Managing Capacity

Chapter 6
6
Chapter Objectives
Be able to:
Explain what capacity is, how firms measure
capacity, and the difference between
theoretical and rated capacity.
Describe the pros and cons associated with
three different capacity strategies: lead, lag,
and match.
Apply a wide variety of analytical tools to
capacity decisions, including expected value
and break-even analysis, decision trees,
learning curves, the Theory of Constraints,
waiting line theory, and Littles Law.

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6
Definitions
Capacity The capability of a
worker, a machine, a workcenter,
a plant, or an organization to
produce output in a time period.
2010 APICS
Dictionary

Capacity decisions
How is it measured?
Which factors affect capacity?
The impact of the supply chain on the
organizations effective capacity.

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6
Measures of Capacity
Theoretical capacity The
maximum output capability,
allowing for no adjustments for
preventive maintenance,
unplanned downtime, or the like.

Rated capacity The long-term,

expected output capability of a 2010 APICS
Dictionary

resource or system.
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6
Examples of Capacity

Table
6.1

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 Indifference Point
6
Examples
Capacity for a PC Assembly Plant

(800 units per line per shift)(# of lines)(# of shifts

Controllable Uncontrollable
Factors Factors
1 or 2 shifts? Supplier problems?
2 or 3 lines? 98% or 100% good?
Employee training? Late or on time?

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Three Common
6
Capacity Strategies
Lead capacity strategy A capacity
strategy in which capacity is added in
anticipation of demand.
Lag capacity strategy A capacity
strategy in which capacity is added
only after demand has materialized.
Match capacity strategy A capacity
strategy that strikes a balance
between the lead and lag capacity
strategies by avoiding period of high
under or overutilization.
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Comparing Strategies

Figure
6.1

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Evaluating Capacity
6
Alternatives
Cost Comparison
Expected Value
Decision Trees
Break-Even Analysis
Learning Curves

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6 Comparison
Cost
Fixed costs The expenses an
organization incurs regardless of
the level of business activity.
Variable costs Expenses
directly tied to the level of
business activity.

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6 Comparison
Cost

TC = FC + VC * X

TC = Total Cost
FC = Fixed Cost
VC = Variable cost per unit of
business activity
X = amount of business activity
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Cost Comparison - Example
6
6.1

Table 6.2

Figure 6.2
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Cost Comparison - Example
6
6.1
Total cost of common carrier option = Total cost of contract
carrier option

$0 + $750X = $5,000 + $300X

X = 11.11 or 11 shipments
Find the indifference point the output
level at which the two alternatives
generate equal costs.
Total cost of contract carrier option = Total cost of leasing

$5,000 + $300X = $21,000 + $50X

X = 64 shipments

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 6
Expected Value

Expected value A calculation

that summarizes the expected
costs, revenues, or profits of a
capacity alternative, based on
several demand levels with
different probabilities.

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Expected Value Example 6.2

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Expected Value Example 6.2

C(low demand) = $5,000 + $300(30) =

$14,000
C(medium demand) = $5,000 +
$300(50) = $20,000
C(high demand) = $5,000 + $300(80) =
$29,000

EVContract = (14,000 * 25%) + ($20,000 * 60%) + ($29,000

* 15%)
= $19,850
EVCommon = (22,500 * 25%) + ($37,500 * 60%) + ($60,000
* Education,
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6
Decision Trees
Decision tree A visual tool that
decision makers use to evaluate
capacity decisions to enable users to
see the interrelationships between
decisions and possible outcomes.

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6
Decision Tree Rules
Draw the tree from left to right
starting with a decision point or an
outcome point and develop branches
from there.
Represent decision points with
squares.
Represent outcome points with
circles.
For expected value problems,
calculate the financial results for each
of the smaller branches and move6 - 18
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 6
Decision Trees Example 6.3

Original
Expected
Value Example

Figure 6.4

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6
Break-Even Analysis
Break-even point The volume
level for a business at which
total revenues cover total costs.

Where:
BEP = break-even point
FC = fixed costs
VC = variable cost per unit of business
activity
R = revenue per unit of business activity

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Break-Even Analysis Example
6
6.4

Suppose the firm makes $1,000 profit on each

shipment before transportation costs are
considered. What is the break-even point for
each shipping option?

Contracting: BEP = $5,000 / $700 = 7.1 or 8

shipments

Common: BEP = $0 / $250 = 0 shipments

Leasing: BEP = $21,000 / $950 = 22.1 or 23

shipments
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6
Learning Curves
Learning curve theory A theory
that suggests that productivity
levels can improve at a
predictable rate as people and
even systems learn to do tasks
more efficiently.

For every doubling of cumulative

output, there
is a Copyright
set percentage reduction
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6
Learning Curves

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 6
Learning Curve Example 6.5

What is the learning

percentage?

4/5 = 80% or .80

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Learning Curve Example 6.5

How long will it take to answer

the 25th call?

Figure 6.6

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Other Capacity
6
Considerations
The strategic importance of an
activity to a firm.

The desired degree of

managerial control.

The need for flexibility.

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The Theory of
6
Constraints
Theory of Constraints An approach
to visualizing and managing capacity
which recognizes that nearly all
products and services are created
through a series of linked processes,
and in every case, there is at least
one process step that limits
throughput for the entire chain.

Figure
6.7

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The Theory of
6
Constraints
Identify the constraint
Exploit the constraint
Keep it busy!
Subordinate everything to the constraint
Make supporting it the overall priority
Elevate the constraint
Try to increase its capacity more hours, screen out
defective parts from previous step.
Find the new constraint and repeat
As one step is removed as a constraint, a new one will
emerge.

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Theory of Constraints Example
6
6.6

Table 6.5

Where is the Bottleneck? Cut and

Style

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Theory of Constraints Example
6
6.6

Current
Process
Figure 6.9

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 Theory of Constraints Example
6
6.6

Adding a
Second
Stylist
Figure 6.10

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 Theory of Constraints Example
6
6.6

Adding
One
Shampoo
er
and 6.11
Figure Two
Stylists

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6
Waiting Line Theory
Waiting Line Theory A theory
that helps managers evaluate
the relationship between
capacity decisions and important
performance issues such as
waiting times and line lengths.

Figure
6.12
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6
Waiting Line Theory
Waiting Line Concerns:
What percentage of the time will the server be
busy?
On average, how long will a customer have to
wait in line? How long will the customer be in
the system?
On average, how may customers will be in
line?
How will those averages be affected by the
arrival rate of customers and the service rate
of the workers?
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6
Waiting Lines Example 6.7
The probability of arrivals in a time period =

Example: Customers arrive at a drive-up window

at a rate of 3 per minute. If the number of arrivals
follows a Poisson distribution, what is the
probability that two or fewer customers would
arrive in a minute?

P(< 2) = P(0) + P(1) + P(2) = .050 + .149 + .224 =

.423 or 42.3%
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6
Waiting Lines Example 6.7
The average utilization of the system:

Example: Suppose that customers arrive at a rate

of four per minute and that the worker at the
window is able to handle on average 5 customers
per minute. The average utilization of the system
is:

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6
Waiting Lines Example 6.8
The average number of customers waiting in the
system (CW) =

The average number of customers in the system

(CS) =

Example: Given an arrival rate of four customers

per minute and a service rate of five customers per
minute:

Average number of customers waiting:

Average number in the system:

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6
Waiting Lines Example 6.9
The average time spent waiting (TW) =

The average time spent in the system (TS) =

Example: Given an arrival rate of four customers

per minute and a service rate of five customers per
minute:

Average time spent waiting:

Average time spent in the system:

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6
Littles Law
Littles Law is a law that holds for
any system that has reached a
steady state that enables us to
understand the relationship
between inventory, arrival time,
and throughput time.
I = RT

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Littles Law - Example
6
6.11

Figure
6.14

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Littles Law - Example
6
6.11
Average Throughput Time =
T = I/R = (25 orders) / (100 orders per day)
= .25 days in order processing

Average time an order spends in workcenter A =

T = I/R = (14 orders)/(70 orders per day)
= .2 days in workcenter A

Amount of time the average A order spends in the plant =

Order processing time + workcenter A time
= .25 days + .2 days = .45 days

Amount of time the average B order spends in the plant =

Order processing time + workcenter B time
= .25 days + .05 days = .30 days
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Littles Law - Example
6
6.11
Average time an order spends in the plant =
70% x .45 days + 30% *.30 days
= .405 days

Estimate average throughout time for the entire system =

T = I/R = (40.5 orders)/(100 orders per day)
= .405 days for the average order

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Managing Capacity
Case Study
Forsters Market

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Printed in the United States of America.

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