Capacity Management in Industrial Engineering

7/30/2019 Capacity Management in Industrial Engineering

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CAPACITY PLANNING


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Strategic Capacity Planning

Capacity is the ability to hold, receive, store, or

accommodate raw materials, finished products,customers, etc.

Strategic capacity planning is an approach fordetermining the overall capacity level of capital intensive

resources, including facilities, equipment, and overalllabour force size.

Capacity used is the rate of output actually achieved.

The best operating level is nominally the capacity for

which the process was designed.Capacity Used

Capacity Utilization RateBest Operating Level


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Capacityplanning

Capacityis the maximum output rate of a production or servicefacility

Capacity planning is the process of establishing the output ratethat may be needed at a facility:

Capacity is usually purchased in chunks

Strategic issues: how much and when to spend capital for

additional facility & equipment

Tactical issues: workforce & inventory levels, & day-to-day use of

equipment


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MeasuringCapacity Examples

There is no one best way to measure capacity

Output measures like cars per day are easier to understand

With multiple products, inputs measures work better

Type of BusinessInput Measures of

Capacity

Output Measures

of Capacity

Car manufacturer Labor hours Cars per shift

Hospital Available beds Patients per month

Pizza parlor Labor hours Pizzas per day

Retail storeFloor space in

square feetRevenue per foot


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BestOperating Level

Example:

Engineers design engines and assembly lines to operate at anideal or best operating level to maximize output and minimize

wear.

Under-utilization

Best Operating Level

Average

unit cost

of output

Volume

Over-utilization


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Best Operating Level for a Hotel


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How Much Capacity Is Best?

The Best Operating Level is the output that results in the

lowest average unit cost

Economies of Scale:

Where the cost per unit of output drops as volume ofoutput increases

Spread the fixed costs of buildings & equipment overmultiple units, allow bulk purchasing & handling ofmaterial

Diseconomies of Scale:

Where the cost per unit rises as volume increases Often caused by congestion (overwhelmingthe

process with too much work-in-process) andscheduling complexity


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Economies of Scale

100-unit

plant

200-unit

plant 300-unit

plant

400-unit

plant

Volume

Average

unit costof output

Economies of scale and operating level curves

Diseconomiesof scale start to take effect


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Experience (Learning) Curves

As plants produce more products, they gain experience in

the best production methods and reduce their costs per unit.

Total accumulated production of units

Cost/price

per unit

Yesterday

Today

Tomorrow


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Economiesof Scale

it costs less per unit to produce high levels of output

fixed costs can be spread over a larger number of units production or operating costs do not increase linearly

with output levels

quantity discounts are available for material purchases

operating efficiency increases as workers gainexperience


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Diseconomies of Scale

Occur above a certain level of output Diseconomies of Distribution

Diseconomies of Bureaucracy

Diseconomies of Confusion

Diseconomies of Vulnerability


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CapacityDecisions (cont.)

Capacity increase depends on

volume and certainty of anticipated demand

strategic objectives costs of expansion and operation

Best operating level

% of capacity utilization that minimizes unit

costs Capacity cushion

% of capacity held in reserve for unexpectedoccurrences


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Diseconomies of Confusion


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Capacity Utilization

Example:

During one week of production, a plant produced 83units of a product. Its historic best utilization was 120

units per week. What is this plants capacity utilization

rate?

Capacity UsedCapacity Utilization RateBest Operating Level

83 /0.69 69%

120 /

units week

units week


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Capacity Planning

Three important considerations in capacity planning:

Maintaining system balance In the ideal case, the output of one stage is the exact input

requirements for the next stage.

Frequency of capacity additions

There are costs in adding capacity too frequently as well as too

infrequently. External sources of capacity

It might be cheaper to outsource some production.

Determining capacity requirements

Forecast sales (within each individual product line)

Calculate equipment and labour requirements to meet forecasts

Project equipment and labour availability


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MakingCapacity Planning Decisions

The three-step procedure for making capacity planning

decisions is as follows:

Step 1: Identify Capacity Requirements

Step 2: Develop Capacity Alternatives

Step 3: Evaluate Capacity Alternatives


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Capacity Requirements Example

A manufacturer produces mustard in small and family-

sized plastic bottles, with the following demand forecasts.

Three 100,000 units-per-year machines are available for small

bottle production. 2 operators are required per machine.

Two 120,000 units-per-year machines are available for family-

sized bottle production. 3 operators are required per machine.

How much capacity is used and what are the machine

and labour requirements?

Year 1 Year 2 Year 3 Year 4

Small (000's) 150 170 200 240

Family (000's) 115 140 170 200


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Capacity Requirements Example (2)

Machine capacity: 300 000 small, 240 000 family size

Labour availability: 6 for small, 6 for family size


Small (000's) 150 170 200 240

Family (000's) 115 140 170 200


Small (000's) 150 170 200 240

Family (000's)115 140 170 200

Small

% capacity used 50.00%

machines req'd 1.50

labour req'd 3.00

Family Size% capacity used

machines req'd

labour req'd

150 0000.50

300 000

150 0001.5

100 000 per machine

21.5 3.0

operatorsmachines

machine


Small (000's) 150 170 200 240

Family (000's)115 140 170 200

Small

% capacity used 50.00%

machines req'd 1.50

labour req'd 3.00

Family Size% capacity used 47.92%

machines req'd 0.96

labour req'd 2.88

115 0000.4792

240 000

115 0000.96

120 000 per machine

30.96 2.88operatorsmachinesmachine


Small (000's) 150 170 200 240

Family (000's)115 140 170 200

Small

% capacity used 50.00% 56.67% 66.67% 80.00%

machines req'd 1.50 1.70 2.00 2.40

labour req'd 3.00 3.40 4.00 4.80

Family Size% capacity used 47.92% 58.33% 70.83% 83.33%

machines req'd 0.96 1.17 1.42 4.25

labour req'd 2.88 3.50 4.25 5.00


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Decision Trees as an aid

A decision tree is a schematic model of the steps in the

capacity planning problem.

Steps:

1. Draw the various decisions

2. Add the possible states of nature, probabilities, andpayoffs

3. Determine the expected value of each decision

4. Make decision (the one with maximum expected

value)


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Decision Trees Example

A glass factory specializing in crystal experiences substantial

backlog, and management is considering three courses of action:

A. Arrange for subcontracting

B. Construct new facilities

C. Do nothing (no change)

The correct choice depends largely upon demand, which may be low,

medium, or high. By consensus, management estimates therespective demand probabilities as 0.1, 0.5, and 0.4.

The management also estimates the profits when choosing from the

three alternatives under the differing probable levels of demand.

These profits, are as follows:

Low (p=0.1) Medium (p-0.5) High (p=0.4)A 10 000 50 000 90 000

B -120 000 25 000 200 000

C 20 000 40 000 60 000


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Decision Trees Example (2)

Medium demand (0.5) 50k



A

B

C

Decisions: States, probabilities, and payoffs:

High demand (0.4) 90k

Low demand (0.1) 10k


Low demand (0.1) - 120k



Start


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Decision Trees Example (3)




A

B

C

Expected values of each decision:




Low demand (0.1) - 120k



0.4 90 0.5 50 0.1 10 $62kAEV

, ,A A i A i iEV P V

0.4 200 0.5 25 0.1 120 $80.5kBEV

0.4 60 0.5 40 0.1 20 $46kCEV

Choose decision B

(highest expected value)


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Capacity Information Needed

Design capacity: Maximum output rate under ideal conditions

A bakery can make 30 custom cakes per day when pushed atholiday time

Effective capacity: Maximum output rate under normal (realistic) conditions

On the average this bakery can make 20 custom cakes perday


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Implementing Capacity Decisions

Capacity flexibility Plant, process, workers, outsourcing

Amount of capacity cushion important in -to-order and services

Timing the capacity change Leading [proactive] Concurrent [neutral]

Lagging [reactive]

Size of the capacity increment


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Capacity Expansion Strategies


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Timing the Capacity Change


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Other Capacity Planning Concepts

The concept of the focused factory (also called capacity

focus) holds that production facilities work best whenthey focus on a fairly limited set of production objectives.

The plants within plants (PWP) concept extendscapacity focus ideas to an operational level.

Capacity flexibility allows rapid increase or decrease ofproduction levels, and can be achieved in three ways:

Flexible plants

Flexible processes

Flexible workers


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Other Issues

Focused factories:

Small, specialized facilities with limited objectives

Plant within a plant (PWP):

Segmenting larger operations into smaller operating

units with focused objectives

Subcontractor networks:

Outsource non-core items to free up capacity for

what you do well

Capacity cushions:

Plan to underutilize capacity to provide flexibility


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Service Capacity vs. Manufacturing Capacity

Capacity planning in services is different than in

manufacturing in three key ways: Time

Goods can not be stored for later use

Capacity must be available to provide a service

when it is needed Location

Service goods must be at the customer demand

point

Capacity must be located near the customer

Volatility of demand

Much greater in services than in manufacturing


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Capacity Decisions

Capacity

maximumcapability toproduce

ratedcapacity istheoretical

effectivecapacityincludesefficiencyand

utilization

Capacity utilization

percent of available time spend working

Capacity efficiency how well a machine or worker performs

compared to a standard output level

Capacity load

standard hours of work assigned to afacility

Capacity load percent ratio of load to capacity

Documents

Capacity Management in Industrial Engineering