of scale

Output rate (patients per week)

Capacity Timing and Sizing

Planned unused Forecast of

capacity capacity required
Capacity

Capacity
increment

Time between
increments

Time

(a) Expansionist strategy

 Capacity Timing and Sizing

Planned use of Forecast of capacity

short-term options required
Capacity

Capacity
increment
Time between
increments

Time

(b) Wait-and-see strategy

Two Capacity Strategies

 Capacity Cushions

Capacity cushions are the amount of reserve capacity a

process uses to handle sudden changes

Examples of capacity cushion can be safety stock, for

service organisation it could be extra people
 Systematic Approach
• For one service or product processed at one
operation with a one year time period, the capacity
requirement, M, is
Capacity Processing hours required for year’s demand
requirement =
Hours available from a single capacity unit (such
as an employee or machine) per year, after
deducting desired cushion
Dp
M=
N[1 – (C/100)]
where
D =demand forecast for the year (number of customers serviced
or units of product)
p =processing time (in hours per customer served or unit
produced)
N =total number of hours per year during which the process
operates
C =desired capacity cushion (expressed as a percent)
 Systematic Approach
• Setup times may be required if multiple
products are produced
Processing and setup hours required for year’s
demand, summed over all services
Capacity or products
requirement = Hours available from a single capacity unit per
year, after deducting desired cushion

[Dp + (D/Q)s]product 1 + [Dp + (D/Q)s]product 1 + … +

[Dp + (D/Q)s]product n
M=
N[1 – (C/100)]
where
Q =number of units in each lot
s =setup time (in hours) per lot
Estimating Capacity Requirements
EXAMPLE A copy center in an office building prepares bound
reports for two clients. The center makes multiple copies (the lot
size) of each report. The processing time to run, collate, and bind
each copy depends on, among other factors, the number of pages.
The center operates 250 days per year, with one 8-hour shift.
Management believes that a capacity cushion of 15 percent (beyond
the allowance built into time standards) is best. It currently has
three copy machines. Based on the following table of information,
determine how many machines are needed at the copy center.

Item Client X Client Y

Annual demand forecast (copies) 2,000 6,000
Standard processing time (hour/copy) 0.5 0.7
Average lot size (copies per report) 20 30
Standard setup time (hours) 0.25 0.40
Estimating Capacity Requirements
SOLUTION

[Dp + (D/Q)s]product 1 + [Dp + (D/Q)s]product 1 + … + [Dp +

M= (D/Q)s]product n
N[1 – (C/100)]

[2,000(0.5) + (2,000/20)(0.25)]+client
[6,000(0.7)
X + (6,000/30)(0.40)]client Y
=
[(250 day/year)(1 shift/day)(8 hours/shift)][1.0 - (15/100)]

5,305
= = 3.12
1,700

Rounding up to the next integer gives a requirement

of four machines.
 Another EX
You have been asked to put together a capacity plan for a critical
operation at the Surefoot Sandal Company. Your capacity measure is
number of machines. Three products (men’s, women’s, and children’s
sandals) are manufactured. The time standards (processing and setup), lot
sizes, and demand forecasts are given in the following table. The firm
operates two 8-hour shifts, 5 days per week, 50 weeks per year.
Experience shows that a capacity cushion of 5 percent is sufficient.

Time Standards
Processing Setup Lot size Demand Forecast
Product
(hr/pair) (hr/pair) (pairs/lot) (pairs/yr)
Men’s sandals 0.05 0.5 240 80,000
Women’s sandals 0.10 2.2 180 60,000
Children’s sandals 0.02 3.8 360 120,000

a. How many machines are needed?

b. If the operation currently has two machines, what is the
capacity gap?
SOLUTION
a. The number of hours of operation per year, N, is N = (2 shifts/day)(8
hours/shifts) (250 days/machine-year) = 4,000 hours/machine-year
The number of machines required, M, is the sum of machine-hour
requirements for all three products divided by the number of
productive hours available for one machine:

[Dp + (D/Q)s]men + [Dp + (D/Q)s]women + [Dp + (D/Q)s]children

M=
N[1 - (C/100)]
[80,000(0.05) + (80,000/240)0.5] + [60,000(0.10) + (60,000/180)2.2]
+ [120,000(0.02) + (120,000/360)3.8]
=
4,000[1 - (5/100)]

14,567 hours/year
= = 3.83 or 4 machines
3,800 hours/machine-year
 A. Problem Qn 2
UP, Up and away is a producer of kites and wind socks. Relevant data rela
operation in a shop for the upcoming fiscal year are given in the following

Items Kites Wind Socks

Demand Forecast 30,000 units / 12,000 units /

year year

Lot Size 20 Units 70 Units

Standard .3 hour / unit 1 hour / unit

Processing time

Standard Set up 3.0 hours / lot 4.0 hours / lot

time
The shop works 2 shifts per day, 8 hours per shift, 200 days per
year. Currently the company operates four machines, and
desires a 25% capacity cushion. How many machines should be
purchased to meet the upcoming year’s demand without
resorting to any short term capacity solutions
Up, Up and Away
The number of hours provided per machine is:

N  2 shifts/day  8 hours/shift  200 days/year   3, 200.H  3, 200 1  0.25

 2, 400 hours/machine

Summing up the machine hour requirements for two products,

we get:

M  30,000 0.30   30,000 20 3  12,000 1.0   12,000 70  4 

 26,186 hours
The capacity requirement is:
M  R H  26,186 2,400  10.91 or 11 machines