Capacity Management

BUS 505 Production and Operations Management

Dilay elebi
25.01.2017

MBA 512E Production and Operations Management Capacity Management 1

 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
MBA 512E Production and Operations Management Capacity Management 2
 Planning Over a Time Horizon

Long-range Add facilities

planning Add long lead time equipment *
Intermediate- Subcontract Add personnel
range planning Add equipment Build or use inventory
Add shifts

Schedule jobs
Short-range
planning * Schedule personnel
Allocate machinery

Modify capacity Use capacity

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 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

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 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

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 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 =

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 Determining Capacity Requirements

2. Calculate 3. Project
1. Forecast sales
equipment and equipment and
within each
labor requirements labor availability
individual product
to meet the over the planning
line
forecasts horizon

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 (dollars per room per night) Economies and Diseconomies of Scale
Average unit cost

25 - room 75 - room
roadside motel 50 - room roadside motel
roadside motel

Economies of Diseconomies of
scale scale
25 50 75
Number of Rooms
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 Capacity Timing and Sizing

Planned unused Forecast of

capacity capacity required
Capacity

Capacity
increment
Time between
increments

Time

(a) Expansionist strategy

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 Capacity Timing and Sizing

Planned use of Forecast of

short-term options capacity required
Capacity

Capacity
increment
Time between
increments

Time

(b) Wait-and-see strategy

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 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

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 Complementary Demand Patterns

4,000
Sales in units

3,000

2,000

1,000 Jet ski

engine
sales

JFMAMJJASONDJFMAMJJASONDJ
Time (months)

MBA 512E Production and Operations Management Capacity Management 12

 Complementary Demand Patterns

4,000
Snowmobile
Sales in units

3,000 motor sales

2,000

1,000 Jet ski

engine
sales

JFMAMJJASONDJFMAMJJASONDJ
Time (months)

MBA 512E Production and Operations Management Capacity Management 13

 Complementary Demand Patterns

Combining both
demand patterns
reduces the
variation
4,000
Snowmobile
Sales in units

3,000 motor sales

2,000

1,000 Jet ski

engine
sales

JFMAMJJASONDJFMAMJJASONDJ
Time (months)

MBA 512E Production and Operations Management 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

MBA 512E Production and Operations Management 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

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 Strategies for Capacity Planning

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

MBA 512E Production and Operations Management Capacity Management 17

 Demand and Capacity Management in the
Service Sector
yield management
building exibility
reducing capacity
leakage
getting organisational
support for capacity
utilisation.

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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.

MBA 512E Production and Operations Management 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

MBA 512E Production and Operations Management Capacity Management 20

 A Three-Station Assembly
Line

A B C

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

MBA 512E Production and Operations Management 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

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 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

MBA 512E Production and Operations Management 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?

MBA 512E Production and Operations Management Capacity Management 24

 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

MBA 512E Production and Operations Management Capacity Management 25

 Capacity Analysis
Bread Fill Toast

15 sec 20 sec 40 sec

Order Wrap

30 sec 37.5 sec

Bread Fill Toast

15 sec 20 sec 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?
MBA 512E Production and Operations Management 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

MBA 512E Production and Operations Management 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

MBA 512E Production and Operations Management 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
pack and
assembly
ship
machining

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 Example : hammer production process

machining
pack and
assembly
ship
machining

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.

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 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.

MBA 512E Production and Operations Management 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

MBA 512E Production and Operations Management 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 2nd part 3rd part

arrives arrives arrives

1st part 2nd part 3rd part

processing processing processing

0 8 10 18 20 28 30

1st part 2nd part 3rd part

departs departs departs
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 Scenario 2: Processing Variability
SCENARIO 1 2
Planning Horizon 30 hours same
Processing time 8 hour/unit 12, 9, 3 Same average !!!
Inter-arrival time 10 hours same
Utilization 80% same
Average queue time 0 hours 1 hour
Average lead time 8 hours 9 hours

1st part 2nd part 3rd part

arrives arrives
Parts waiting
arrives Same utilization but ...
in queue
More queue time
More lead time
2nd part
1st part processing 3
processing

0 10 12 20 21 24 30

1st part 2nd part 3rd part

departs departs departs
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 Scenario 3: Arrival Variability
SCENARIO 1 2 3
Planning Horizon 30 hours same as 1 same as 1
Processing time 8 hour/unit 12, 9, 3 same as 1
Inter-arrival time 10 hours same 13.5, 6.5 Same average !!!
Utilization 80% same as 1 same as 1
Average queue time 0 hours 1 hours 0.5 hours
Average lead time 8 hours 9 hours 8.5 hours
Again, same utilization
but . . .
1st part 2nd part 3rd part More queue time
arrives arrives arrives
13.5 hours 6.5 hours More lead time
Part 3 waiting
in queue

1st part 2nd part 3rd part

processing processing processing

0 8 10 13.5 20 21.5 29.5

1st part 2nd part 3rd part

departs departs departs
MBA 512E Production and Operations Management Capacity Management 35
 Example Summary

SCENARIO 1 2 3
Planning Horizon 30 hours same as 1 same as 1
Processing time 8 hour/unit 12, 9, 3 same as 1
Inter-arrival time 10 hours same as 1 13.5, 6.5
Utilization 80% same as 1 same as 1
Average queue time 0 hours 1 hours 0.5 hours
Average lead time 8 hours 9 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.

MBA 512E Production and Operations Management Capacity Management 36

 The impact of variability on queues

MBA 512E Production and Operations Management Capacity Management 37

 Arrival
Arrival 10515 10515
9 mins
30
20 Processing time
frequency
frequency Processing time
(demand)
(demand) minsmins mins
mins
Throughput time
and capacity X
Utilization
Utilization
Utilization===100
33.33
50
100%%
% %% QQQQ====0infinity
<100% 0>0
utilisation
High

High utilization but long

time
length of queue

throughput times
Process throughput
(or inventory)

X
Average

Low utilization but short

X
throughput times
Reduce process
Low
X variability

X X X
0 20% 40% 60% 80% 100%
Capacity utilization
MBA 512E Production and Operations Management Capacity Management 38
 Process utilization, waiting time and variability

Average number of units waiting

Average number of units waiting

High utilization but

long waiting time

to be processed
to be processed

Decreasing Reduction in
process X
variability variability
Short waiting
time but low
utilization

Y Z

0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100
Utilization Utilization

(a) Decreasing variability allows higher (b) Managing process capacity and/or
utilization without long waiting times. variability.

MBA 512E Production and Operations Management Capacity Management 39

 References

Operations Management for Competitive Advantage, 11th

Edition, by Chase, Jacobs, and Aquilano, 2005, N.Y.: McGraw-
Hill/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

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