Omps Mim 4

Organization and Management
of Productive Systems
Capacity
Lecturer : Dr. Andreas Efstathiades

CAPACITY
Capacity is the maximum rate of output for a facility. The facility can be a
workstation or an entire organization
Long term capacity plans: Deal with investments in new facilities and equipment
Short term capacity plans: Focus on work-force size, overtime budgets,

inventories,
etc
CAPACITY PLANNING
1. Output measures: Are the usual choice of product-focused firms

2. Input measures: Are the usual choice of process focused firms
UTILIZATION
Utilization= Average output/maximum capacity x 100
The greatest difficulty is establishing maximum capacity

2
Design capacity
Maximum Capacity
Effective capacity
Design Capacity is the maximum output that a process or facility can achieve
under ideal conditions. A firm reaches it by using extraordinary measures such as
excessive overtime, extra shifts, overstaffing, subcontracting etc
Effective Capacity The maximum output that a process or a firm can

economically sustain under normal conditions ( in some organizations normal
conditions implies one shift operation, in others a three shift)
Utilization (design)= Average Output rate/Design capacity x 100
Utilization (effective) = Average Output rate/Effective capacity x 100
Bottleneck: Is an operation that has the lowest effective capacity of any operation
in the facility and thus limits the systems out put.
3
Economies of Scale: States that the average unit cost of a good or service can be
reduced increasing its output rate
Reasons why costs go down when output increases:

(a) Spreading Fixed costs : Certain costs do not vary with changes in the output rate
(Overhead costs)
(b) Reducing construction costs
(c) Cutting costs of purchased materials: Higher volumes can reduce the costs of
purchased materials and services
(d) Finding process Advantages: Jigs & Fixtures, dedicated technologies
Diseconomies of scale: The average cost per unit increases as the facility’s size
increases. Excessive size can bring complexity, loss of focus, inefficiencies,
bureaucracy, e.t.c
4
Capacity Strategies
Operations managers must examine three dimensions of capacity strategy before
making capacity decisions
(a) Sizing capacity cushions
(b) Timing and sizing capacity expansions
(c) Linking capacity and other operating decisions
Sizing capacity cushions

Capacity cushion is the amount of reserve capacity that a firm maintains to handle
sudden increases in demand or temporary losses of production capacity.
It measures the amount by which the average utilization falls below 100%
Capacity cushion= 100% - Utilization (effective) rate%
Large capacity Cushion is needed when:

• Demand varies (supermarket peak hours)
• Future demand is uncertain and recourse flexibility is low
• Supply uncertainty
• Allow for employee absenteeism, vacations, holidays, no overtime, etc.
Argument in favor of small capacity cushion is unused capacity. 5

Timing and Sizing Expansion
Ie when to expand and by how much
(a) Expansionist Strategy
(b) Wait and See strategy
Expansionist Strategy Characteristics

• Expansion results in economies of scale and faster rate of learning (ie price
reduction- competing on price etc)
• Might increase the firms market share
• Helps for preemptive marketing( ie by making a large capacity expansion or
announcing that one is imminent, the firm uses capacity to pre-empt expansion
of other firms)
Wait and see strategy

• Expand in smaller increments by renovating existing facilities rather than
building new ones.
• No risk of over expansion
• Might be unable to respond on high demands or preempted by other firms
6
(a) Expansionist strategy
(b) Wait-and-see strategy
LINKING CAPACITY & OTHER DECISIONS
• Capacity decisions should be closely linked to strategies and operations
throughout
the organization
• When managers make decisions about location, resource flexibility and
inventory
they must consider the impact on capacity cusions
• If a system is well balanced and a change is made in some other decision area,
then the capacity cusion may need change to compensate
Examples:
(a) Competitive priorities ie faster deliveries requires larger capacity cusion
(b) Quality Management ie Higher quality permits lowering the capacity cusion due
to less uncertainty
(c) Capital Intensity High investment necessitates lower capacity cusion in order to
get an acceptable R.O.I
(d) Recourse flexibility ie Less worker flexibility necessitates high capacity cusion
(e) Inventory ie Less inventory necessitates high capacity cusion
(f) Scheduling ie better scheduling permits low capacity cusion
• Capacity decisions are linked with the other functional areas and careful
integration of plans is required 9
A SYSTEMATIC APPROACH TO CAPACITY DECISIONS
Steps:
1. Determine and establish existing capacity
2. Estimate future capacity requirements
3. Identify gaps by comparing requirements with available capacity
4. Evaluate each alternative both qualitatively and quantitatively, and
make a final choice
10
Estimate Capacity Requirements
The foundation for estimating long term capacity needs is forecasts of:
•Demand
•Productivity
•Competition
•Technological changes
M= D.P / [n(1- c)]
M= Number of machines required

D= No of units (customers) forecast per year
P= Processing time (in hours per unit or customer)
C= Desired capacity cushion
n= No. of working hours of the machine in a year
Multiple Products
If multiple products or services are involved extra time is needed to change over
from one product to the next
Set up time is the time required to change a machine from making one product or
service to making another
M= [D.P+(D/Q).S] + [D.P+(D/Q).S] + [D.P+(D/Q).S] / [N. (1-C/100)]
Q= number of units in each lot
11
S= Setup time (in hours) per lot
Identify Gaps
A capacity gap is any difference (positive or negative) between projected demand
and current capacity
• If one operation is a bottleneck, capacity can be expanded only if the capacity of
the bottleneck operation is expanded
Develop Alternatives
Development of alternative plans to cope with projected gaps
Alternatives:
• Base case ; Do nothing
• Timing (expansionist or wait and see strategy)
• Expanding at different locations
• Overtime, temporary workers, subcontracting
Evaluate the alternatives

In this step the manager evaluates each alternative both quantitatively and
qualitatively
(a) Qualitative concerns
Proceed with the “what if analysis” ie uncertainties about demand, competitive
reaction, technological changes
(b)Quantitative Concerns
Quantitatively the manager estimates the change in cash flows for each alternative 12
TOOLS FOR CAPACITY PLANNING
Long term capacity planning requires demand forecasts to an extended period of time.
Forecast accuracy declines as the forecasting horizon lengthens.
Waiting Line Models

Waiting line models use probability distributions to provide estimates of average
customer delay times, average length of waiting lines, and utilization of the work
center.
Manager can use this information to choose the most cost – effective capacity,
balancing customer service and the cost of adding capacity
Decision trees
A decision tree is particularly valuable for evaluating different capacity expansion
alternatives when demand is uncertain and sequential decisions are involved
13
Example 1 (1 of 2)
A copy center in an office building prepares bound reports for two clients. The
center makes multiple copies (the lot size) of each report. The processing time
to run, collate, and bind each copy depends on, among other factors, the
number of pages. The center operates 250 days per year, with one 8-hour shift.
Management believes that a capacity cushion of 15 percent (beyond the
allowance built into time standards) is best. It currently has three copy
machines. 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
Standard setup time (hours) 0.25 0.40
Example 1 (2 of 2)
Rounding up to the next integer gives a requirement of four

machines.
Solved Problem 1 (1 of 4)
You have been asked to put together a capacity plan for a critical operation at the
Surefoot Sandal Company. Your capacity measure is number of machines. Three
products (men’s, women’s, and children’s sandals) are manufactured. The time
standards (processing and setup), lot sizes, and demand forecasts are given in the
following table. The firm operates two 8-hour shifts, 5 days per week, 50 weeks per
year. Experience shows that a capacity cushion of 5 percent is sufficient.
Blank Time Standards Time Blank Blank

Standards
Product Processing Setup Lot size Demand Forecast

(hr/pair) (hr/pair) (pairs/lot) (pairs/yr)
Men’s sandals 0.05 0.5 240 80,000
Women’s sandals 0.10 2.2 180 60,000
Children’s sandals 0.02 3.8 360 120,000
a. How many machines are needed?

b. If the operation currently has two machines, what is the capacity gap?
a. The number of hours of operation per year, N, is N = (2 shifts/day)
(8 hours/shifts) (250 days/machine-year) = 4,000 hours/machine-
year
The number of machines required, M, is the sum of machine-hour
requirements for all three products divided by the number of
productive hours available for one machine:
b. The capacity gap is 1.83 machines (3.83 –2). Two more machines should
be purchased, unless management decides to use short-term options to fill
the gap.

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Organization and Management

Lecturer : Dr. Andreas Efstathiades

Short term capacity plans: Focus on work-force size, overtime budgets,

1. Output measures: Are the usual choice of product-focused firms

Utilization= Average output/maximum capacity x 100

The greatest difficulty is establishing maximum capacity

Effective Capacity The maximum output that a process or a firm can

Utilization (design)= Average Output rate/Design capacity x 100

Utilization (effective) = Average Output rate/Effective capacity x 100

Reasons why costs go down when output increases:

Sizing capacity cushions

Capacity cushion= 100% - Utilization (effective) rate%

Large capacity Cushion is needed when:

Argument in favor of small capacity cushion is unused capacity. 5

Expansionist Strategy Characteristics

Wait and see strategy

M= D.P / [n(1- c)]

M= Number of machines required

Evaluate the alternatives

Waiting Line Models

Item Client X Client Y

Rounding up to the next integer gives a requirement of four

Blank Time Standards Time Blank Blank

Product Processing Setup Lot size Demand Forecast

a. How many machines are needed?

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