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Chapter 5

Chapter 5 BU385.docx

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Paul Iyogun

BU385 Chapter 5 – Strategic Capacity Planning Week 4 Introduction -Capacity- the upper limit on the workload that an operating unit can handle. Capacity is also measured as maximum production rate. Alternatively, a major input is used, ex. Size -Ex. Maximum number of motorcycles that can be assembled in a particular plant per day -Capacity decisions have different time frames: long term, medium term, or short term -Long term usually refers to one to five years into the future -Long term capacity decisions include the plant size and major machines and equipment -Medium term usually refers to the next 12 months and the decisions include the nature and level of workforce -Short term related to the next few days and weeks, up to 12 weeks ahead and the decisions include the nature and level of staffing and work shifts -Strategic capacity planning – systematic determination of facility and major equipment requirements to meet long-term demand for goods and services The Importance of Long Term Capacity 1. Capacity has a real impact on the ability of the organization to meet future demands for products: capacity essentially limits the rate of output possible 2. Capacity affects operating costs and ease of management 3. Capacity is usually a major determinant of initial capital cost 4. Capacity involves long-term commitment of resources and, once they are committed, it may be difficult to modify them without incurring major costs 5. Capacity can affect competitiveness Measuring Capacity and Two Related Performance Measures -In selecting a measure of capacity, it is better to choose one that does not require updating -Where only one product is involved, the capacity of the productive unit may be expressed in terms of that item -When multiple products are involved, as is often the case, using a simple measure of capacity based on units of output can be misleading -One possible solution to this is to state capacities in terms of each product -Ex. 100 refrigerators per day or 160 freezers -Also, one can use the availability of a major input -Ex. A hospital has a certain number of beds -Two types of capacity: design capacity, and effective capacity -Design capacity – the maximum output that can possibly be attained under ideal conditions -Effective capacity – the maximum possible output that can be sustained given operating hours, product mix, scheduling differences and expected delays, and machine maintenance -Effective capacity is less than design capacity owing to realities of working less than 24 hour per day, changing product mix, or periodic maintenance of equipment, lunch and coffee breaks, problems in scheduling and balancing operations, and similar circumstances -Different measures of capacity are useful in defining two measures of operating unit performance: efficiency and utilization -Efficiency – the ratio of actual output to effective capacity -Utilization – the ratio of actual output to design capacity, or equivalently used time over available time Efficiency = actual output Utilization = actual output or used time__ effective capacity design capacity available time -Both efficiency and utilization are normally less than 100 percent -The key to improving capacity utilization is to increase effective capacity by identifying what is BU385 Chapter 5 – Strategic Capacity Planning Week 4 constraining it Factors Influencing Effective Capacity Facilities and Machines -The design of facilities, including floor space and layout, directly influence effective capacity -Further, machine and equipment speed and their state directly influence capacity, which means their maintenance is important Product -Ex. When items are similar, the ability of the system to produce those items is much greater than when successive items differ Workers -The tasks that make up a job, the variety of activities involved, and the training, skill, and experience required to perform a job all have an impact on the potential and actual output Planning and Operational Factors -Hours of operation influence effective capacity -A company using only one eight-hour shift per day forgoes the use of its equipment 67% of the time -Scheduling problems may occur when there are differences in equipment capabilities or differences in job requirements External Factors -Product standards, especially minimum quality and performance standards can restrict management’s options for increasing effective capacity -Also pollution standards can often reduce effective capacity Strategic Capacity Planning Process in Organizations 1. Forecast demand for products one to five years, or more in advance 2. Calculate capacity requirements to meet the forecasts 3. Measure capacity no
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