III - Capacity Decisions

Capacity Management
BUS 505 Production and Operations Management

Dilay elebi
25.01.2017
MBA 512E Production and Operations Management
Capacity Management
Capacity
The throughput, or the number of units a

facility can hold, receive, store, or produce in
a period of time
Determines
fixed costs
Determines if
demand will
be satisfied
Three time horizons
Capacity Management
Planning Over a Time Horizon
Long-range
planning
Add facilities
Add long lead time equipment
Intermediaterange planning
Subcontract
Add equipment
Add shifts
Short-range
planning
*
Add personnel
Build or use inventory
Schedule jobs
Schedule personnel
Allocate machinery
Modify capacity
Use capacity
Capacity Management
Design and Effective Capacity
Design capacity is the maximum theoretical

output of a system
Normally expressed as a rate
Effective capacity is the capacity a firm

expects to achieve given current operating
constraints
Often lower than design capacity
Capacity Management
Utilization and Efficiency

Utilization is the percent of design capacity achieved
Utilization = Actual output/Design capacity
Efficiency is the percent of effective capacity

achieved
Efficiency = Actual output/Effective capacity
Capacity Management
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 =
Utilization =
Efficiency =
Efficiency of new line = 75%
Expected Output =
Capacity Management
Determining Capacity Requirements
1. Forecast sales
within each
individual product
line
2. Calculate
equipment and
labor requirements
to meet the
forecasts
Capacity Management
3. Project
equipment and
labor availability
over the planning
horizon
Average unit cost

(dollars per room per night)
Economies and Diseconomies of Scale
25 - room
roadside motel
50 - room
roadside motel
Economies of
scale
25
75 - room
roadside motel
Diseconomies of
scale
50
Number of Rooms
Capacity Management
75
8
Capacity Timing and Sizing

Forecast of
capacity required
Capacity
Planned unused
capacity
Capacity
increment
Time between
increments
Time
(a) Expansionist strategy

Capacity Management
Capacity Timing and Sizing
Capacity
Planned use of
short-term options
Forecast of
capacity required
Capacity
increment
Time between
increments
Time
(b) Wait-and-see strategy

Capacity Management
10
Managing Demand
Demand exceeds capacity
Curtail demand by raising prices, scheduling longer lead time
Long term solution is to increase capacity
Capacity exceeds demand

Stimulate market
Product changes
Adjusting to seasonal demands

Produce products with complementary demand patterns
Capacity Management
11
Complementary Demand Patterns
Sales in units
4,000
3,000
2,000
Jet ski
engine
sales
1,000
JFMAMJJASONDJFMAMJJASONDJ
Time (months)
Capacity Management
12
Sales in units
4,000
Snowmobile
motor sales
3,000
2,000
Jet ski
engine
sales
1,000
Time (months)
Capacity Management
13

Combining both
demand patterns
reduces the
variation
Sales in units
4,000
Snowmobile
motor sales
3,000
2,000
Jet ski
engine
sales
1,000
Time (months)
Capacity Management
14
Tactics for Matching Capacity to Demand

1. Making staffing changes
2. Adjusting equipment
Purchasing additional machinery

Selling or leasing out existing equipment
3. Improving processes to increase throughput
4. Redesigning products to facilitate more throughput

5. Adding process flexibility to meet changing product
preferences
6. Closing facilities
Capacity Management
15
Tools for Capacity Planning
Waiting-line models
Useful in high customer-contact processes
Simulation
Useful when models are too complex for
waiting-line analysis
Decision trees
Useful when demand is uncertain and
sequential decisions are involved
Capacity Management
16
Strategies for Capacity Planning

Level capacity strategy in an outpatients clinic
Chase capacity strategy for a fast-food

restaurant
Capacity Management
17
Demand and Capacity Management in the

Service Sector
yield management
building exibility
reducing capacity
leakage
getting organisational
support for capacity
utilisation.
Capacity Management
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What happens when managers cant cope with demand?

The coping zone in a high-quality restaurant
Customers have to wait a long time for service.

There is increasing likelihood of stock-outs (items removed from the menu).
Customers feel rushed and under pressure not to ask too much from busy
serving staff.
Staff feel under pressure and are less likely to give courteous responses or
the personalised service expected.
Capacity Management
19
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
Capacity Management
20
A Three-Station Assembly
Line
2 min/unit
4 min/unit
3 min/unit
Capacity Management
21
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
Capacity Management
22
Process Performance Metrics

Throughput time = Average time for a unit to move
through the system
Cycle time = Average time between completion of units
1
Throughput rate
Cycle Time
Capacity Management
23
Cycle Time Example
Suppose you had to produce 600 units in 80

hours to meet the demand requirements of a
product. What is the cycle time to meet this
demand requirement?
Capacity Management
24
Capacity Analysis
Two identical sandwich lines
Lines have two workers and three operations
All completed sandwiches are wrapped
Bread
15 sec/sandwich
Fill
Toast
20 sec/sandwich
40 sec/sandwich
Order
Wrap
30 sec/sandwich
37.5 sec/sandwich
Bread
15 sec/sandwich
Fill
Toast
20 sec/sandwich
40 sec/sandwich
Capacity Management
25
Capacity Analysis
Bread
15 sec
Fill
20 sec
Toast
40 sec
Order
Wrap
30 sec
37.5 sec
Bread
15 sec
Fill
20 sec
Toast
40 sec
Which station has the longest processing time?

What is the process time of the combined lines?
Which station is the bottleneck?
What is the capacity per hour?
What is process cycle time?
Capacity Management
26
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
Capacity Management
27
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
Capacity Management
28
Example : hammer production process

Description
1. Work begins at the machining center. Here two lines form
the heads of the hammers and place them in a buffer.
2. Handles are attached at the assembly step.
3. Finished hammers are sent to the next stage, where they
are packed and shipped.
machining
assembly
machining
Capacity Management
pack and
ship
29
Example : hammer production process

machining
assembly
machining
pack and
ship
Process Data:
machining: Set up 80 min. 4 min per unit processing.
Batch size 200. Identical lines.
assembly: Manual by two workers (no set up). Each
hammer requires 40 min processing. 34 workers available.
pack and ship: 30 min set up, 2 min per unit processing.
Lot sizes of 100.
Capacity Management
30
A very useful relationship

Littles Law:
WIP = (Throughput) x (Lead Time)
Littles Law is a fundamental law of system dynamics

Gives good results for a variety of scenarios
Throughput (Units/time).
Example: A facility has a cycle time of 2 minutes per unit, and
the average lead time is 20 minutes.
Capacity Management
31
Littles law (a really quite useful law)
Throughput (TH) = Work In Process (WIP) / Cycle Time (CT)

Cycle time = 2 mins
WIP = 10
Lead time = 20 minutes
Throughput rate = 1 units/ 2 mins
Capacity Management
32
Scenario 1: No Variability (Ideal World)

Data and Calculations
Planning Horizon
30 hours
Processing time
8 hour/unit
Inter-arrival time
10 hours
Utilization
80%
Average queue time
0 hours
Average lead time
8 hours
1st part
arrives
2nd part
arrives
1st part
processing
3rd part
arrives
2nd part
processing
10
1st part
departs
3rd part
processing
18 20
2nd part
departs
Capacity Management
28
30
3rd part
departs
33
Scenario 2: Processing Variability

SCENARIO
Planning Horizon
Processing time
Inter-arrival time
Utilization
Average queue time
Average lead time
1st part
arrives
2nd part
arrives
1
30 hours
8 hour/unit
10 hours
80%
0 hours
8 hours
Parts waiting
in queue
2
same
12, 9, 3
same
same
1 hour
9 hours
3rd part
arrives
Same average !!!
Same utilization but ...

More queue time
More lead time
2nd part
processing
1st part processing
10
12
1st part
departs
20
21 24
2nd part
departs
30
3rd part
departs
Capacity Management
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Scenario 3: Arrival Variability

SCENARIO
Planning Horizon
Processing time
Inter-arrival time
Utilization
Average queue time
Average lead time
1
30 hours
8 hour/unit
10 hours
80%
0 hours
8 hours
1st part
arrives
13.5 hours
2
same as 1
12, 9, 3
same
same as 1
1 hours
9 hours
2nd part
arrives
3
same as 1
same as 1
13.5, 6.5 Same average !!!
same as 1
0.5 hours
Again, same
8.5 hours
utilization
but . . .
6.5 hours
More queue time
3rd part
arrives
More lead time
Part 3 waiting
in queue
1st part
processing
2nd part
processing
8 10
1st part
departs
13.5
20
3rd part
processing
21.5
2nd part
departs
Capacity Management
29.5
3rd part
departs
35
Example Summary
SCENARIO
Planning Horizon
Processing time
Inter-arrival time
Utilization
Average queue time
Average lead time
1
30 hours
8 hour/unit
10 hours
80%
0 hours
8 hours
2
same as 1
12, 9, 3
same as 1
same as 1
1 hours
9 hours
3
same as 1
same as 1
13.5, 6.5
same as 1
0.5 hours
8.5 hours
Utilization alone is not sufficient to

estimate the lead-time performance
One must also consider the products arrival
and processing variability.
A mathematical model is needed to study
the system.
Capacity Management
36
The impact of variability on queues
Capacity Management
37
Arrival
Arrival
frequency
frequency
(demand)
(demand)
Throughput time
and capacity
utilisation
9 mins
30
20
10515 10515
Processing
time
Processing
time
minsmins mins
mins
Utilization
Utilization
33.33
50
100
%%
% %% QQQQ====0infinity
0>0
Utilization===100
<100%
High
time
Process throughput
length of queue
Average
(or inventory)
High utilization but long

throughput times
X
Low utilization but short
throughput times
X
Reduce process
variability
Low
20%
40%
60%
80%
100%
Capacity utilization
Capacity Management
38
Decreasing
variability
10 20 30 40 50 60 70 80 90 100
Utilization
(a) Decreasing variability allows higher

utilization without long waiting times.
Average number of units waiting

to be processed
Average number of units waiting

to be processed
Process utilization, waiting time and variability
High utilization but

long waiting time
Reduction in
process
variability
Short waiting
time but low
utilization
Y
10 20 30 40 50 60 70 80 90 100
Utilization
(b) Managing process capacity
variability.
Capacity Management
and/or
39
References
Operations Management for Competitive Advantage, 11th
Edition, by Chase, Jacobs, and Aquilano, 2005, N.Y.: McGrawHill/Irwin.
Heizer, J. and Render, B., Operations Management, 9/E,
Prentice Hall, 2009, ISBN-10: 0136073662
Krajewski, Lee J., Larry P. Ritzman; Manoj K. Malhotra,
Operations Management: Processes and Supply Chains, Tenth
Edition, Global Edition | 978-0-273-76683-4
Capacity Management
40

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III - Capacity Decisions

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Capacity Management

BUS 505 Production and Operations Management

MBA 512E Production and Operations Management

The throughput, or the number of units a

Planning Over a Time Horizon

MBA 512E Production and Operations Management

Design and Effective Capacity

Design capacity is the maximum theoretical

Effective capacity is the capacity a firm

MBA 512E Production and Operations Management

Utilization and Efficiency

Efficiency is the percent of effective capacity

MBA 512E Production and Operations Management

Determining Capacity Requirements

MBA 512E Production and Operations Management

Average unit cost

Economies and Diseconomies of Scale

Capacity Timing and Sizing

(a) Expansionist strategy

Capacity Timing and Sizing

(b) Wait-and-see strategy

Capacity exceeds demand

Adjusting to seasonal demands

MBA 512E Production and Operations Management

Complementary Demand Patterns

Complementary Demand Patterns

Complementary Demand Patterns

Tactics for Matching Capacity to Demand

Purchasing additional machinery

4. Redesigning products to facilitate more throughput

Tools for Capacity Planning

Strategies for Capacity Planning

MBA 512E Production and Operations Management

Chase capacity strategy for a fast-food

Demand and Capacity Management in the

What happens when managers cant cope with demand?

Customers have to wait a long time for service.

Bottleneck Analysis and Theory of Constraints

MBA 512E Production and Operations Management

MBA 512E Production and Operations Management

Process Times for Stations, Systems, and Cycles

MBA 512E Production and Operations Management

Process Performance Metrics

MBA 512E Production and Operations Management

Cycle Time Example

Suppose you had to produce 600 units in 80

MBA 512E Production and Operations Management

MBA 512E Production and Operations Management

Which station has the longest processing time?

MBA 512E Production and Operations Management

MBA 512E Production and Operations Management

Example : hammer production process

MBA 512E Production and Operations Management

Example : hammer production process

A very useful relationship

Littles Law is a fundamental law of system dynamics

MBA 512E Production and Operations Management

Littles law (a really quite useful law)

Throughput (TH) = Work In Process (WIP) / Cycle Time (CT)

MBA 512E Production and Operations Management

Scenario 1: No Variability (Ideal World)

Scenario 2: Processing Variability

Same average !!!

Same utilization but ...