Ch.6 Capacity Planning

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Chapter 6

Capacity Planning

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Capacity Planning

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

Capacity is the amount of work that can be done in a period of time

It is usually stated in standard hours of workIt must be determined at plant, department,

and work center levels.

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• 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

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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.

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Efficiency and Utilization

Actual outputEfficiency =

Effective capacity

Actual outputUtilization =

Design capacity

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

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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

dayunitsdayunits

CapacityDesignOutputActualnUtilizatio

dayunitsdayunits

CapacityEffectiveOutputActualEfficiency

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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

Capacity planning

Definitions : Capacity planning is the process of determining the production capacity needed by an organization to meet changing demands for its products. In the context of capacity planning, "capacity" is the maximum amount of work that an organization is capable of completing in a given period of time

Capacity planning• In information technology, capacity planning is the science and art

of estimating the space, computer hardware, software and connection infrastructure resources that will be needed over some future period of time.

• A typical capacity concern of many enterprises is whether resources will be in place to handle an increasing number of requests as the number of users or interactions increase.

• The aim of the capacity planner is to plan so well that new capacity is added just in time to meet the anticipated need but not so early that resources go unused for a long period. The successful capacity planner is one that makes the trade-offs between the present and the future that overall prove to be the most cost-efficient.

Capacity planning• Capacity planning has seen an increased emphasis due to the financial

benefits of the efficient use of capacity plans within material requirements planning systems and other information systems.

• Insufficient capacity can quickly lead to deteriorating delivery performance, unnecessarily increase work-in-process, and frustrate sales personnel and those in manufacturing.

• However, excess capacity can be costly and unnecessary. • The inability to properly manage capacity can be a barrier to the

achievement of maximum firm performance. • In addition, capacity is an important factor in the organization's choice

of technology.

Capacity calculation

• Capacity = (number of machines or workers) × (number of shifts) × (utilization) × (efficiency).

Various Strategies• Lead strategy is adding capacity in anticipation of an increase in

demand. Lead strategy is an aggressive strategy with the goal of luring customers away from the company's competitors. The possible disadvantage to this strategy is that it often results in excess inventory, which is costly and often wasteful.

• Lag strategy refers to adding capacity only after the organization is running at full capacity or beyond due to increase in demand . This is a more conservative strategy. It decreases the risk of waste, but it may result in the loss of possible customers.

• Match strategy is adding capacity in small amounts in response to changing demand in the market. This is a more moderate strategy.

Capacity Planning

1. Determine Service Level RequirementsThe first step in the capacity planning process is to categorize the work done by systems and to quantify users’ expectations for how that work gets done.

2. Analyze Current CapacityNext, the current capacity of the system must be analyzed to determine how it is meeting the needs of the users.

3. Planning for the futureFinally, using forecasts of future business activity, future system requirements are determined. Implementing the required changes in system configuration will ensure that sufficient capacity will be available to maintain service levels, even as circumstances change in the future.

1. Determine Service Level requirements

a. The overall process of establishing service level requirements first demands an understanding of workloads. You can view system performance in business terms rather than technical ones, using workloads.

b. Before setting service levels, you need to determine what unit you will use to measure the incoming work.

d. Finally, you establish service level requirements, the promised level that will be provided by the IT organization.

**Workloads Explained**• From a capacity planning perspective, a computer system

processes workloads (which supply the demand) and delivers service to users.

• A workload is a logical classification of work performed on a computer system. If you consider all the work performed on your systems as pie, a workload can be thought of as some piece of that pie.

• If you analyze performance based on workloads corresponding to business departments, then you can establish service level requirements for each of those departments.

2. Analyze Current Capacitya. First, compare the measurements of any items referenced in service level

agreements with their objectives. This provides the basic indication of whether the system has adequate capacity.

b. Next, check the usage of the various resources of the system (CPU, memory, and I/O devices). This analysis identifies highly used resources that may prove problematic now or in the future.

c. Look at the resource utilization for each workload. Ascertain which workloads are the major users of each resource. This helps narrow your attention to only the workloads that are making the greatest demands on system resources.

d. Determine where each workload is spending its time by analyzing the components of response time, allowing you to determine which system resources are responsible for the greatest portion of the response time for each workload

3. Determine Future Processing Requirements

Future processing requirements include:• Expected growth in the business• Requirements for implementing new

applications• Planned acquisitions• IT budget limitations• Requests for consolidation of IT resources

Plan Future System Configuration

• After system capacity requirements for the future are identified, a capacity plan should be developed to prepare for it. The first step in doing this is to create a model of the current configuration.

• From this starting point, the model can be modified to reflect the future capacity requirements.

• If the results of the model indicate that the current configuration does not provide sufficient capacity for the future requirements, then the model can be used to evaluate configuration alternatives to find the optimal way to provide sufficient capacity.

LONG-TERM CAPACITY PLANNING

• Over the long term, capacity planning relates primarily to strategic issues involving the firm's major production facilities.

• Long-term capacity issues are :• Location decisions• Technology • Transferability of the process to other products • May evolve when short-term changes in capacity are

insufficient.Example: If the firm's addition of a third shift to its current two-

shift plan still does not produce enough output, and subcontracting arrangements cannot be made, one feasible alternative is to add capital equipment and modify the layout of the plant (long-term actions). It may even be desirable to add additional plant space or to construct a new facility (long-term alternatives).

SHORT-TERM CAPACITY PLANNING

It includes issues of• Scheduling• Labor shifts • Balancing resource capacities. The goal of short-term capacity planning is to

handle unexpected shifts in demand in an efficient economic manner. The time frame for short-term planning is frequently only a few days but may run as long as six months.

Steps in Capacity Planning

• Forecast the demand• Convert this into capacity requirement• Asses capacity of existing facilities• Asses the gap between the needed and available

capacity• Make alternative plans to fill the gap• Compare the alternative plans and choose the best• Implement the best plan and check and control its

progress

The factors influencing the compromise

• Demand forecast, sales accomplished, back orders, demand variation

• Operations dept. - M/c capacity & utilisation, capital budgeting plans, productivity plans

• HR dept. - Manpower inventory, inventory policy, storage constraints

• Marketing dept. - Forecast reliability, new product arrangement, product substitution.

Demand management

• Price variation• Marketing effort variation• Incentive and discounts• Buffer stock creation • Lead time variation• Rationing- reservation and appointment

system

Capacity management• Working hours and shift management• Scheduling work patterns• Part time staff• Outsourcing• Process adjustment• Adjusting equipment and processes• Rescheduling maintenance• Self service• Franchising • Subcontracting

Factors favoring overcapacity

• The process is uneconomic, when there is an economic capacity size

• Building capacity is not so costly• Buying outside is not feasible• Lead time to add capacity is too long• Lost sales are viewed very negatively by

trading circles.

Capacity cushion

• Attempt to prevent a run out – positive cushion - Additional capacity than the forecast demand

• Meet the average forecast - • Maximise utilisation - Negative cushion -

capacity build up cost is very high – eg. Oil refineries, paper mills.It can harm long term market share.

Capacity planning and control techniques

1. Capacity planning using overall factors (CPOF) 2. Capacity bills 3. Resource profiles 4. Capacity requirements planning (CRP) 5. Input/output control 6. Capacity bath tub

Capacity planning using overall factors (CPOF)

• Data requirements are minimal (only accounting system data)

• Valid only when product mixes or historical divisions of work between work centers remain constant


The CPOF method requires three data inputs • The MPS • The standard or estimated total time required to produce one

"typical" part• The proportion of total time required by each resource to

produce the part. CPOF calculations can rely heavily on intuition and may be computed on a typical calculator. The estimated cumulative time is multiplied by the MPS quantity to obtain the total time required in the factory to match the MPS. This time is than prorated among all the key work centers by multiplying the total time by the historical proportion of time used at a given resource.


Master production Schedule (in units)End product 1 2 3 4 5 6 Total

A 33 40 30 37 35 32302B 17 17 15 13 16 15108

Direct labor per unit ( in standard hours)A 0.95 hoursB 1.5 hours


Work Historical 1 2 3 4 5 6 TotalCentre percentage

X 60% 34.11 38.1 30.6 32.79 34.35 31.74201.69Y 30% 17.06 19.05 15.3 16.40 17.18 15.87100.85Z 10% 5.67 6.35 5.10 5.66 5.73 5.29 33.62TOTAL 56.85 63.5 51.0 54.65 57.25 52.9 336.15

Calculation example: 33 * 0.95 + 17* 1.5 = 56.8560% of 56.85 = 34.1130% of 56.85 = 17.0610% of 56.85 = 5.67

Capacity bills

• Takes into account any shifts in product mixRequired data:

• Bill of material• Routing data• Direct labor-hour or machine-hour data

for each operation

Capacity bills

Part requirementA

C D

B

D

F – F- 2

E- 2

Capacity billsEnd products

Lot Sizes

Operation Work centre

Std. set up hrs.

Std. set up hrs.Per unit

Std. run time hrs.Per unit

Total hrs. per unit

A 40 1 of 1 100 1.0 0.025 0.025 0.05

B 20 1 of 1 100 1.0 0.050 1.25 1.30

ComponentsC 40 1 of 2

2 of 2200300

1.01.0

0.0250.025

0.5750.175

0.60.2

D 60 1 of 1 200 2.0 0.033 0.067 0.1

E 100 1 of 1 200 2.0 0.020 0.080 0.1

F 100 1 of 1 200 2.0 0.020 0.0425 0.0625

Bill of Capacity

Capacity billsA B

Work centre Total time/unit Total time/unit

100 0.05 1.30

200 0.70 0.55

300 0.20 0.0Total time/unit 0.95 1.85

Calculation Example: Set time/ Lot size = 1/40 = 0.025Std. set up hrs. per unit = 0.025 + 0.025 = 0.50For 1 C and 1 D = 0.60 + 0.1 = 0.70For one D, two Es and four Fs = 0.1 + 2*0.1 +4 * 0.0625 =0.55

Capacity bills------- ---------- ---------- PERIOD ---------- ------- Total

HoursWork center %

Work center

1 2 3 4 5 6

100 23.75 18.90 18.90 34.00 36.95 36.95 172.74 40%

200 32.45 35.15 35.15 34.75 40.75 40.75 215.93 50%

300 6.60 8.00 8.00 6.00 7.40 7.40 43.19 10%

Total 62.80 62.05 62.05 74.75 85.10 85.10 431.85 100%

Calculation Example: For ‘Work Center- 100’ ‘: 33*0.05 + 17 *1.3 = 23.75For ‘Work Center- 200’ ‘: 33*0.7 + 17*0.55 = 32.45

Resource profiles

• Takes into account the specific timing of the projected workloads at individual work centers

• Production set up and lead time data are taken into account

• MPS is useful.

Resource profiles

Time required during preceding periods for one end product assembled in period 5:….Time period ....3 4 5

End product AWork center 100 0 0 0.05Work center 200 0.6 0.1 0Work center 300 0 0.2 0

End product BWork center 100 0 0 1.3Work center 200 0.25 0.3 0

Resource profilesTime phased capacity requirements generated from MPS for 40 As and 13 Bs in time

period 5:….Time period ....3 4 5

40 AsWork center 100 0 0 2Work center 200 24 4 0Work center 300 0 8 0

13 BsWork center 100 0 0 16.9Work center 200 3.25 3.9 0Work center 300 0 0 0

Total from period 5 MPSWork center 100 0 0 18.9Work center 200 27.5 7.9 0Work center 300 0 8 0

Capacity requirements planning (CRP) Capacity Requirements Planning, also known as CRP, allows business to plan ahead to determine

How large their future inventory capacity needs to be in order to meet demand.

How much space they will need to hold these materials.

It verifies that you have the sufficient capacity available to meet the capacity requirement for the MRP plans.

It thus helps the planners to make the right decisions on scheduling before the problem develops.

Capacity requirements planning (CRP)

The process of determining short-range capacity requirements.

Inputs to capacity requirement planning· Planned-order releases for the MRP· Current shop loading· Routing information· Job time

Key outputs· Load reports for each work center

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Capacity Requirements Planning (CRP) Example

The ‘XYZ’ Company makes sign mountsfor commercial customers. Oneproduct is the H mount which is made up of apainted surface on both sides of a wooden Hframe. The H mount is put together in finalassembly. The surfaces are painted in thepaint shop, and frame is made in the frameshop. XYZ’ wants to estimate the H mount capacity needs for next five periods in final assembly, the paint shop, and the frame shop.

SetupOperation Work Center Time Run timeMount assembly Final Assembly 2 hours 1.0 hoursFabricate H frame Frame Shop 3 hours 0.5 hoursPaint surfaces Paint Shop 4 hours 0.4 hours

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Capacity Requirements Planning (CRP) Example (continued)

1 2 3 4 5 615 20 20 20 20 015

Projected available balance 10 10 20 0 10 20 2030 0 30 30 0 0

1 2 3 4 5 630 40 40 40 40 050

Projected available balance 25 45 5 15 25 35 350 50 50 50 0 0

1 2 3 4 5 620 20 20 20 20 20

Projected available balance 25 5 0 0 0 0 015 20 20 20 20

Item: H framePeriod

Gross requirementsScheduled Receipts


Planned order releaseQ = 50, LT = 1, SS = 5

Planned order releaseQ = 30, LT = 1, SS = 0

Item: Painted SurfacePeriod

Planned order releaseQ = L4L, LT = 1, SS = 0

Item: H mountPeriod


Input/Output control• Planned work input and planned output at a work center will

becompared to the actual work input and output

Deviations are caused by:• Lower-than-expected productivity• Breakdowns• Absences• Random variations• Poor product quality• Insufficient output from a preceding work center• Improper releasing of planned orders• Monitors backlogs as the cushion between input and output

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Capacity Planning Techniques: Pros and ConsCapacity Bills

Pros ConsEasy to use Doesn’t consider lead times, inventory Minimal computational information, or gross-to-netting

requirementsConsider product mix Less accurate

Resource ProfilesEasy to use Doesn’t consider inventory information Minimal computational or gross-to- nettingrequirementsConsiders lead times Less accurateConsider product mix

Capacity Requirements PlanningConsiders: gross-to-netting, Requires MRP system, Time-phased Inventory information, records, Extensive computational lead times requirementsMore accurateConsiders product mix

Question Bowl

The objective of Strategic Capacity Planning is to provide an approach for determining the overall capacity level of which of the following?

a. Facilitiesb. Equipmentc. Labor force sized. All of the abovee. None of the above

Answer: (d )

Question BowlTo improve the Capacity Utilization Rate we can do

which of the following?

a. Reduce “capacity used”b. Increase “capacity used”c. Increase “best operating level”d. All of the abovee. None of the above

Answer: ( b )

Question BowlWhen we talk about Capacity Flexibility

which of the following types of flexibility are included?

a. Plantsb. Processesc. Workersd. All of the abovee. None of the above

Answer: (d )

Question Bowl

When adding capacity to existing operations which of the following are considerations that should be included in the planning effort?

a. Maintaining system balanceb. Frequency of additionsc. External sources d. All of the abovee. None of the above

Answer: (d )

Question Bowl

Which of the following is a term used to describe the difference between projected capacity requirements and the actual capacity requirements?

a. Capacity cushionb. Capacity utilizationc. Capacity utilization rated. All of the abovee. None of the above

Answer: (a)

Question BowlIn determining capacity requirements we must do

which of the following?

a. Address the demands for individual product lines

b. Address the demands for individual plantsc. Allocate production throughout the plant

networkd. All of the abovee. None of the above

Answer: (d)

Question Bowl

In a Decision Tree problem used to evaluate capacity alternatives we need which of the following as prerequisite information?

a. Expect values of payoffsb. Payoff valuesc. A treed. All of the abovee. None of the aboveAnswer: (b)

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END OF CHAPTER 6

Ch.6 Capacity Planning

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