Capacity Planning, Facility

Location & Layout

 Capacity planning
• Introduction
 A dictionary definition of capacity is “the ability to hold,
receive, store, or accommodate.”
 In a general business sense, it is most frequently viewed
as the amount of output that a system is capable of
achieving over a specific period of time.
 In a service setting, this might be the number of
customers that can be handled between a given time
interval.
 In manufacturing, this might be the number of
automobiles that can be produced in a single shift.
Why organizations are involved in capacity planning?

The basic reasons are:

Changes in demand
Changes in technology
Changes in environment
Perceived threats and opportunities

If the organizations are engaged in capacity planning activity

the key questions to be answered are:
 What kind of capacity is needed?
 How much capacity is needed to match demand?
 When is it needed?
 The objective of strategic capacity planning is to provide
an approach for determining the overall capacity level of
capital-intensive resources—facilities, equipment, and
overall labour force size—that best supports the
company’s long-range competitive strategy.
 If capacity is inadequate, a company may lose customers
through slow service or by allowing competitors to enter
the market.
 If capacity is excessive, a company may have to reduce
prices to stimulate demand; underutilize its workforce;
carry excess inventory; or seek additional, less profitable
products to stay in business.
Measuring Available Capacity/types
of capacity

The Best Operating Level is the output

that results in the lowest average unit
cost.
 Types of capacity
• The general concept of capacity can be refined into two useful
definitions of capacity. These are Design and system capacity
 Design capacity:
capacity is the maximum rate of output achieved under
ideal condition.
 System/Effective capacity:
capacity is the maximum output of the
specific product or product mix the system of workers and
machines is capable of producing as an integrated whole.
 In short it can be defined as design capacity minus allowances
such as personal time, maintenance and scrap.
The capacity utilization rate is expressed as a percentage
and requires that the numerator and denominator be
measured in the same units and time periods (such as
machine hours/day, barrels of oil/day, dollars of output/day).
 2.3.1 Determinants of Effective Capacity
1 . Facilities: The design of facilities, including size and
provision for expansions, is a key. Location factors such
as transportation costs, distance to market, labor supply,
energy sources, and room for expansion are also
important.

2. Product and service factors: Product/services design

can have a tremendous influence on capacity.

3. Process factors: The quantity capability of a process is

an obvious determinant of capacity
4. Human factors:

5. Operational factors: problems associated with

Scheduling, materials management, quality assurance,
equipment break down are some of the basic factors
which influence effective capacity.
6. Supply chain factors:
7. External factors: Product standards, especially
minimum quality and performance standards can restrict
management’s options for increasing capacity.
2.3.2 Types of Capacity Strategies
The three primary strategies are:

Leading: Build capacity in anticipation of future demand

increases.

Following: build capacity when demand exceeds current

capacity.

Tracking: similar to the following strategy, but adds capacity

in relatively small increments to keep pace with increasing
demand
Steps for Capacity Planning

1.Estimate future capacity requirements.

2.Evaluate existing capacity.
3.Identify alternatives.
4.Conduct financial analysis.
5.Assess key qualitative issues.
6.Select one alternative.
7.Implement alternative chosen.
8.Monitor results.
 Forecasting capacity requirements

Capacity planning is generally viewed

in three time durations:
1.Long range—greater than one year.
2. Intermediate range—monthly or
quarterly plans for the next 6 to 18
months.
3.Short range—less than one month.
 capacity should be based on
Calculating Processing Requirements:

Calculating processing requirements

requires reasonably accurate demand
forecasts for each product, and knows
the standard processing time per unit for
each product, the number of work days
per year and the number of shifts.
 Example: A department works one 8 hour shift, 250 days in a
year, and has these figures for usage of a machine that is currently
being considered:

Prod Annual Standard Processing

uct demand processing time time needed
per unit (Hr) (Hr)

1 400 5.0 2000

2 300 8.0 2400

3 700 2.0 1400

5800
 k

pD i i
NR  i 1
T
where
N R  number of required machines
pi  standard processing time for product i
Di  demand for product i during the planning horizon
T  processing time available during the planning horizon

 (5 * 400)  (8 * 300)  (2 * 700)

NR  i 1
 2.9machines
8 * 250
 Planning Service Capacity/Additional challenges of
planning service capacity are:

There are three very important factors in

planning service capacity are:
 The need to be near customers.
 The inability to store services, and
 The degree of volatility of demand
 Economies and Diseconomies of Scale

Economies of scale is that as a plant gets larger

and volume increases, the average cost per unit
of output will drops.
Diseconomies of Scale:
Scale
– Where the cost per unit rises as volume
increases
– Often caused by bottleneck
 Cont’d

Figure: Minimum cost and optimal operating rate are functions of

size of a production unit
 Developing Capacity Alternatives

Alternative 1: Purchase one large facility, which is

requiring one large initial investment.

Alternative 2: Add capacity incrementally in

smaller chunks as needed.
 Evaluating alternatives
A number of techniques are useful for
evaluating capacity alternatives from
economic stand point such as:
cost volume analysis
financial analysis
waiting line analysis and
Decision theory.
1. Cost volume analysis/ Break even point analysis

profit  TR  TC
profit  R * Q  ( FC  VC * Q )
the required volume needed to generate specified profit
Volume     

Example. A manager has an option of purchasing one, two,

or three machines. Fixed costs and potential volume are as
follows:
 Number of Total annual fixed Corresponding range of output
machines costs

1 9,600 Birr 0 to 300

2 15,000 Birr 301 to 600

+3 20,000 Birr 601 to 900

If Variable cost is 10 Birr per unit and revenue/ selling price is 40

Birr per unit.
Required
A.Determine the breakeven point for each range.
B.If projected annual demand is between 580 and 660 units, how
many machines should the manager decide to purchase?
 Solution. a.

9600
i..Qbe p   320..unit / not.in.range
40 / unit  10 / unit
15000
ii..Qbe p   500
40 / unit  10 / unit
20000
iii...Qbe p   666.67units
40 / unit  10 / unit
b. Comparing the projected range of demand to
the two ranges for which a breakeven point
occurs, you can see that the breakeven point is
500, in range 301 to 600. this means that even
if demand is at the low end of the range (i.e.
580), it would be above the breakeven point
and thus yield profit.
That is not true of range 601 to 900. at the top end
of projected demand (i.e. 660), the volume
would still be less than the breakeven point for
that range, so there would be no profit, hence
the manager should choose two machines
 IMPORTANCE OF CAPACITY DECISIONS

 It have a real impact on the ability of the

organisation to meet future demands for products
and services.
 It affect operating costs.
 It often involve long-term commitment of
resources
 It can affect competitiveness.
 Capacity affects the ease of management;
  
2.4 Facility location and layout
 
2.4.1 Facility location
Concept of a Facility:
 2.4.1 Planning Facility Location
• Plant location or the facilities location problem is an
important strategic level decision making for an organisation.
• The selection of location is a key-decision as large investment
is made in building plant and machinery.
• The plant location should be based on the company’s
expansion plan and policy, diversification plan for the
products, changing market conditions, the changing sources
of raw materials and many other factors that influence the
choice of the location decision.
• The purpose of the location study is to find an optimum
location one that will result in the greatest advantage to the
organization.
 Need for Selecting a Suitable
Location
• The need for selecting a suitable location arises because of
three situations.
I. In Case of Location Choice for the First Time or New
Organisations.
 The following are the factors to be considered while selecting
the location for the new organisations:
– Identification of region
– Choice of a site within a region
– Dimensional analysis
 Cont’d
II. In Case of Location Choice for Existing Organisation
•The different operations strategies under this circumstances could
be:
– Plants manufacturing distinct products
– Manufacturing plants supplying to a specific market area.
– Plants divided on the basis of the process or stages in
manufacturing
III. In Case of Global Location
Because of globalisation, multinational corporations are setting up
their organizations by extending their operations in other countries.
 Factors Influencing Plant/Facility Location

CONTROLLABLE FACTORS UNCONTROLLABLE FACTORS

 Proximity to markets  Government policy
 Supply of materials  Climate conditions
 Transportation facilities  Supporting industries and services
 Infrastructure availability  Community and labour attitudes
 Labour and wages  Community Infrastructure.
 External economies
 Capital.
 Location Models
• Some of the popular models are:
1. Factor rating method
2. Weighted factor rating method
3. Centre of gravity method
4. Break-even analysis and etc.
 1. Factor Rating Method
• The process of selecting a new facility location involves a
series of following steps:
1. Identify the important location factors.
2. Rate each factor according to its relative importance, i.e.,
higher the ratings is indicative of prominent factor.
3. Assign each location according to the merits of the
location for each factor.
4. Calculate the rating for each location by multiplying
factor assigned to each location with basic factors
considered.
5. Find the sum of product
 ILLUSTRATION 1:
• Let us assume that a new medical facility, Health-care, is to
be located in Adama. The location factors, factor rating and
scores for two potential sites are shown in the following table.
Which is the best location based on factor rating method?
 Solution

The total score for location 2 is higher than that of location 1.

Hence location 2, is the best choice.
 2. Weighted Factor Rating Method
• In this method to merge quantitative and qualitative factors,
factors are assigned weights based on relative importance and
weight-age score for each site using a preference matrix is
calculated. The site with the highest weighted score is selected
as the best choice.

• ILLUSTRATION 2: Let us assume that a new medical facility,

Health-care, is to be located in Adama. The location factors,
weights, and scores (1 = poor, 5 = excellent) for two potential
sites are shown in the following table. What is the weighted
score for these sites? Which is the best location?
Cont’d
 SOLUTION:
The weighted score for this particular site is
calculated by multiplying each factor’s weight by its
score and adding the results:
Weighted score location 1 = 25 × 3 + 25 × 4 + 25 × 3 + 15 × 1 +
10 × 5
= 75 + 100 + 75 + 15 + 50 = 315
Weighted score location 2 = 25 × 5 + 25 × 3 + 25 × 3 + 15 × 2 +
10 × 3
= 125 + 75 + 75 + 30 + 30 = 335
•Location 2 is the best site based on total weighted
scores.
 3. Centre of Gravity
• Centre of gravity is based primarily on cost considerations. This
method can be used to assist managers in balancing cost and
service objectives. The centre of gravity method takes into
account the locations of plants and markets, the volume of
goods moved, and transportation costs in arriving at the best
location for a single intermediate warehouse.
• The centre of gravity is determined by the formula:

•where Cx = x-coordinate of the centre of gravity

•Cy = y-coordinate of the centre of gravity
•Dix = x-coordinate of location i
•Diy = y-coordinate of location i
 ILLUSTRATION 3:
• The new Health-care facility is targeted to serve seven census
tracts in Adama. The table given below shows the coordinates
for the centre of each census tract, along with the projected
populations, measured in thousands. Customers will travel from
the seven census tract centres to the new facility when they
need health-care. Two locations being considered for the new
facility are at (5.5, 4.5) and (7, 2), which are
• the centres of census tracts C and F. Details of seven census
tract centres, coordinate distances along with the population
for each centre are given below. Find the target area’s centre of
gravity for the Health-care medical facility.
 Cont’d

SOLUTION: To calculate the centre of gravity, start with the

following information, where population is given in thousands.
 Cont’d

•Next we find Cx and Cy.

•Cx = 453.5/68 = 6.67
•Cy = 205.5/68 = 3.02
The centre of gravity is (6.67, 3.02). Using the centre of gravity as
starting point, managers can now search in its vicinity for the optimal
location.
 4. Break-even Analysis

• Break even analysis implies that at some point in the

operations, total revenue equals total cost. Break even
analysis is concerned with finding the point at which
revenues and costs agree exactly. It is called ‘Break-even
Point’. The Fig. 4.3 portrays the Break Even Chart: Breakeven
point is the volume of output at which neither a profit is
made nor a loss is incurred. The Break Even Point (BEP) in
units can be calculated by using the relation:
 ILLUSTRATION 5:
• Potential locations X, Y and Z have the cost structures shown
below.
• The ABC Company has a demand of 130,000 units of a new
product. Three potential locations X, Y and Z having following
cost structures shown are available. Select which location is
to be selected and also identify the volume ranges where
each location is suited?
 SOLUTION:
• Solve for the crossover between X and Y:
• 10X + 150,000 = 8X + 350,000
• 2X = 200,000
• X = 100,000 units
• Solve for the crossover between Y and Z:
• 8X + 350,000 = 6X + 950,000
• 2X = 600,000
• X = 300,000 units
• Therefore, at a volume of 130,000 units, Y is the appropriate
strategy.
• From the graph we can interpret that location X is suitable up to
100,000 units, location Y is suitable up to between 100,000 to
300,000 units and location Z is suitable if the demand is more than
300,000 units.
 Cont’d
From the graph we can interpret that location X is suitable up to
100,000 units, location Y is suitable up to between 100,000 to
300,000 units and location Z is suitable if the demand is more
than 300,000 units.

Break-even chart
 2.4.2 Facility Layout
 Plant layout refers to the physical arrangement of
production facilities.
 It is the configuration of departments, work centres
and equipment in the conversion process.

 According to Moore “Plant layout is a plan of an

optimum arrangement of facilities including personnel,
operating equipment, storage space, material handling
equipment and all other supporting services along with
the design of best structure to contain all these
facilities”.
 Principles of Plant Layout
Principle of integration
Principle of minimum distance
Principle of cubic space utilisation
Principle of flow
Principle of maximum flexibility
Principle of safety, security and
satisfaction
Principle of minimum handling
 CLASSIFICATION OF LAYOUT

• Layouts can be classified into the

following five categories:
– 1. Process layout
– 2. Product layout
– 3. Combination layout
– 4. Fixed position layout
– 5. Group layout
 Process Layout
• Process layout is recommended for batch production. All
machines performing similar type of operations are grouped at
one location in the process layout e.g., all lathes, milling
machines, etc. are grouped in the shop will be clustered in like
groups.
• Thus, in process layout the arrangement of facilities are grouped
together according to their functions.
• Process layout is normally used when the production volume is
not sufficient to justify a product layout. Typically, job shops
employ process layouts due to the variety of products
manufactured and their low production volumes.
 Product Layout
 In this type of layout, machines and auxiliary services
are located according to the processing sequence of
the product.
 The product layout is selected when the volume of
production of a product is high such that a separate
production line to manufacture it can be justified.
 In a strict product layout, machines are not shared by
different products. Therefore, the production volume
must be sufficient to achieve satisfactory utilisation of
the equipment.
 3. Combination Layout
• A combination of process and
product layouts combines the
advantages of both types of layouts.
 4. Fixed Position Layout
 This is also called the project type of layout. In this
type of layout, the material, or major components
remain in a fixed location and tools, machinery, men
and other materials are brought to this location.

 This type of layout is suitable when one or a few

pieces of identical heavy products are to be
manufactured and when the assembly consists of large
number of heavy parts, the cost of transportation of
these parts is very high.
 5. Group Layout (or Cellular Layout)
 A grouping of equipment for performing a sequence of
operations on family of similar components or products has
become all the important.

 Group Technology (GT) is the analysis and comparisons of items

to group them into families with similar characteristics.

 GT can be used to develop a hybrid between pure process layout

and pure flow line (product) layout. This technique is very useful
for companies that produce variety of parts in small batches to
enable them to take advantage and economics of flow line
layout.
 Cont’d
• The application of group technology involves two
basic steps;
First step is to determine component families or
groups.
The second step in applying group technology is to
arrange the plants equipment used to process a
particular family of components.
Thank You!