Planning and Managing

Capacity
SBCO6160
Outline
Capacity
Design and Effective Capacity
Capacity Considerations
Capacity Planning
Managing Demand
Demand and Capacity Management in Service Sector
Evaluating Capacity Alternatives
Reducing Risk with Incremental Changes
Learning Objectives
1. Define the concept of capacity and explain how it is
measured
2. Discuss the importance of capacity planning
3. Describe the major steps in the capacity planning
process
4. Discuss capacity strategies
5. Show how different work flow layout influence
capacity
6. Applying a variety of analytical tools to capacity
decisions, including breakeven analysis, bottleneck
analysis, expected value analysis, waiting line
theory, and learning curve
3
What is Capacity?
The throughput, or the number of units a facility can
hold, receive, store, or produce in a period of time.
The capability of a worker, machine, work center, plant,
or organization to produce output per unit time.
No single capacity measure is applicable to all types of
situations.
Output measures
The choice of line flow process
Brewery and most flow processes
Input measures
The choice of flexible flow process
Photocopy shop, theatre
Output rate and capacity must be measured in the same
units: time, customers, units, or dollars 4
Decisions OP Managers Consider
How capacity is measured
Which factors affects capacity.
The impact of supply chain on the organizations effective capacity
Should be able to answer the following
How mush capacity do we need
When do we need it
What form should it take
Common Measures of Capacity
Output measures- are the usual choice of high-volume processes that
produce only one type of product.
Input measures-are the usual choice of low-volume, flexible
processes.
Ex: photocopy shop machine hours or the number of machines

6
Capacity Types

Design Capacity: a theoretical maximum output that of a

system in a given period of time under ideal conditions.

Effective Capacity/Systems Capacity: the maximum capacity

a firm expects to achieve given current operating constraints.
{quality factors, product mix, machine maintenance, scheduling
difficulties and the like}-lower than design capacity..
Actual output: the rate of output actually attained. It is typically
less than the effective output caused by machine breakdown
absenteeism, shortages of materials and quality problems as well as
factors outside the control of the operations managers.

7
Measures of System Effectiveness or Performance
Different measures of capacity are useful in defining two
measures of system effectiveness:
Efficiency is the percent of design capacity achieved
Efficiency = Actual output x 100% or (actual rate of production) x100%
Effective Capacity (standard rate of production)

Utilization is the percentage of effective capacity achieved

Utilization= Actual Output x100% or ( Hours Worked ) X 100%
Design Capacity (Hours Available)

Rated capacity = available time x utilization x efficiency

8
Common Measures of Capacity (Types of Business)
Types of Business Input Measures Output Measures
Oil Refinery Size of refinery Barrels of fuel oil per day

Retail Sales Number of square feet Units sold per day

Dollars per day
Annual sales dollar per sqm
Theatre Number of seats Number of performances
per week

Steel Mill Size of furnace Tons of steel per week

Airline Number of seats Number of flights per day

Available seat miles/month
(ASMs)
Auto Manufacturing Machine hours / labour Number of cars per shift
hours per month
9
Bakery Example

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

2011 Pearson Education

Bakery Example

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

2011 Pearson Education

Bakery Example

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

Efficiency = 148,000/175,000 = 84.6%

2011 Pearson Education

Bakery Example

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Efficiency = 84.6%
Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

= (175,000)(.75) = 131,250 rolls

2011 Pearson Education

Methods of Evaluating Capacity Alternatives
Cost Comparison
Expected Values
Decision Trees
Break-Even Analysis
Learning Curves
Cost Comparison
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.
Cost Comparison

TC = FC + VC * X

TC = Total Cost
FC = Fixed Cost
VC = Variable cost per unit of business activity
X = amount of business activity
Cost Comparison - Example: 2

Table 6.2
Cost Comparison - Example 2cont.

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
Decision Trees Example

Original Expected
Value Example
Break-Even Analysis

Technique for evaluating process

and equipment alternatives
Objective is to find the point in
dollars and units at which cost
equals revenue
Requires estimation of fixed costs,
variable costs, and revenue
 Break-Even Analysis
Fixed costs are costs that continue
even if no units are produced
Depreciation, taxes, debt, mortgage
payments
Variable costs are costs that vary
with the volume of units produced
Labor, materials, portion of utilities
Contribution is the difference between
selling price and variable cost

2011 Pearson Education

 Break-Even Analysis
Assumptions
Costs and revenue are linear
functions
Generally not the case in the
real world
We actually know these costs
Very difficult to verify
Time value of money is often
ignored
2011 Pearson Education
 Break-Even Example
50,000

Revenue
40,000
Break-even
point Total
30,000
Dollars

costs

20,000

Fixed costs
10,000

| | | | | |
0 2,000 4,000 6,000 8,000 10,000
Units

2011 Pearson Education

 Break-Even Analysis

Total revenue line
900

800
Break-even point Total cost line
700 Total cost = Total revenue
Cost in dollars
600

500

400 Variable cost

300

200

100 Fixed cost

| | | | | | | | | | | |
0 100 200 300 400 500 600 700 800 900 1000 1100
Figure S7.5 Volume (units per period)
2011 Pearson Education
Break-Even Analysis
BEPx = break-even point in x = number of units
units produced
BEP$ = break-even point in TR = total revenue = Px
dollars F = fixed costs
P = price per unit (after V = variable cost per unit
all discounts) TC = total costs = F + Vx

Break-even point occurs when

TR = TC F
or BEPx =
P-V
Px = F + Vx
Break-Even Analysis
BEPx = break-even point in x = number of units
units produced
BEP$ = break-even point in TR = total revenue = Px
dollars F = fixed costs
P = price per unit (after V = variable cost per unit
all discounts) TC = total costs = F + Vx

BEP$ = BEPx P
= F P Profit = TR - TC
P-V = Px - (F + Vx)
= F
= Px - F - Vx
(P - V)/P
F = (P - V)x - F
=
1 - V/P
 Break-Even Example

Fixed costs = $10,000 Material = $.75/unit

Direct labor = $1.50/unit Selling price = $4.00 per unit

F $10,000
BEP$ = =
1 - (V/P) 1 - [(1.50 + .75)/(4.00)]
 Break-Even Example

Fixed costs = $10,000 Material = $.75/unit

Direct labor = $1.50/unit Selling price = $4.00 per unit

F $10,000
BEP$ = =
1 - (V/P) 1 - [(1.50 + .75)/(4.00)]
$10,000
= = $22,857.14
.4375

F $10,000
BEPx = = = 5,714
P-V 4.00 - (1.50 + .75)

2011 Pearson Education

 Break-Even Example

Fixed costs = $10,000 Material = $.75/unit

Direct labor = $1.50/unit Selling price = $4.00 per unit

F $10,000
BEP$ = =
1 - (V/P) 1 - [(1.50 + .75)/(4.00)]

2011 Pearson Education

 Break-Even Example

Fixed costs = $10,000 Material = $.75/unit

Direct labor = $1.50/unit Selling price = $4.00 per unit

F $10,000
BEP$ = =
1 - (V/P) 1 - [(1.50 + .75)/(4.00)]
$10,000
= = $22,857.14
.4375

F $10,000
BEPx = = = 5,714
P-V 4.00 - (1.50 + .75)
 Break-Even Example
50,000

Revenue
40,000
Break-even
point Total
30,000
Dollars

costs

20,000

Fixed costs
10,000

| | | | | |
0 2,000 4,000 6,000 8,000 10,000
Units

2011 Pearson Education

 Break-Even Example

Multiproduct Case
F
BEP$ =
1-
Vi
Pi
x (Wi)

where V = variable cost per unit

P = price per unit
F = fixed costs
W = percent each product is of total dollar sales
i = each product

2011 Pearson Education

Multiproduct Example
Fixed costs = $3,000 per month
Annual Forecasted
Item Price Cost Sales Units
Sandwich $5.00 $3.00 9,000
Drink 1.50 .50 9,000
Baked potato 2.00 1.00 7,000
 Multiproduct Example
Fixed costs = $3,000 per month
Annual Forecasted
Item Price Cost Sales Units
Sandwich $5.00 $3.00 9,000
Drink 1.50 .50 9,000
Baked potato 2.00 1.00 7,000

Annual Weighted
Selling Variable Forecasted % of Contribution
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)
Sandwich $5.00 $3.00 .60 .40 $45,000 .621 .248
Drinks 1.50 .50 .33 .67 13,500 .186 .125
Baked 2.00 1.00 .50 .50 14,000 .193 .096
potato
$72,500 1.000 .469

2011 Pearson Education

 Multiproduct Example
BEP = $
F

1-
Vi
Pi
x (Wi)
Fixed costs = $3,000 per month
Annualx Forecasted
$3,000 12
Item Price Cost = Sales Units
= $76,759
.469
Sandwich $5.00 $3.00 9,000
Drink 1.50 .50
Daily 9,000
$76,759
Baked potato 2.00 sales = 312 days
1.00 = $246.02
7,000

Annual Weighted
Selling Variable .621 x $246.02% of Contribution
Forecasted
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales = 30.6 531x col 7)
$5.00$ Sales (col
sandwiches
Sandwich $5.00 $3.00 .60 .40 $45,000 .621 per day
.248
Drinks 1.50 .50 .33 .67 13,500 .186 .125
Baked 2.00 1.00 .50 .50 14,000 .193 .096
potato
$72,500 1.000 .469

2011 Pearson Education

Expected Monetary Value (EMV) and
Capacity Decisions

Determine states of nature

Future demand
Market favorability
Analyzed using decision trees
Hospital supply company
Four alternatives
Expected Monetary Value (EMV) and
Capacity Decisions
Market favorable (.4)
$100,000

Market unfavorable (.6)

-$90,000

Market favorable (.4)

$60,000
Medium plant
Market unfavorable (.6)
-$10,000

Market favorable (.4)

$40,000

Market unfavorable (.6)

-$5,000

$0
Expected Monetary Value (EMV) and
Capacity Decisions
Market favorable (.4)
$100,000

Market unfavorable (.6)

-$90,000

Market favorable (.4)

$60,000
Medium plant
Large Plant Market unfavorable (.6)
-$10,000

EMV = (.4)($100,000) Market favorable (.4)

$40,000
+ (.6)(-$90,000)
Market unfavorable (.6)
EMV = -$14,000 -$5,000

$0
 Expected Monetary Value (EMV) and
Capacity Decisions
-$14,000
Market favorable (.4)
$100,000

Market unfavorable (.6)

-$90,000
$18,000
Market favorable (.4)
$60,000
Medium plant
Market unfavorable (.6)
-$10,000
$13,000
Market favorable (.4)
$40,000

Market unfavorable (.6)

-$5,000

$0
2011 Pearson Education
Strategy-Driven Investment

Operations may be responsible

for return-on-investment (ROI)
Analyzing capacity alternatives
should include capital
investment, variable cost, cash
flows, and net present value
Limitations
1. Investments with the same NPV may have
different projected lives and salvage values
2. Investments with the same NPV may have
different cash flows
3. Assumes we know future interest rates
4. Payments are not always made at the end of a
period
Understanding and Analysing Process Capacity
This section deals with the unique challenge of understanding and
analysing capacity in a business process environment:
Here people or products travel through several different steps before
leaving the process
How does the capacity at each step affect the capacity of the overall
process?
What is the relationship between inventory levels, flow times and
process capacity.
The Theory of 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.
Bottleneck Analysis and Theory of
Constraints
Each work area can have its own unique capacity
Capacity analysis determines the throughput
capacity of workstations in a system
A bottleneck is a limiting factor or constraint
A bottleneck has the lowest effective capacity in
a system
Five steps approach to managing the constraint
(throughput) for a process chain-system
Identify the constraint
Exploit the constraint
Subordinate every thing to the constraint
Evaluate the constraint
Find new constraint and repeat the steps
 Process Times for Stations,
Systems, and Cycles
The process time of a station is the
time to produce a unit at that single
workstation
The process time of a system is the
time of the longest process in the
system the bottleneck
The process cycle time is the time it
takes for a product to go through the
production process with no waiting
2011 Pearson Education
 A Three-Station
Assembly Line QuickTime and a
decompressor
are needed to see this picture.

A B C

2 min/unit 4 min/unit 3 min/unit

Figure S7.4

2011 Pearson Education

 Process Times for Stations,
Systems, and Cycles
The system process time is the process
time of the bottleneck after dividing by the
number of parallel operations
The system capacity is the inverse of the
system process time
The process cycle time is the total time
through the longest path in the system

2011 Pearson Education

Capacity Analysis
Two identical sandwich lines
Lines have two workers and three operations
All completed sandwiches are wrapped

Bread Fill Toast

15 sec/sandwich 20 sec/sandwich 40 sec/sandwich
Order Wrap
30 sec/sandwich 37.5 sec/sandwich
Bread Fill Toast
15 sec/sandwich 20 sec/sandwich 40 sec/sandwich

2011 Pearson Education

 Capacity Bread Fill Toast

Analysis
15 sec 20 sec 40 sec
Order Wrap
30 sec 37.5 sec
Bread Fill Toast
15 sec 20 sec 40 sec

Toast work station has the longest processing time 40

seconds
The two lines each deliver a sandwich every 40 seconds
so the process time of the combined lines is 40/2 = 20
seconds
At 37.5 seconds, wrapping and delivery has the longest
processing time and is the bottleneck
Capacity per hour is 3,600 seconds/37.5
seconds/sandwich = 96 sandwiches per hour
Process cycle time is 30 + 15 + 20 + 40 + 37.5 = 142.5
seconds
2011 Pearson Education
Capacity Analysis
Standard process for cleaning teeth
Cleaning and examining X-rays can happen
simultaneously

Cleaning

Takes Develops 24 min/unit Check

Check in Dentist
X-ray X-ray out

2 min/unit 2 min/unit 4 min/unit X-ray 8 min/unit 6 min/unit

exam

5 min/unit

2011 Pearson Education

 Capacity Check
in
Takes
X-ray
Develops
X-ray
Cleaning

24 min/unit
Dentist
Check
out

Analysis 2 min/unit 2 min/unit 4 min/unit X-ray

exam

5 min/unit
8 min/unit 6 min/unit

All possible paths must be compared

Cleaning path is 2 + 2 + 4 + 24 + 8 + 6 = 46 minutes
X-ray exam path is 2 + 2 + 4 + 5 + 8 + 6 = 27 minutes
Longest path involves the hygienist cleaning the teeth
Bottleneck is the hygienist at 24 minutes
Hourly capacity is 60/24 = 2.5 patients
Patient should be complete in 46 minutes

2011 Pearson Education

Theory of Constraints
Five-step process for recognizing and managing
limitations
Step 1: Identify the constraint
Step 2: Develop a plan for overcoming the
constraints
Step 3: Focus resources on accomplishing Step 2
Step 4: Reduce the effects of constraints by
offloading work or expanding capability
Step 5: Once overcome, go back to Step 1 and find
new constraints
Bottleneck Management
1. Release work orders to the system at the pace of
set by the bottleneck
2. Lost time at the bottleneck represents lost time
for the whole system
3. Increasing the capacity of a non-bottleneck
station is a mirage
4. Increasing the capacity of a bottleneck increases
the capacity of the whole system