Course: MBASubject: Production & Operation

ManagementUnit:2.1

Capacity

Capacity

• Capacity is defined as the ability to achieve, store or produce.

• For an organization, capacity would be the ability of a given system to produce output within the specific time period.

• In operations, management capacity is referred as an amount of the input resources available to produce relative output over period of time.

• Capacity planning is essential to be determining optimum utilization of resource and plays an important role decision-making process, for example, extension of existing operations, modification to product lines, starting new products, etc.

• Strategic Capacity Planning:• A technique used to identify and measure overall capacity of

production is referred to as strategic capacity planning. Strategic capacity planning is utilized for capital intensive resource like plant, machinery, labor, etc.

• Strategic capacity planning is essential as it helps the organization in meeting the future requirements of the organization. Planning ensures that operating cost are maintained at a minimum possible level without affecting the quality. It ensures the organization remain competitive and can achieve the long-term growth plan.

Types of Capacity Planning

• Capacity planning based on the timeline is classified into three main categories:

• Long range

• Medium range

• Short range

Long term planning

• Long range capacity of an organization is dependent on various other capacities like design capacity, production capacity, sustainable capacity and effective capacity.

• Design capacity is the maximum output possible as indicated by equipment manufacturer under ideal working condition.

• Production capacity is the maximum output possible from equipment under normal working condition or day.

• Sustainable capacity is the maximum production level achievable in realistic work condition and considering normal machine breakdown, maintenance, etc.

• Effective capacity is the optimum production level under pre-defined job and work-schedules, normal machine breakdown, maintenance, etc.

• Medium Term Capacity: The strategic capacity planning undertaken by organization for 2 to 3 years of a time frame is referred to as medium term capacity planning.

• Short Term Capacity: The strategic planning undertaken by organization for a daily weekly or quarterly time frame is referred to as short term capacity planning.

Goal of Capacity Planning

• The ultimate goal of capacity planning is to meet the current and future level of the requirement at a minimal wastage.

• The three types of capacity planning based on goal are

• Lead capacity planning,

• Lag strategy planning

• Match strategy planning.

Factors Affecting Capacity Planning

• Effective capacity planning is dependent upon factors like

• production facility (layout, design, and location),

• product line or matrix,

• production technology,

• human capital (job design, compensation),

• operational structure (scheduling, quality assurance)

• external structure ( policy, safety regulations)

Forecasting v/s Capacity Planning

• There would be a scenario where capacity planning done on a basis of forecasting may not exactly match.

• For example, there could be a scenario where demand is more than production capacity;

• in this situation, a company needs to fulfill its requirement by buying from outside.

• If demand is equal to production capacity; • company is in a position to use its production capacity

to the fullest. • If the demand is less than the production capacity,

company can choose to reduce the production or share it output with other manufacturers.

Capacity Planning

• Capacity is the upper limit or ceiling on the load that an operating unit can handle.

• The basic questions in capacity handling are:

– What kind of capacity is needed?

– How much is needed?

– When is it needed?

• Impacts ability to meet future demands

• Affects operating costs

• Major determinant of initial costs

• Involves long-term commitment

• Affects competitiveness

• Affects ease of management

Importance of Capacity Decisions

Various Capacities

• Design capacity

– Maximum obtainable output

• Effective capacity, expected variations

– Maximum capacity subject to planned and expected variations such as maintenance, coffee breaks, scheduling conflicts.

• Actual output, unexpected variations and demand

– Rate of output actually achieved--cannot exceed effective capacity. It is subject to random disruptions: machine break down, absenteeism, material shortages and most importantly the demand.

Efficiency and Utilization

Actual outputEfficiency =

Effective capacity

Actual outputUtilization =

Design capacity

This definition of efficiency is not used very much. Utilization is more important.

Design capacity = 50 trucks/day availableEffective capacity = 40 trucks/day, because 20% of truck capacity

goes through planned maintenance Actual output = 36 trucks/day, 3 trucks delayed at maintenance, 1

had a flat tire

Efficiency/Utilization Examplefor a Trucking Company

%72/ 50

/ 36

%90/ 40

/ 36

dayunits

dayunits

CapacityDesign

OutputActualnUtilizatio

dayunits

dayunits

CapacityEffective

OutputActualEfficiency

Determinants of Effective Capacity/Output

• Facilities, layout

• Products or services, product mixes/setups

• Processes, quality

• Human considerations, motivation

• Operations, scheduling and synchronization problems

• Supply Chain factors, material shortages

• External forces, regulations

Caution: While discussing these the book considers effective capacity almost synonymous to output.

Some Possible Growth/Decline Patterns

Vo

lum

e

Vo

lum

e

Vo

lum

e

Vo

lum

e

0 0

0 0

Time Time

Time Time

Growth Decline

Cyclical Stable

Figure 5-1

Developing Capacity Alternatives

• Design flexibility into systems, – modular expansion

• Take a “big picture” approach to capacity changes,– hotel rooms, car parks, restaurant seats

• Differentiate new and mature products, – pay attention to the life cycle, demand variability vs.

discontinuation • Prepare to deal with capacity “chunks”,

– no machine comes in continuous capacities• Attempt to smooth out capacity requirements,

– complementary products, subcontracting• Identify the optimal operating level,

– facility size

Outsourcing: Make or Buy

• Outsourcing: Obtaining a good or service from an external provider

• Decide on outsourcing by considering

– Available capacity

– Expertise

– Quality considerations

– The nature of demand: Stability

– Cost

– Risk: Loss of control over operations with outsourcing; loss of know-how. Loss of revenue.

Evaluating Alternatives: Facility Size

Minimum

cost

Ave

rag

e c

os

t p

er

un

it

0Rate of output

Production units have an optimal rate of output for minimal cost.

Evaluating Alternatives: Facility Size

Minimum cost & optimal operating rate are

functions of size of production unit.A

ve

rag

e c

os

t p

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un

it

0

Smallplant Medium

plant Large

plant

Output rate

• Need to be near customers– Capacity and location are closely tied

• Inability to store services– Capacity must me matched with timing of demand

• Degree of volatility of demand– Peak demand periods

Planning Service Capacity

Example: Calculating Processing Requirements

ProductAnnual

Demand

Standardprocessing time

per unit (hr.)Processing time

needed (hr.)

#1

#2

#3

400

300

700

5.0

8.0

2.0

2,000

2,400

1,400 5,800

Cost-Volume Relationships

Am

ou

nt

($)

0Q (volume in units)

Fixed cost (FC)

Cost-Volume Relationships

Am

ou

nt

($)

Q (volume in units)0

Cost-Volume Relationships: Break-even analysis

Am

ou

nt

($)

Q (volume in units)

0 BEP units

FCvRQP )(cost) Fixed()Margin Toon Contributi)(Quantity(

Break-Even Problem with Multiple Fixed Costs

Quantity

Fixed costs and variable costs.

Thick lines are fixed costs.

1 machine

2 machines

3 machines

Break-Even Problem with Step Fixed Costs

Quantity

Step fixed costs and variable costs.

Break even

points.

TR

No break even points in this range

Lean and Mean Manufacturing

Lean has been defined in many different ways.

“A systematic approach to identifying and eliminating waste(non-value-added activities) through continuous improvement by flowing the product at the pull of the customer in pursuit of perfection.”

By The MEP Lean Network

History Timeline for Lean Manufacturing

Lean manufacturing is a philosophy

• In 1990 James Womack, Daniel T. Jones, and Daniel Roos wrote a book called “The Machine That Changed the World: The Story of Lean Production-- Toyota's Secret Weapon in the Global Car Wars That Is Now Revolutionizing World Industry”

• In this book, Womack introduced the Toyota Production System to American.

• What was new was a phrase–• "Lean Manufacturing."

How to Increase Profit?

Profit

Cost

Profit

Cost

Profit

Cost

Muda (Waste)

Taiichi Ohno (1912-1990), the Toyota executive who was the most ferocious foe of waste human history has produced, identified the first seven types of muda in manufacturing system:

• Storage• Transportation• Waiting• Motion• Process• Defects• Over-production

Muda is everywhere.

Lean Overview

Lean Manufacturing Tools

5S Value Stream Mapping Standardized Work Load Leveling Kaizen Kanban Visual Workplace Quick Changeover Andon Poka-yoke One-piece flow Cellular Manufacturing

Production Planning System (Push System)

Push System

Pull System

References

• Society of Manufacturing Engineers, Lean Manufacturing 2007, Supplement to Manufacturing Engineering, 2007.

• Society of Manufacturing Engineers, Lean Manufacturing 2008, Supplement to Manufacturing Engineering, 2008.

• Garrett Brown and Dara O’Rourke, “Lean ManufacturingComes to China: A Case Study of its Impact on Workplace Health and Safety,” International Journal of Occupational and Environmental Health (IJOEH), 13(3), JUL/SEP 2007.

• Challenges in Applying Lean Manufacturing in China, McKinsey Quarterly, 2006 Special Edition available at Jackson Library. Friday, October 12, 2007 | Posted by Simone Yu in International