Capacity Planning

Capacity

• Capacity is the ability / rate at which the system can deliver

desired output
• Creation of capacity is an investment decision
• Centralised and decentralised capacity
• The concept of capacity is thus invariably connected with
the weakest link in the chain
• Capacity has to do some thing with making in-house or
subcontracting from outside

Capacity of a facility is a limiting capability to produce an

output over a period of time

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Importance of capacity

• Operations manager are concerned with capacity

because:
 They want sufficient capacity to meet market demands on
time

Capacity effects cost efficiency of operations

It dictates the ease and difficulty of scheduling output
 Cost of maintaining the facility
 Capital investment

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Measurement of capacity

• Tangible single products – units or numbers per unit of time

(electricity in MW, transistor in units, Steel in MT)
• Tangible multiple products – in terms of constrains in capacity
(Jobshop in max labour hours, hospitals in bed days)
• Tangible services – units or numbers per unit of time (Insurance
co in policies per year)
• Heterogeneous services – capacity of constrains (man hours
per month for a bank branch)
• Capacity can also be measured on output rate & input rate

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Types of capacity

• Fixed capacity – Capital assets (equipments & building)

are known as fixed capacity
• Adjustable capacity – Size of workforce, number of
working hours and extent of subcontracting
• Design capacity – Planned rate of output of goods or
services under normal operating conditions. It is also
known as installed capacity
• System capacity – max output of a product or product
mix the system is capable of producing. It is equal to or
less than design capacity

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Types of capacity . . . contd

• Effective capacity – capacity which is used within the

current budgeted period. Also known as practical
capacity or operating capacity
• Normal capacity or rated capacity – estimated output
done be industrial engineering department
• Actual or utilised capacity – Actual output achieved
during a particular time period

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Capacity decisions
Market Resource base &
Environment technology Long range (1-15 yrs).
Major Capacity
additions, product &
process decisions
Forecast & Capacity (mtl,
customer order labour, capital)

Aggregate Intermediate range (6-18 mths)

production plan Workforce, overtime plans,
inventory & subcontracting
levels, minor capacity changes
Master Prod
Schedule (MPS)

Short range (upto 6 mnths)

Material Capacity detailed scheduling, routings,
Requirements Requirements alternate workcentres,
overtime etc
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Importance of capacity decisions

• Capacity decisions are important because:

 They have a long term impact

Capacity determines the selection of appropriate
technology, type of labour & equipments

Right capacity ensures commercial viability of business
venture
 Capacity influences the competitiveness of the firm

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Factors affecting determination of plant
capacity

• Market demand for a product / service

• Amount of capital that can be invested
• Degree of automation desired
• Level of integration
• Type of technology selected
• Dynamic nature of all factors affecting plant capacity:
 Changes in product design

Market conditions

Product life cycle

Process Technology

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Factors affecting determination of plant
capacity . . contd

• Difficulty in forecasting future demand and technology

• Obsolesce of product & technology over a period of time
• Present demand and future demand in
 Long range
 Intermediate range
 Short range
• Flexibility of capacity additions

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 Dovetailing of plans
Units

Market Production
Demands Capacities

Plan 3 Match the two

Plan 2 optimally

Plan 1 = Matching
capacity Plan
Plan 1
Plan 2 = Leveling
capacity plan
Demand Time
Plans Cost of Operational changes Inventory Related cost Total
1 5,50,000 15,000 5,65,000
2 - 1,55,000 1,55,000
3 60,000 75,000 1,35,000
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Ways of changing capacity

• Capacity Addition
 Sub-contracting certain components
 Acquisition
 Developing new sites, buildings & equipments
 Reactivating facilities

• Capacity Reduction
 Selling of facilities
 Layoff and transfer
 Developing new products

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Capacity planning & Control

• Capacity planning is determining the necessary

resources to meet the production objectives of a firm
• Capacity or facility planning includes determination of:

How much long range production capacity is needed

When additional capacity is needed
 Where production facilities should be located
 Layout and characteristics of facilities
• Capacity control is monitoring output, comparing it with
capacity plan, determining if variations exceed limits and
taking corrective action

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Factors effecting capacity planning

•Controllable factors •Less controllable factors


Labour employed 
Absenteeism

Facilities installed 
Labour performance

Machines & tools 
Machine breakdowns

Number of shifts 
Material shortages

Overtime policy 
Rejects & rework

Subcontracting 
Accidents

Preventive maintenance 
Strikes

Production set-ups

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Capacity Planning Process

• Future capacity requirement: prediction


Forecasting, mature products are subject to better
prediction
• Multiple outputs
 Demand forecasting for specific output is easier than
multiple
 Demand of each output is estimated and then summed up
• Capacity plans: generation process

Decide to expand capacity or lose some sales

Alternative sources

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Capacity Planning Process . . contd

• Capacity enhancement: size

 Should capacity be added in many small doses or in one large dose
• Cost Volume relationship
 Identify break even volume
• Evaluation of various alternative plans
 Financial analysis
 Risk analysis
• Final decision

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Formulas

• System efficiency = Actual output / System Capacity

• Standard run hrs = setup time + Run time

EBQ

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Problem 1 Actual o/p =
310 per day
430 380 350 410

1. What is the system capacity?

2. What is the system efficiency?

Solution:
System capacity is the capacity of the bottle neck = 350 per day
System efficiency = Actual output / System capacity
= 310 / 350 = 0.8857
= 88.57%

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Problem 2
A work centre operates 5 days a week on a 2 shift per day basis,
each shift of 8 hrs duration. There are five machines of the same
capacity in the work centre. If the machines are utilised 80% and
system efficiency is 90% what is the rated output on hrs per week

Solution:
Rated o/p per machine per week = (5) x (2) x (8) x 0.8 x 0.9
= 57.6 hrs

Rated o/p of system = 5 x 57.6 = 288 std hrs

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Problem 3
Two product groups A & B have product trees as shown:

A B

C D C E

The process sheets are shown in table with setup time and run time
standards. Along with the said details economic batch quantity and
demand for each item is given in the table. The standard work hrs
per week is 500. Calculate the number of each machine required

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Problem 3 .. contd

Item Opr. Descr Setup hrs Run Hrs EBQ Demand / wk

A Assembly 0 2.00 15 3000
B Assembly 0 3.00 10 2000
C Milling 0.3 0.14 25
Drilling 2.4 0.40
Milling 2.7 0.23
Grinding 1.0 0.21
D Milling 0.40 0.15 20
Drilling 2.8 0.35
Grinding 2.2 0.24
E Milling 0.3 0.18 30
Drilling 2.1 0.39
Milling 2.5 0.26
Grinding 1.3 0.23
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Problem 3 - Solution

Item Opr. Descr Setup hrs Run Hrs EBQ Std run hrs /
unit
A Assembly 0 2.00 15 2.00
B Assembly 0 3.00 10 3.00
C Milling 0.3 0.14 25 0.152
Drilling 2.4 0.40 0.50
Milling 2.7 0.23 0.338
Grinding 1.0 0.21 0.25
D Milling 0.40 0.15 20 0.17
Drilling 2.8 0.35 0.49
Grinding 2.2 0.24 0.35
E Milling 0.3 0.18 30 0.19
Drilling 2.1 0.39 0.46
Milling 2.5 0.26 0.34
Grinding 1.3 0.23 0.27 22
Problem 3 - Solution
Calculate product wise work load on each machine per unit

Standard run hrs per unit

Machine Product A Product B
Milling 0.66 1.02
Drilling 0.99 0.96
Grinding 0.60 0.52
Assembly 2.00 3.00

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Problem 3 - Solution
Calculate product wise work load on each machine per week for demand
of A = 3000 and B = 2000

Standard run hrs per week

Machine Product A Product B W/L of A W/L of B Total W/L
Milling 0.66 1.02 1980 2040 4020
Drilling 0.99 0.96 2970 1920 4890
Grinding 0.60 0.52 1800 1040 2840

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Problem 3 - Solution
Calculate required number of machines to fulfill demand

Machine Total Hrs Available No of m/c’s

Hrs
Milling 4020 500 8.04 ~ 8

Drilling 4890 500 9.78 ~ 10

Grinding 2840 500 5.68 ~ 6

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 Problem 4 - Practice
Clark & co makes 3 products on different type of machines. The matrix of
operating times & job set up times, demand per month and economic lot sizes
are shown in table. The machine utilisation factor is 90% and operator efficiency
is 105%. How many machines are needed if the plant works for forty hrs/ week.
Equipment Product A Product B Product C
Punch
Set up hrs 0.75 0.600
Run Hrs 0.04 0.060
Grind
Set up hrs 0.750
Run Hrs 0.020
Screw
Set up hrs 0.400 0.520
Run Hrs 0.030 0.050
Demand / month 1200 2000 1000
EBQ 300 500 250 26