Capacity Planning &amp Management

CAPACITY PLANNING AND
MANAGEMENT
25 January 2010 Group-3 Capacity Planning Sec: A 1

CONTENTS
 Meaning and Definition of Capacity
Planning
 Needs of Capacity planning
 Types of Capacity
 Break Even Analysis
 Role of forecasting in Capacity
planning
 Decision Analysis Tree
 Capacity Expansion Strategies
 Case Study
 Conclusions

CAPACITY
 “Capacity" is the maximum amount of work
that an organization is capable of
completing in a given period of time.

BASIC QUESTIONS
 The basic questions in capacity handling
are:
 Whatkind of capacity is needed?
 How much is needed?
 When is it needed?

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.

Example
• If a machine can run 200hrs in a month & 2000
washers per hour are made, then the capacity of
machine can be expressed 4lakhs washers per
month.
Classical formula
C = T * E * U where,
C = actual measured capacity (in standard hours)
T = real time available
E = efficiency
U = utilisation

CAPACITY PLANNING
 Capacity planning is the process of
determining the production capacity
needed by an organization to meet
changing demands for its products
.

NEED OF CAPACITY
PLANNING
 To keep low production cost
 To minimize loadings
 To meet expected demand
 Optimum utilization of resources
 To manage change in production
 To avoid loss of productivity

Measurement of capacity
 Capacity can be measured in terms of
output or input of the conversion
process. Organisation of Measures
capacity
Automobile industry No. of vehicles
Steel mill No. of tonnes of steel
Hospital No. of beds

CLASSES OF CAPACITY
PLANNING
 Lead strategy
 Lag strategy
 Match strategy

Types Of Capacity
There are three types of capacity:
1.Design Capacity:
Maximum rate at which a process can operate
on continuous basis under ideal condition.
This is the capacity designed for the
facility.It depends upon the number of
machines and equipment, coupled with
labor. It represents the maximum rate of
output that can be achieved under ideal
conditions.

2. Effective Capacity:
The production rate which can be achieved under

normal conditions taking into a/c product mix,
scheduling methods, breakdowns, minor power
failures, employee trg, rest pauses etc.

Proper process quality control so that there
are lesser defective items requiring rework.
Good training.high
Proper facility motivation,less
location, layout & absenteeism &
internal working Ways turnover on the part of
condition of workers.
increas
ing
Making products & effectiv Good coordination
services as uniform e with suppliers for
as possible in capacit timely & defects free
design so that the y supplies,& proper
no. of set-ups scheduling of
required are less. products on
machines.
Properly following the environmental &
pollution norms.
25 January 2010 13
Group-3 Capacity Planning Sec: A
ACTUAL CAPACITY
This is maximum output rate which is actually

achieve under the constraints of machine
breakdowns, labor inefficiencies & absenteeism,
defective products, late deliveries of materials by
the supplier & so on..
Actual Capacity can be equal to or less than effective

capacity.

Capacity Utilization= Actual capacity x100%
Design capacity
Capacity Efficiency= Actual capacity 100%

x
Normal capacity

Efficiency/Utilization Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
Actual output = 36 units/day

Efficiency = = 90%
Effective capacity 40 units/ day
Utilization = Actual output = 36 units/day

= 72%
Design capacity 50 units/day

BREAK EVEN ANALYSIS
 It determines the level of output at which
additional revenue equals the additional
cost of adding capacity.
 We have to know how large Q i.e. output

rate would have to be for the additional
capacity to become profitable.

BREAK – EVEN ANALYSIS
Piper Industries is considering opening a new manufacturing

plant to produce shoes .The new facility will have a capacity
of 2,00,000 pairs of shoes per year and an annual cost
function of
Cost = Rs. 25,00,000 + 12 Q
Piper expect to sale the shoe for Rs. 27 per unit, so annual
revenue will be
Annual revenue = Rs. 27 Q
where, Q is the output rate.

SOLUTION
Rs. 27Q = Rs. 25,00,000+Rs. 12 Q
Rs. 15Q = Rs. 25,00,000
Q = 166,667
Unless new facility produces more than

166,667 units per year, it will lose
money.


BREAK-EVEN ANALYSIS
27Q
=
ue
v en
l re fi t
ta P ro
To +1 2Q
Cost & Revenue(Rs.)
0 , 000
. 25, 0
t = Rs
l c os
a
Tot
Loss
0 BEP= 1,66,667
Q (output rate in units)

CAPACITY PLANNING PROBLEM
Annual demand for a Product A being mfd. By XYZ Ltd is expected

to be as follows:
Demand : 8000 10000 15000 20000
Probability : 0.5 0.2 0.2 0.1
Annual Fixed Cost are Rs.2,00,000

Revenue/Unit is Rs 35
Variable cost/Unit Output Level
=Rs 7.75
8,000 units
=Rs 5.50 10,000 units
=Rs 5.33 15,000 units

CAPACITY PLANNING PROBLEM
An expected facility under consideration would

require
Annual Fixed Cost are Rs.2,50,000
Variable cost/Unit Output Level
=Rs 9.40
8,000 units
=Rs 5.20 10,000 units
=Rs 3.80 15,000 units
=Rs 4.90 20,000 unit

Which facility would you recommend?
VARIABLE COST
SOLUTION
EXISTING : 8000X0.5X7.75 = 31,000
10,000X0.2X5.0 = 10,000
15,000X0.2X5.33 = 15,990
20,000X0.1X7.42 = 14,840
TOTAL = 71,830
EXPANDED: 8000X0.5X9.40 = 37,600

10,000X0.2X5.2 = 10,400
15,000X0.2X3.8 = 11,400
20,000X0.1X4.9 = 9,800
TOTAL = 69,200

SOLUTION
8000 X 0.5 = 4000

10000 X 0.2 = 2000
EXPECTED SALES
15000 X 0.2 = 3000
20000 X 0.1 = 2000
11000

SOLUTION
EXISTING EXPANDED
FC 2,00,000 2,50,000
VC 71,830 69,200
TC 2,71,830 3,19,200
REVENUE 11000 X 35 =3,85,000
PROFIT 1,13,170 65,800
Ans. Existing facility is recommended

ECONOMIES AND DISECONOMICS
OF SCALE
Economies of scale
If the output rate is less than the optimal
level, increasing output rate results in
decreasing average unit costs
 Diseconomies of scale
If the output rate is more than the

optimal level, increasing the output rate
results in increasing average unit costs

AVG. COST/UNIT ECONOMIES OF SCALE
BEST OPERATING LEVEL
OPTIMAL OUTPUT
RATE

•Different demand patterns/trends are possible in
demand forecast.
•Growth trend
•Decline trend
•Cyclical trend
•Stable trend

Growth trend
DF
TIME

Decline trend
DF
TIME

Cyclic trend
DF
TIME

Stable trend
DF
TIME

OPTIMAL CAPACITY
DETERMINATION
 The avg unit cost of production
decreases as the output rate increases.
 When output is increased beyond a
particular limit the avg cost of production
start increasing.
 The output rate at which cost is
minimum is called optimum output rate

ACPU
Optimum
output rate

DECISION TREE
ANALYSIS
 Used to analyze decision situations that
are sequential in nature.
 Decision is taken one after the another
in the sequence.
 Rectangles-decision nodes
 Circles-points of outcomes

USING DECISION TREES TO EVALUATE
Question: CAPACITY ALTERNATIVES
The owner of the Hacker’s Computer Store is considering what

to do
with his business over the next 5 years. Sales growth over the
past couple of years has been good, but sales could grow
substantially if major electronics firm is built in his area as
proposed. Hacker’s owner sees three options. The first is to
enlarge his current store, the second is to locate at a new site,
and the third is to simply wait and do nothing. The decision to
expand or move would take time, and therefore, the store
would not lose revenue. If nothing were done the first year and
strong growth occurred, then the decision to expand
reconsidered. Waiting longer than one year would allow
competition to move in& would make expansion no longer
feasible.
Contd……
 The assumption & conditions are as follows:
1. Strong growth as a result of the increased population of
computer fanatics from the new electronics firm has a
55% probability.
2. Strong growth with a new site would give annual
returns of $195,000 per year. Weak growth with a new
site would mean annual returns of $115,000.
3. Strong growth with an expansion would give annual
returns of $190,000 per year. Weak growth with an
expansion would mean annual return of $100,000.

Contd…..
4. At the existing store with no changes,
there would be returns of $170,000 per
year if there is strong growth and
$105,000 per year if the growth is weak.
5. Expansion at the current site would cost
$87,000.
6. The move to the new site would cost
$210,000.

Contd…
7. If the growth is strong and the existing site is
enlarged during the second year,the cost would
still be $87,000
8. Operating costs for all options are equal.

Solution:
 We construct a decision tree to advice Hacker’s
owner on the best action.
 Values of each alternatives calculated are as
follows:

ALTERNATIVE REVENUE COST VALUE
Move to new location,strong $195,000*5 $210,000 $765,000

Growth(975000-210000=765000)
Move to the new location,weak $115,000*5 $210,000 $365,000

growth
Expand store,strong growth $190,000*5 $87,000 $863,000
Expand store,weak growth $100,000*5 $87,000 $413,000
Do nothing now,strong growth $170,000*1 $87,000 $843,000
$190,000*4
Do nothing now, strong growth $170,000*5 $0 $850,000

Do not expand next year
Do nothing now,weak growth $105,000*5 $0 $525,000

TABLE 1 Decision tree
for Hacker’s Computer Store
Problem
Strong growth .55
Move Revenue move cost
Weak growth .45
Revenue move cost
Hacker’s
computer store Strong growth .55
Expand Revenue expansion cost
Weak growth .45
Revenue expansion cost
Expand
Do nothing
Strong growth .55 Revenue expansion
cost
Weak growth .45 Do nothing (revenue)
revenue

TABLE 1 Decision tree
for Hacker’s Computer Store
Problem
Strong growth .55 $765,000
Move
Weak growth .45 $365,000
$585,000
Hacker’s computer
Strong growth .55 $863,000
store Expand
Weak growth .45 $413,000
$660,500
$843,000
Strong growth .55
Do nothing
$850,000
Weak growth .45
$525,000
$703,750
11/21/10 SEC. B PGDM -III 43

Capacity Expansion Strategies
The primary purpose of capacity planning is
to match the company’s production
capability with customer demand in the most
profitable way. The capacity strategy should
consider the demand pattern as well as
supply capabilities.
Fundamental aspects of capacity decisions

is whether facilities are organized around
products, processes or markets.

Different types of
organization facility
 Production organized facility
 Process organized facility
 Market organized facility

The different capacity
expansion strategies are:-
1)Demand Leading
2) Demand Trailing
3)Demand Matching
4)Steady Expansion

DEMAND LEADING
CAPACITY/DEMAND
EXCESS
CAPACITY
CAPACITY
TIME

DEMAND TRAILING
CAPACITY/DEMAND
CAPACITY SHORTAGEDEMAND
CAPACITY
TIME

DEMAND MATCHING
CAPACITY/DEMAND
CAPACITY
DEMAND
TIME

STEADY EXPANSION
DEMAND
CAPACIY/DEMAND
CAPACITY
CAPACIT ADDED AT REGULAR

TIME INTERVALS
TIME

Glaxo Smith
Kline India
Ltd.

Introduction
 Glaxo Smith Kline India Ltd. is one of
the most important and growing parts of
pharmaceutical manufacturing giant
Glaxo Smith Kline, UK (known as GSK,
worldwide).
 It has more than 20% of the market
share of pharmaceutical products in
India.

Operations
 It has its own 4 manufacturing units and
rest of its manufacturing is outsourced to
23 partner pharmaceutical
manufacturing companies throughout
India.
 It has 5 warehouses strategically located
to cater to distributors (CFAs) who are
located in widely scattered geography of
India. The total number of distributors
(CFAs) is 31.

Transportations
 Transportation part of the whole distribution
system is outsourced to many independent
private goods carriers.
 These carriers are grouped as trucking (with
varying carrying capacities ; railroad, surface
couriers and air couriers.
 The lead-time varies from 15 days for a railroad
connection from the western part of India to the
far eastern part of India to 5 – 7 days for most
road connections for trucks to 2 days for air
courier.

Applications
 Glaxo Smith Kline India Ltd. had
implemented ERP system from vendor
JD Edwards.
 While this system has been proving very
useful for their manufacturing
processes, they did not had a
satisfactory solution for their product
transportation and distribution processes

The Challenge
1. Planning used to take at least 2 weeks and
required input from many people. A lot of
effort was required to make these plans.
2. By the time the plan was made, it became obsolete
as initial requirements got changed.
When any change in plan was required, it was
impossible to incorporate these changes
in the plan.
3. The whole product distribution system was
inefficient.

Challenges
4. There were many under fill movements
of trucks.
5. No transparency In distribution system.
6. Late orders were creating a lot of
problems.

The Solution
1. When Optimization Engine is
implemented in an organization where
there is already an implementation of
any ERP system, Optimization Engine
works as the brains behind the business
operations whereas the ERP system
works as the business enabler.

Contd…..
2. Our Optimization Engine software
consolidates all sales forecasts made by
different sales units as well as the
purchase orders; the company receives.
Based on this consolidated figure, the
company can do any supply chain
related planning

Contd…..
3. Our Optimization Engine Software is
based on Genetic Algorithm based
computation. The plan it generates is
the most optimal solution for the given
scenario and no other solution can
easily beat it.

Contd…..
4. Optimization Engine software takes into
account stock out cost (loss of order due
to unavailability of stock), inventory cost
and transportation cost, raw material
costs, human resources costs, and it
generates a plan to minimize all of these
costs.

Contd…..
5. Optimization Engine software takes into
account lead time and other constraints.
It takes them into account completely
when it generates the most optimal plan.
6.User has a choice to assign weight age
and the software generates the most
optimal plan accordingly.

Contd…..
7. Our experience shows that even at places
like big and reputed multinational
companies; the efficiency of their business
processes is not optimal even after good
implementation of ERP systems. In most
cases our software can improve their
business processes by at least 10% and
it can go even to 300%. This translates to
corresponding cost savings and effective
capacity planning.

Benefits of the solution:
1. When a company is looking to cut its
operational costs to be competitive.
2. When a company is looking to expand
and wants to make capacity planning for
the new facilities.
3. When a company wants to revise the
capacities for the merged facilities after
acquisitions.

Highlights of implementations:
 The total distribution cost savings
experienced by the company stood at
more than 150% compared to their
earlier distribution costs. The service
levels were achieved more than 95% for
all products.

Conclusion
1. To update the model a specified naming
convention needs to be followed for e.g.
Purchases should be named as PU,
Transfers as TR, Sales as SL, stocks
as ST, and receipts as RT. All these
files need to be stored in the Integrate
folder on D: drive of the machine..

Contd…..
 To start replication user needs to select
replicate option from the Optimization
Icon in the Start button Programs list.
The application can either use the
current stock as the opening stock for
the whole month if the stocks are
updated at the start of the month or just
let the daily update run as per the
regular routine.

Contd…..
2. After running the Replication model, user
can create a new plan.
3. To create a new plan, user can select the
Optimization Engine icon and login into the
application. Planning for some selected
products or all the products depends upon
the users choice, he may also select the
option of medicines or vaccines before
creating the plan and accordingly the
product, source and destination lists are
handled.

Contd…..
 Planner also has the option of setting
the objectives of the plan by selecting
the Advanced button where the
constraints like:
Ω optimizing on high or low stock out
costs
Ω what percent of excess quantity of
products at various locations should be
considered for movement on the basis
of availability

Contd…..
Ω the kind of weekly distribution pattern
that needs to be followed for logistics of
goods.
Ω Week wise distribution describes the
shipment of products over the month.

Capacity Planning
Challenges
 Inability to create a steady flow of demand to fully
utilize capacity
 Idle capacity always a reality for services.
 Customer arrivals fluctuate and service demands
also vary.
 Customers are participants in the service and the
level of congestion impacts on perceived quality.
 Inability to control demand results in capacity
measured in terms of inputs.

Importance of Capacity
Decisions
1. Impacts ability to meet future demands
2. Affects operating costs
3. Major determinant of initial costs
4. Involves long-term commitment
5. Affects competitiveness
6. Affects ease of management
7. Globalization adds complexity
8. Impacts long range planning

CONCLUSION
‘The primary purpose of capacity planning

is to match the company’s production
capability with customer demand in the
most profitable way.’

1
1
111

Capacity Planning &amp Management

Transféré par

Informations du document

Description originale:

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Capacity Planning &amp Management

Transféré par

Droits d'auteur :

Formats disponibles

CAPACITY PLANNING AND

25 January 2010 Group-3 Capacity Planning Sec: A 1

25 January 2010 Group-3 Capacity Planning Sec: A 2

25 January 2010 Group-3 Capacity Planning Sec: A 3

25 January 2010 Group-3 Capacity Planning Sec: A 4

 Introducing new techniques

25 January 2010 Group-3 Capacity Planning Sec: A 5

25 January 2010 Group-3 Capacity Planning Sec: A 6

25 January 2010 Group-3 Capacity Planning Sec: A 7

25 January 2010 Group-3 Capacity Planning Sec: A 8

Steel mill No. of tonnes of steel

Hospital No. of beds

25 January 2010 Group-3 Capacity Planning Sec: A 9

25 January 2010 Group-3 Capacity Planning Sec: A 10

25 January 2010 Group-3 Capacity Planning Sec: A 11

The production rate which can be achieved under

25 January 2010 Group-3 Capacity Planning Sec: A 12

This is maximum output rate which is actually

Actual Capacity can be equal to or less than effective

25 January 2010 Group-3 Capacity Planning Sec: A 14

Capacity Efficiency= Actual capacity 100%

25 January 2010 Group-3 Capacity Planning Sec: A 15

Actual output = 36 units/day

Utilization = Actual output = 36 units/day

25 January 2010 Group-3 Capacity Planning Sec: A 16

 We have to know how large Q i.e. output

25 January 2010 Group-3 Capacity Planning Sec: A 17

Piper Industries is considering opening a new manufacturing

25 January 2010 Group-3 Capacity Planning Sec: A 18

Unless new facility produces more than

25 January 2010 Group-3 Capacity Planning Sec: A 19

25 January 2010 Group-3 Capacity Planning Sec: A 20

Annual demand for a Product A being mfd. By XYZ Ltd is expected

Annual Fixed Cost are Rs.2,00,000

=Rs 5.33 15,000 units

An expected facility under consideration would

=Rs 3.80 15,000 units

=Rs 4.90 20,000 unit

EXPANDED: 8000X0.5X9.40 = 37,600

25 January 2010 Group-3 Capacity Planning Sec: A 23

8000 X 0.5 = 4000

25 January 2010 Group-3 Capacity Planning Sec: A 24

Ans. Existing facility is recommended

25 January 2010 Group-3 Capacity Planning Sec: A 25

If the output rate is more than the

25 January 2010 Group-3 Capacity Planning Sec: A 26

BEST OPERATING LEVEL

25 January 2010 Group-3 Capacity Planning Sec: A 27

25 January 2010 Group-3 Capacity Planning Sec: A 28

25 January 2010 Group-3 Capacity Planning Sec: A 29

25 January 2010 Group-3 Capacity Planning Sec: A 30

25 January 2010 Group-3 Capacity Planning Sec: A 31

25 January 2010 Group-3 Capacity Planning Sec: A 32

25 January 2010 Group-3 Capacity Planning Sec: A 33

25 January 2010 Group-3 Capacity Planning Sec: A 34

25 January 2010 Group-3 Capacity Planning Sec: A 35

The owner of the Hacker’s Computer Store is considering what

25 January 2010 Group-3 Capacity Planning Sec: A 37

25 January 2010 Group-3 Capacity Planning Sec: A 38

25 January 2010 Group-3 Capacity Planning Sec: A 39

25 January 2010 Group-3 Capacity Planning Sec: A 40

Move to new location,strong $195,000*5 $210,000 $765,000