Capacity PlanningCustomer the foundations of an

process operations mgmt system

capacity

we shall now address Capacity

a. Creating New Capacity

b. Expanding Capacity

Three Basic Questions

How much Capacity ?

How ?? In What Stages ?

Overall Economy - Financial Implications

Flexibility

Single Plant

Single Location Multiple Plants

Multiple Locations

In several countries ?

The Combination Of :

Equipment

process

Accessories

Workflow And Culture

Employee Skill Levels

How much of what and in how much time a firm can produce is capacity.

PROCESSCAPACITYCONSISTENCY

CUSTOMER

Productive Resources To Meet

Sales Goals

Service Goals

Physical Plant Resources, Human Resources, Material Resources And Knowledge Resources Are The Four Which Make Up For Capacity (And Capability).

Here we will concentrate on;

physical plant resources.

Short Term Capacity Issues are discussed by you in Aggregate Planning

Here we shall focus on medium term and long term issues.

Capital Investment AnalysisSome Terms and Issues

Break Even

Compound Interest

Present Value of Rupee

Equivalent Annual Cost (To compare proposals with different life times)

Internal Rate of Return.

Cash Flow

Depreciation

Debt service coverage ratio

Obsolescence

Opportunity costs

Rate contract possibilities

Supply chain creation - an alternative ?Decision tree, Risk Analysis

Criteria for Capacity Management Decision

1. Number of Units that internal and external factories must satisfy

2. Timing of Demand

a. Ability / desirability of postponing demand

b. Seasonal or cyclical variations in the demand pattern

c. Effects of the product life cycle on demand

d. Ability to forecast total market demand

e. Stability of Market Share

1. Locations to expand or contract capacity in the customer-service system, including production, distribution and retailing operations

2. Timing of capacity adjustments

a. Time required to expand or contract capacity

b. Feasible increments of expansion or contraction

c. Capacity adjustments to lead or lag anticipated changes in demand

5.Value Tradeoffs for these decisions.

Capacity is rate of output per unit of time.

(Capability….What all and how much you

can do ? )

(Capacity ……How much you can do ?)

Capacity is sometimes stated on input rate………sometimes on output rate.

Example:

1.Sugar Mills……so much of sugarcane crushing per day.

2.Steel Mills…..so much of steel produced per day.

Types of Capacity

Maximum Capacity / Design Capacity

Effective Capacity / Planned Capacity

Demonstrated Capacity

Maximum Capacity or Designed Capacity assumes ideal theoretical situation like

No Break Down

No Power Shut down

No Absenteeism

No set up time lost……etc.

Effective Capacity

Management ‘Plan’ to operate at a capacity lower than maximum or design capacity ;

(a) To give allowance for unexpected happenings like,

Breakdown . Absenteeism

Preventive Maintenance

Design Problem solving etc.,

Operator’s Need for Breaks

(b) To provide for unexpected high demand.

Effective Capacity = Maximum x utilisation x

efficiency

Utilisation = Actual Hours / Scheduled Available hours

Efficiency = Standard Time / Actual Time

Maximum Capacity = Hours per shift x shifts per day x days per month x planned OT x Output per hour of critical resource.

(Note the word critical resource which has to be identified)

Demonstrated Capacity

= Average Recorded Figures of Actual output

Demonstrated Capacity Differs from Effective and Maximum Capacity due to

Product Mix, Operator Skill and experience, Equipment condition, variation in material quality and other problems like;

Starvation

Blockage

Rejections and Rework

Training Time

New Development and Trials

In an effective and efficient and well designed

OMS, Gap between maximum and effective and

demonstrated capacity should be;

as per company’s plan and strategy.

Problems with Capacity Insufficient Capacity

Excess Capacity

Desire to use “Existing” Not so suitable capacity

Capacity audit and bottleneck diagnosis helps to solve these problems

When Capacity is insufficient and is being over utilised, in the short term there is a very good return on investment and cash flow will be very attractive, but there are associated problems.

• Any small upset in the process, like breakdown, non-receipt of materials in time creates a chain of problems / confusion.

• High overtime payments to labour tends to create “OT Fixation”.

• Rejections and deviations may increase.• Customer Service level drops.• Over Taxes machines and people.• Inadequate maintenance• Innovations / improvements suffer

Similarly having excess capacity is also a curse.1. Low ROI2. People getting adjusted to low work load may

not change their speed even when needed.3. Postponement of tasks inviting uncertain

outcome.4. More Rejections and more waste.5. Higher employee cost per unit of production

and will keep increasing.6. Overall , sets a “Lazy” or laid back culture.

Similarly the problems connected with desire to use existing capacity may lead to ineffective / inefficient working unless “re-engineered”.

OPTION FOR INCREASING CAPACITYUse over time Run multiple shifts

Part of the processSubcontract

Complete process Buy the components ( Make buy decisions ) Increase labour force Add machines Modify process Expand Acquire facilities Acquire capacity Lease equipment

Out source theProducts or

services

ECONOMICS OF PLANT SIZE C = V + F / R C = average cost per unit of productionV = variable costF = fixed cost of the systemR = planned capacity

Small Plant Large PlantMedium-sized Plant

Range 1 Range 2 Range 3

Costs

Level of ProductionForecasting the expected volume is a key issue.Notice the BE point BW RangesWhen you consider multiple locations transport costs also to be considered.

?

CAPACITY EXPANSION STRATEGIES

Demand

Plant Capacity

A. CAPACITY LEAD STRATEGY

Cost

Time

DemandPlant Capacity

B. CAPACITY LAG STRATEGY

Cost

Time

CAPACITY EXPANSION STRATEGIES…CONTD

Plant Capacity

C. CAPACITY STRADDLE STRATEGY

Cost

Time

CAPACITY EXPANSION STRATEGIES…CONTD

Demand

Flow Serve Corporation USACapacity Creation Strategy

HQ USA

Plants in

USA

South America

Europe

Middle East

Asia

Several Components

Several

countries

“Best Cost Producer”……Who?

Leading to Global Capacity Plans

This is at one level

At “Plant Level”

“ Quick Response Service Units” (In Spare Time also produce some components)

Which are small shops catering to cluster of industries.

Human Capital

Tradeoffs

Major ValueEnhancementCapabilities

Invest in HRD for Rebuilding Future

Upgrade Facility (As Needed)

Employee Skills and Culture Valuable

Employee Skills and Culture as Liability

Relocate (Start from Scratch)

Rebuild in same Location

Limited Value Enhancement Capabilities

Plant, Equipment, and Logistic Tradeoffs

PLANT REJUVENATION TRADEOFFS

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