Operations Management: Processes and

Supply Chains
Thirteenth Edition

Capacity
Planning
Chapter 5
CH. 4
TOPICS TO
BE COVERED
Planning Long-Term
Capacity

Capacity Timing and

Sizing Strategies

Systematic Approach
to Long-Term Capacity
Decisions
Tools for Capacity
Planning
Class Work Session – Capacity
1. What are the considerations for determining needed capacity?
- Consider demand, people, equipment, and any other areas

2. Does your process have enough capacity? How do you know?

3. What’s your labor productivity?

Topic Key Information

Product Demand 52,000 units per year (or 1000 units per week)
Processing Time 0.46 hours per unit on average
Product Mix 100 hours per week of setup / changeover time
Equipment Needed 5 identical machines that can make up to 210 parts
per week each

People Fully staffed at 14 workers for 40 hours per week

Class Work Session – Capacity – A Change!
1. What are the considerations for determining needed capacity?
- Consider demand, people, equipment, and any other areas

2. Does your process have enough capacity? How do you know?

3. Your Marketing team wants to run a promotion to raise sales,

resulting in demand of 1100 per week. What would you do?

Topic Key Information

Product Demand 52,000 units per year (or 1000 units per week)
Processing Time 0.46 hours per unit on average
Product Mix 100 hours per week of setup / changeover time
Equipment Needed 5 identical machines that can make up to 210 parts
per week each

People Fully staffed at 14 workers for 40 hours per week

Examples of
Adding Capacity
More Examples of
Adding Capacity
Examples of
Reducing
Capacity
IT’S NOT JUST ABOUT CLOSING
SITES…
WHAT IS CAPACITY ?
Capacity is the maximum rate of output of a process or a system.

Capacity decisions are some of the most important decisions of

the business.
 Goal is to meet customer demand
 Too little capacity misses revenue opportunities and may impact
on-time delivery performance
 Too much capacity is wasting money and may lead to the
downfall of the company!

Before you invest in new capacity, you must understand the

current process and how it interrelates with the overall value
chain!!
CONSIDERATIONS FOR
CAPACITY CHANGES
FOR AN EXPANSION OR A REDUCTION

Future demand Operating profit Investment Resource

(Marketing and (Accounting) implications availability
Sales) (Finance) (Human
Resources)

Infrastructure Operational Supply chain

(Information impact support (Supply
Systems) (Operations) Chain)
CAPACITY CHANGES – TIME
HORIZONS
CAPACITY CHANGES – THIS
CHAPTER

Save for
Chapter
6
CHARACTERISTICS OF LONG-TERM
CAPACITY PLANNING
1. Decisions are made at the
Capacity planning
Organizational Level
(long-term) 2. These are considered strategic decisions
• Economies and because of the investment and impact
diseconomies of on the business
scale 3. The horizon is generally two years out
• Capacity timing
and sizing
into the future
strategies
• Systematic Considerations must include:
approach to o How much cushion do we need in our
capacity business?
decisions o Should we invest in advance of the
demand or wait-and-see?
FIRST, WE MUST DETERMINE OUR
CURRENT STATE.
HOW DO YOU MEASURE CAPACITY
AND CAPACITY UTILIZATION?
The answer: “It depends!”

Examples:
 Airlines use seat-miles
 Retailer uses sales $$ per square foot
 Auto manufacturer uses throughput – cars made
 Hospitals may use patients or beds filled
 Machine center will use worker hours or machine hours

The bottom line is to use a measure that optimizes your

business resources.
MEASURES OF CAPACITY – OUTPUT OR INPUT?

Use Output measures when:

 The firm uses high volume, standardized processes
 Relatively small number of products
 Also good for measuring individual processes within a firm
 Examples of output measures – throughput, seat miles, revenue,
etc.

Use Input measures when:

 The firm uses low-volume, flexible processes
 High variety and product mix
 Examples of input measures – machine hours, people hours,
trucks received, etc.
MEASURING CAPACITY UTILIZATION

Average output rate

Utilization   100%
Maximum capacity

Maximum capacity – Greatest level of output that can

be sustained for a longer period of time
Consider (things like):
• Employee work schedules and hours
• Equipment performance
• Process yields
• Downtime requirements for routine equipment
maintenance work
CONSIDER ECONOMIES OF SCALE FOR
CAPACITY ADDITIONS
Economies of scale – efficiency gained when adding
capacity (which should lead to additional volume)
1. Spreading fixed costs
Example – Building costs, support function costs (such as HR,
Finance, Marketing) , corporate allocations, etc.
2. Reducing construction costs
Increasing the size of a building will not cause additional costs for
permitting, architects fees, etc.
3. Cutting costs of purchased materials
Leverage for reduced pricing per unit
4. Finding process advantages
Better technology, more efficient processes
ALSO CONSIDER DISECONOMIES OF SCALE
FOR CAPACITY ADDITION
Diseconomies of scale – efficiencies lost due to the
addition of capacity and volume
1. Complexity
Too many layers of management and bureaucracy can stifle a
business, slow it down, and add barriers to performance
2. Loss of focus
If too many resources (people and money) are required to
implement the new capacity and make it successful, they can
lose focus on the core business
3. Inefficiencies
Too much business can cause chaos in a firm. People and
equipment can be over-utilized and driven to failure
EXAMPLE OF:
ECONOMIES AND DISECONOMIES
OF SCALE
CONSIDERATIONS THAT MUST BE
EVALUATED BEFORE MAKING
CAPACITY DECISIONS

Sizing Capacity “Cushions”

Timing and Sizing of the Expansion

Linking the Process Capacity with Other Decisions

HOW TO Capacity cushions are the amount of reserve
DETERMI capacity a process uses to handle sudden increases
in demand or temporary losses of production
NE capacity.
CAPACITY  It measures the amount by which the average
utilization (in terms of total capacity) falls below
CUSHIONS 100 percent.
(WHICH
CAN BE Capacity cushion = 100% – Average Utilization
YOUR rate (%)
 Capacity cushions vary with industry
MOST  Capital intensive industries prefer cushions well
CONTROV under 10 percent while hotel industry can live
ERSIAL with 30 to 40 percent cushion.

DECISION)
WHY DO WE WANT A CAPACITY CUSHION?
Cheaper to have additional staff than to
lose customers due to long lines
Large variation in demand • Ex: Grocery stores, Target, (not
Walmart)

Amount of effort changes as the mix

Changing product mix of product or services changes

Need to respond when material is

Unstable supply chain available

Absenteeism, vacations, holidays,

Normal operating issues may offset the need for high
overtime
YOU ALSO MUST DECIDE:
CAPACITY TIMING AND SIZING OF
THE INVESTMENT
The market may change…

Changing market trends

Then, you must decide on
• Automotive industry is a when to take the leap and
good example
• SUVs, Trucks, Hybrids,
make the investment. Do
Electric you invest early
(expansionist) or follow
Demand decreases the market (wait-and-
• Retail Chains and Banks see)?
are very good examples
• Both have reduced brick
and mortar capacity
because of demand
 CAPACITY TIMING AND SIZING –
EXPAND IN ADVANCE OF THE NEEDED
CAPACITY
Benefits:
• Faster rate of
learning (remember
the learning curve!)
• Economies of scale
possible
• Send a signal to the
market that you are
in it to win it
• Scare off
competitors

Downside and Risks:

• Covering costs
now, without
additional revenue
• Sales may not
materialize – then
what?
 CAPACITY TIMING AND SIZING –
WAIT-AND-SEE WHAT HAPPENS IN THE
MARKET
Benefits:
• Save the money
now!
• Less risk if the
market never really
materializes
• Cover short-term
demand to see what
is needed in the
long run

Downside and Risks:

• Could lose
business to a
competitor
• Higher demand
could result in
missing delivery
schedules and lost
customers
ANOTHER VIEW OF CAPACITY PLANNING STRATEGIES
THE MOST LIKELY ANSWER

Make a smaller investment now, if needed, and

cover the short-term gap with short-term
options. It’s not always all or nothing.

But – Before making any new investment, make

sure your existing process has been
optimized!!
(That’s what we learn in this class!)
HOW DO
WE GET Estimat Estimate future capacity requirements
e
THERE?
NEED TO Identify gaps by comparing requirements with
Identify
USE A available capacity

SYSTEMAT
IC
APPROACH Develop Develop alternative plans for reducing the
gaps
TO LONG-
TERM
CAPACITY Evaluat Evaluate each alternative, both qualitatively
DECISIONS e and quantitatively, and make a final choice
 STEP 1 - ESTIMATE CAPACITY
REQUIREMENTS - 1
For one service or product processed at one operation with a one-year time period, the
capacity requirement, M, is

where:
D = demand forecast for the year (number of customers served or units produced)
p = processing time (in hours per customer served or unit produced)
N = total number of hours per year during which the process operates
C = desired capacity cushion (expressed as a percent)
M = the number of input units required
 STEP 1 - ESTIMATE CAPACITY
REQUIREMENTS - 2
It gets a bit more complicated when there are Setup times.
These may be required if multiple products are produced
What is a Setup?
One-time portion of a production cycle in which a specific machine, work
center, or assembly line is 'made ready' to switch from production of the
last good piece of the last lot to the first good piece of the new lot. Also
called change over.
There is no production during the setup.

Annual Setup Time = (Total Demand for the year (D) / Lot size (Q)) x Setup time
(s)
= (D/Q)s
Setup Setup

Product A Product B Product C

Production sequence over time

STEP 1 - ESTIMATE CAPACITY
REQUIREMENTS - 3
Therefore, the capacity requirements must include both
processing times and setup times

where:
Q = number of units in each lot
s = setup time in hours per lot
EXAMPLE FOR CAPACITY REQUIREMENTS
1. A copy center in an office building prepares bound reports for two clients.
2. The center makes multiple copies (the lot size) of each report.
3. The processing time to run, collate, and bind each copy depends on, among other
factors, the number of pages.
4. The center operates 250 days per year, with one 8-hour shift.
5. Management believes that a capacity cushion of 15 percent (beyond the allowance
built into time standards) is best.
6. It currently has three copy machines.
7. Based on the following information, determine how many machines are needed at the
copy center.

Item Client X Client Y

Annual demand forecast (copies) 2,000 6,000
Standard processing time (hour/copy) 0.5 0.7
Average lot size (copies per report) 20 30
EXAMPLE FOR CALCULATING CAPACITY
REQUIREMENTS - CONTINUED
The equation looks worse than it is!

Rounding up to the next integer gives a requirement of

four machines.
PRACTICE PROBLEM
The Southern Manufacturing Company is producing products A and B, using the
same machine called Powermation. Demand forecasts for next year and other
production-related information are provided in the following table.

The company works each machine 250 days per year and operates 2 shifts each
day, each shift covering 8 hours. If 25 percent of capacity cushion is maintained
throughout the year, how many machines (Powermation) does the company need
next year to meet the demand? (Round your answer up to the next whole machine.)

Product A Product B

Demand forecast (units/yr) D 8,000 15,000

Batch size (units/batch) Q 80 150

Processing time (hr/unit) p 2.5 2.0

Setup time (hr/batch) s 16 12

𝑴 =¿ ¿
Practice Problem -
continued 𝑴 =¿ ¿
Product A:
(8000 x 2.5) + (8000 / 80) x 16 =
20,000 + 1600 = 21,600 hours

Produc Produc
Product B:
tA tB (15,000 x 2) + (15,000 / 150) x 12 =
Demand forecast (units/yr)
30,000 + 1200 = 31,200 hours
8,000 15,000
D

Batch size (units/batch)

Hours Needed = 52,800
80 150
Q
Hours Available:
Processing time (hr/unit) 2.5 2.0 250 days per year x 2 shifts x 8 hours = 4000 hours
p

Setup time (hr/batch) 16 12

Reduce by Capacity Cushion:
s
4000 hours x (1 – 25%) = 3000 hours available

Hours Available = 3,000

Machines Needed:
52,800 hours needed / 3,000 hours available = 17.6,
therefore, we need 18 machines
 1. Estimate future capacity requirements

2. Identify gaps by comparing requirements

with available capacity

STEP 2 - IDENTIFY GAPS

3. Develop alternative plans for reducing the
gaps

4. Evaluate each alternative, both

qualitatively and quantitatively, and make a
final choice

Identify gaps between projected capacity

requirements (M) and current capacity
Complicated by multiple operations and resource
inputs
Chapter 6 – We will learn that we must manage the
bottlenecks to truly increase capacity
 1. Estimate future capacity requirements
STEPS 3 AND 4 – 2. Identify gaps by comparing requirements
DEVELOP AND with available capacity

EVALUATE 3. Develop alternative plans for reducing the

gaps
ALTERNATIVES 4. Evaluate each alternative, both
qualitatively and quantitatively, and make a
final choice

- Base case is to do nothing and suffer the consequences

- Many different alternatives are possible – remember
expansionist and wait-and-see. There are many
alternatives in between these.
- Qualitative concerns include strategic fit, risk,
uncertainties of the market, competitors, customer
implications, etc.
- Quantitative concerns may include cash flows and other
quantitative measures.
TOOLS FOR CAPACITY PLANNING
Waiting-line models
Useful in high customer-contact processes
We cover these next class (Supplement B)
Simulation
Useful when models are too complex for waiting-
line analysis.
Model the process in advance to minimize risk!
Decision trees
Useful when demand is uncertain and sequential
decisions are involved
FYI – DECISION TREES –
ESTIMATING THE BETTER
ALTERNATIVE
FYI - Relationship Between Capacity Types

Theoretical Capacity
>=
Effective Capacity
>=
Process Capacity
>=
Throughput
FYI - TYPES OF The maximum rate of output of a process or a
CAPACITY
Types of Definition
system.
Example
Capacity
1 washing machine can wash 10 loads per 10 hr
day. Each load is 20 clothes. There are 2
Number of Flow Units Processed by the machines.
Theoretical
Resource Pool during “Scheduled
Capacity Availability”
Theoretical Capacity = 2 x 20 x 10 = 400
clothes/day
Resources Not Available for 60 minutes/day
Effective or Number of Flow Units Processed by the (maintenance, etc.)
Core Resource Pool during “Net
Capacity Availability” Effective Capacity = 400 x 540/600 =
360 clothes / day
Resource is not able to work during its Say starving and blocking happens for 30
net availability due to not having minutes / day.
Process anything to work on (Starving) or can’t
Capacity work because
it can’t push finished work to Process Capacity = 400 x 510 / 600 =
downstream (Blocking) 340 clothes/day

Say the external demand is 300 clothes/day;

External Constraint of lower demand
Throughput
than Process Capacity
Throughput = 300 clothes/day
ONE MORE PRACTICE
PROBLEM
Assume: Average output is 45 cars per day
Maximum Capacity: 52 cars / day

1. What’s the capacity utilization?

2. What’s the capacity cushion?

ONE MORE PRACTICE
PROBLEM - ANSWERS
Assume: Average output is 45 cars per day
Maximum Capacity: 52 cars / day

1. What’s the capacity utilization?

45/52 = 86.5%

2. What’s the capacity cushion?

100 – 86.5 = 13.5%
From 2019
GM's labor dispute is being
exacerbated by the
automaker's major shift to
electric vehicles

https://www.businessinsider.com/general-
motors-labor-dispute-exacerbated-by-electr
ic-vehicle-plans-2019-9
September 2023