Capacity Planning by Anil Kakkar

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Capacity Planning : 

Capacity Planning presented by: Anil Kakkar Vikas Chahal Haryan school of business GJU S&T HISAR

Capacity planning is the process of determining the production capacity needed by an organization to meet changing demands for its products. In the context of capacity planning, "capacity" is the maximum amount of work that an organization is capable of completing in a given period of time. Capacity planning is the process used to determine how much capacity is needed (and when) in order to manufacture greater product or begin production of a new product. A number of factors can affect capacity—number of workers, ability of workers, number of machines, waste, scrap, defects, errors, productivity, suppliers, government regulations, and preventive maintenance. Capacity planning is relevant in both the long term and the short term. However, there are different issues at stake for each.

A discrepancy between the capacity of an organization and the demands of its customers results in inefficiency, either in under-utilized resources or unfulfilled customers. The goal of capacity planning is to minimize this discrepancy. Demand for an organization's capacity varies based on changes in production output, such as increasing or decreasing the production quantity of an existing product, or producing new products. Better utilization of existing capacity can be accomplished through improvements in overall equipment effectiveness (OEE). Capacity can be increased through introducing new techniques, equipment and materials, increasing the number of workers or machines, increasing the number of shifts, or acquiring additional production facilities. Capacity is calculated: (number of machines or workers) × (number of shifts) × (utilization) × (efficiency).

Significance : 

Significance Insufficient capacity will lead to poor delivery performance, increased work-in-process inventories and frustrated manufacturing personnel. This can lead to reduced customer satisfaction and reduced profitability prospects. On the other hand, excess capacity can burden the company with needless expenses. Capacity planning can help in optimal utilization of resources (Vollmann et al.,

Definition : 

Definition No single measure of capacity will be applicable in every situation. Three commonly used definitions of capacity are as follows:1) Design capacity: It refers to the maximum output that can possibly be achieved.2) Effective capacity: Effective capacity is the maximum possible output given constraints such as quality requirements, product mix composition, machine maintenance and scheduling problems.3) Actual output: It is the rate of output actually attained. It is typically less than the effective output caused by machine breakdowns.

The broad classes of capacity planning : 

The broad classes of capacity planning Lead strategy 2. Lag strategy Match strategy Lead strategy is adding capacity in anticipation of an increase in demand. Lead strategy is an aggressive strategy with the goal of luring customers away from the company's competitors. The possible disadvantage to this strategy is that it often results in excess inventory, which is costly and often wasteful.

Lag strategy refers to adding capacity only after the organization is running at full capacity or beyond due to increase in demand (North Carolina State University, 2006). This is a more conservative strategy. It decreases the risk of waste, but it may result in the loss of possible customers. Match strategy is adding capacity in small amounts in response to changing demand in the market. This is a more moderate strategy.

Capacity planning in short - term and long - term : 

Capacity planning in short - term and long - term LONG-TERM CAPACITY PLANNING: Over the long term, capacity planning relates primarily to strategic issues involving the firm's major production facilities. In addition, long-term capacity issues are interrelated with location decisions. Technology and transferability of the process to other products is also intertwined with long-term capacity planning. Long-term capacity planning may evolve when short-term changes in capacity are insufficient. For example, if the firm's addition of a third shift to its current two-shift plan still does not produce enough output, and subcontracting arrangements cannot be made, one feasible alternative is to add capital equipment and modify the layout of the plant (long-term actions). It may even be desirable to add additional plant space or to construct a new facility


SHORT-TERM CAPACITY PLANNING In the short term, capacity planning concerns issues of scheduling, labor shifts, and balancing resource capacities. The goal of short-term capacity planning is to handle unexpected shifts in demand in an efficient economic manner. The time frame for short-term planning is frequently only a few days but may run as long as six months. Alternatives for making short-term changes in capacity are fairly numerous and can even include the decision to not meet demand at all. The easiest and most commonly-used method to increase capacity in the short term is working overtime. This is a flexible and inexpensive alternative. While the firm has to pay one and one half times the normal labor rate, it foregoes the expense of hiring, training, and paying additional benefits. When not used abusively, most workers appreciate the opportunity to earn extra wages. If overtime does not provide enough short-term capacity, other resource-increasing alternatives are available. These include adding shifts, employing casual or part-time workers, the use of floating workers, leasing workers, and facilities subcontracting.


CAPACITY-PLANNING TECHNIQUES There are four procedures for capacity planning: 1.Capacity planning using overall factors (CPOF), 2.Capacity bills, 3.Resource profiles, 4.Capacity requirements planning (CRP). The first three are rough-cut approaches (involving analysis to identify potential bottlenecks) that can be used with or without manufacturing resource planning (MRP) systems. CRP is used in conjunction with MRP systems.

Capacity using overall factors is a simple, manual approach to capacity planning that is based on the master production schedule and production standards that convert required units of finished goods into historical loads on each work center. Bills of capacity is a procedure based on the MPS. Instead of using historical ratios, however, it utilizes the bills of material and routing sheet (which shows the sequence or work centers required to manufacture the part, as well as the setup and run time). Capacity requirements can then be determined by multiplying the number of units required by the MPS by the time needed to produce each.

Resource profiles are the same as bills of capacity, except lead times are included so that workloads fall into the correct periods. Capacity requirements planning (CRP) is only applicable in firms using MRP or MRP II. CRP uses the information from one of the previous rough-cut methods, plus MRP outputs on existing inventories and lot sizing. The result is a tabular load report for each work center or a graphical load profile for helping plan-production requirements. This will indicate where capacity is inadequate or idle, allowing for imbalances to be corrected by shifts in personnel or equipment or the use of overtime or added shifts. Finite capacity scheduling is an extension of CRP that simulates job order stopping and starting to produce a detailed schedule that provides a set of start and finish dates for each operation at each work center.

Methods used to evaluate alternative capacities : 

Methods used to evaluate alternative capacities Break-Even Analysis: Break-even analysis is one of the methods used to evaluate alternative capacities. It determines how costs and profit are influenced by production volume changes. It helps evaluated changes in profit caused by changes in variable costs, fixed costs, selling prices, volumes and the mix of products sold. Studying the relationship between costs, sales and profit helps the management evaluate capacity alternatives.

Decision Trees: The decision tree approach is another method of evaluating alternative capacities. It is particularly useful for weighing capacity expansion alternatives when demand is uncertain and sequential decisions are required.

Capital Budgeting Capital budgeting is another way to determine capacity. Operations managers have discretionary power over some capital budget expenditures. Facilities investment decision making, often referred to as capital budgeting, is the process of planning and evaluating long-term capital expenditures. Capital budgeting can be used in situations such as selecting a product line, deciding whether to sell or keep a business concern, and evaluating alternative asset investment options.

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