Capacity and

Constraint
Management
Lesson 3.2
LEARNING OUTCOMES:

1. Define capacity.
2. Determine design capacity, effective capacity and
utilization.
3. Perform bottleneck analysis.
Capacity
• refers to an upper limit or ceiling on the load that an
operating unit can handle.
• Capacity is the “throughput,” or the number of units a facility
can hold, receive, store, or produce in a given time.
• The load might be in terms of the number of physical units
produced (e.g., bicycles assembled per hour) or the number
of services performed (e.g., computers upgraded per hour).
• The operating unit might be a plant, department,
machine, store, or worker.

• Capacity needs include equipment, space, and employee

skills.
Capacity planning is a
key strategic
component in
designing the system.
 The key questions in capacity planning are the
following:
1. What kind of capacity is needed?
2. How much is needed to match demand?
3. When is it needed?
 For example

750 packs of takudo chips

50 packs= 2 kgs

How many kgs of takudo will we need?

Slicer
750 packs/ 50 packs= 15 *2= 30 kgs.
 CAPACITY DECISIONS ARE
STRATEGIC

✓Capacity decisions have a real impact on the

ability of the organization to meet future demands
for products and services; capacity essentially
limits the rate of output possible.

✓Capacity decisions affect operating costs.

✓Capacity is usually a major determinant of initial

cost.
✓Capacity decisions often involve long-term commitment
of resources and the fact that, once they are
implemented, those decisions may be difficult or
impossible to modify without incurring major costs.

✓Capacity decisions can affect competitiveness.

✓Capacity affects the ease of management; having

appropriate capacity makes management easier than
when capacity is mismatched.
Slicer
to meet future demands for products and services

Demand per month:

750 packs of takudo chips
affect operating costs

Depreciation cost
long-term commitment of resources

Investment? How much?

How many years of useful life?
✓Globalization has increased the importance and the
complexity of capacity decisions.

✓Because capacity decisions often involve substantial

financial and other resources, it is necessary to plan for
them far in advance.
BUSINESS PLAN
 DEFINING AND MEASURING
CAPACITY
Two useful definitions of capacity:
1. Design capacity: The maximum output rate or
service capacity an operation, process, or facility is
designed for.
-Normally expressed as a rate

2. Effective capacity: Design capacity minus allowances

such as personal time, and maintenance.
-Often lower than design capacity
 Design and Effective Capacity
TABLE S7.1 Capacity Measurements
MEASURE DEFINITION EXAMPLE

Design capacity Ideal conditions exist Machines at Frito-Lay are designed to produce
during the time that the 1,000 bags of chips/hr., and the plant operates
system is available 16 hrs./day.
Design Capacity = 1,000 bags/hr. × 16 hrs.
= 16,000 bags/day
 Design and Effective Capacity
TABLE S7.1 Capacity Measurements
MEASURE DEFINITION EXAMPLE
Effective capacity Design capacity minus Frito-Lay loses 3 hours of output per day
lost output because of (= 0.5 hrs./day on preventive maintenance,
planned resource 1 hr./day on employee breaks, and 1.5 hrs./day
unavailability (e.g., setting up machines for different products).
preventive Effective Capacity = 16,000 bags/day
maintenance, machine – (1,000 bags/hr.)
setups/changeovers, (3 hrs./day)
changes in product = 16,000 bags/day
mix, scheduled breaks) – 3,000 bags/day
= 13,000 bags/day
 Design and Effective Capacity
TABLE S7.1 Capacity Measurements
MEASURE DEFINITION EXAMPLE
Actual output Effective capacity minus On average, machines at Frito-Lay are not running 1
lost output during hr./day due to late parts and machine breakdowns.
unplanned resource Actual Output = 13,000 bags/day
idleness (e.g., – (1,000 bags/hr.)
absenteeism, machine (1 hr./day)
breakdowns, unavailable = 13,000 bags/day
parts, quality problems) – 1,000 bags/day
= 12,000 bags/day
The different measures of capacity are useful in
defining two measures of system effectiveness:
efficiency and utilization.
Efficiency is the ratio of actual output to effective
capacity.
Capacity utilization is the ratio of actual output to
design capacity.
Example
Example
Bakery example
Bakery example
Bakery example
Bakery example
Bakery example
Bakery example
Bakery example
Bakery example
 Capacity and Strategy
► Capacity decisions impact all 10 decisions of operations
management as well as other functional areas of the
organization
► Capacity decisions must be integrated into the
organization’s mission and strategy
10 OM Decisions

1. Design of goods and services

2. Managing quality
3. Process and capacity strategy
4. Location strategy
5. Layout strategy
6. Human resources and job design
7. Supply chain management
8. Inventory management
9. Scheduling
10.Maintenance
Capacity Considerations

1. Forecast demand accurately

2. Match technology increments and sales
volume
3. Find the optimum operating size
(volume)
4. Build for change
CONSTRAINT MANAGEMENT

A constraint is
something that limits
the performance of a
process or system in
achieving its goals.
There are seven categories of constraints:
❑ Market: Insufficient demand.
❑ Resource: Too little of one or more resources (e.g.,
workers, equipment, and space)
❑ Material: Too little of one or more materials.
❑ Financial: Insufficient funds.
❑ Supplier: Unreliable, long lead time, substandard
quality.
❑ Knowledge or competency: Needed knowledge or
skills missing or incomplete.
❑ Policy: Laws or regulations interfere.
Service-Sector Demand and Capacity
Management
► Demand management
► Appointment, reservations, FCFS rule

► Capacity
management
► Full time,
temporary,
part-time
staff
Bottleneck Analysis and the 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
► The time to produce a unit or a specified batch size is
the process time
 Bottleneck Analysis and the
Theory of Constraints
► The bottleneck time is the time of the slowest
workstation (the one that takes the longest) in a
production system
► The throughput time is the time it takes a unit to go
through production from start to end, with no waiting

Figure S7.4

A B C

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

 Capacity Analysis
► Two identical sandwich lines
► Lines have two workers and three operations
► All completed sandwiches are wrapped

First assembly line

Bread Fill Toaster

15 sec/sandwich 20 sec/sandwich 40 sec/sandwich

Wrap/
Order
Deliver
30 sec/sandwich
Bread Fill Toaster 37.5 sec/sandwich

15 sec/sandwich 20 sec/sandwich 40 sec/sandwich

Second assembly line

 Bread Fill Toaster

Capacity 15 sec 20 sec 40 sec

Analysis Order

30 sec
Wrap

Bread Fill Toaster 37.5 sec

15 sec 20 sec 40 sec

► The two lines are identical, so parallel processing can

occur
► At 40 seconds, the toaster has the longest processing
time and is the bottleneck for each line
► At 40 seconds for two sandwiches, the bottleneck time of
the combined lines = 20 seconds
► At 37.5 seconds, wrapping and delivery is the bottleneck
for the entire operation
 Bread Fill Toaster

Capacity
15 sec 20 sec 40 sec

Order Wrap

Analysis 30 sec

Bread Fill Toaster 37.5 sec

15 sec 20 sec 40 sec

► Capacity per hour is 3,600 seconds/37.5

seconds/sandwich = 96 sandwiches per hour
► Throughput time is 30 + 15 + 20 + 40 + 37.5 = 142.5
seconds
Example
Capacity Analysis
► Standard process for cleaning teeth
► Cleaning and examining X-rays can happen
simultaneously

Hygienist
cleaning

Takes Develops 24 min/unit Check

Check in Dentist
X-ray X-ray out

2 min/unit 2 min/unit 4 min/unit X-ray 8 min/unit 6 min/unit

exam

5 min/unit
 Hygienist
cleaning

Capacity Check Takes Develops

24 min/unit
Check

Analysis
Dentist
in X-ray X-ray out

2 min/unit 2 min/unit 4 min/unit 8 min/unit 6 min/unit

X-ray
exam

5 min/unit

► All possible paths must be compared

► Bottleneck is the hygienist at 24 minutes
► Hourly capacity is 60/24 = 2.5 patients
► X-ray exam path is 2 + 2 + 4 + 5 + 8 + 6 = 27 minutes
► Cleaning path is 2 + 2 + 4 + 24 + 8 + 6 = 46 minutes
► Longest path involves the hygienist cleaning the teeth,
patient should complete in 46 minutes
 Techniques for evaluating
capacity alternatives

Cost–Volume Analysis
Cost–volume analysis focuses on
relationships between cost, revenue,
and volume of output. The purpose of
cost–volume analysis is to estimate
the income of an organization under
different operating conditions.
Cost–Volume Analysis

Fixed costs tend to remain constant

regardless of volume of output.
Examples include rental costs, property
taxes, equipment costs, heating and
cooling expenses, and certain
administrative costs.

Variable costs vary directly with volume

of output. The major components of
variable costs are generally materials
and labor costs.
Break-even point (BEP)
Break-even point (BEP) The volume of output at which total
cost and total revenue are equal.
Total profit can be computed using the formula:
Example
Example
 Break-Even Analysis
–
Total revenue line
900 –

800 –
Break-even point Total cost line
700 – Total cost = Total revenue
Cost in dollars
600 –

500 –
Variable cost
400 –

300 –

200 –

100 – Fixed cost

| | | | | | | | | | | |
0 100 200 300 400 500 600 700 800 900 1000 1100
Figure S7.5
Volume (units per period)
Break-Even Analysis
Assumptions
► Costs and revenue are linear
functions
► Generally not the case in the real
world
► We actually know these costs
► Very difficult to verify
► Time value of money is often
ignored
Break-Even Analysis
BEPx = break-even point x = number of units
in units produced
BEP$ = break-even point TR = total revenue = Px
in dollars F = fixed costs
P = price per unit V = variable cost per unit
(after all discounts)
TC = total costs = F + Vx

Break-even point occurs when

TR = TC F
or BEPx =
P–V
Px = F + Vx
Break-Even Analysis
BEPx = break-even point x = number of units
in units produced
BEP$ = break-even point TR = total revenue = Px
in dollars F = fixed costs
P = price per unit V = variable cost per unit
(after all discounts)
TC = total costs = F + Vx
F Profit = TR - TC
BEP$ = BEPx P = P
P–V = Px – (F + Vx)
F = Px – F – Vx
=
(P – V)/P
= (P - V)x – F
F
=
1 – V/P
 Break-Even Example
Fixed costs = $10,000 Material = $.75/unit
Direct labor = $1.50/unit Selling price = $4.00 per unit

F $10,000
BEP$ = =
1 – (V/P) 1 – [(1.50 + .75)/(4.00)]
$10,000
= = $22,857.14
.4375
 Break-Even Example
Fixed costs = $10,000 Material = $.75/unit
Direct labor = $1.50/unit Selling price = $4.00 per unit

F $10,000
BEP$ = =
1 – (V/P) 1 – [(1.50 + .75)/(4.00)]
$10,000
= = $22,857.14
.4375

F $10,000
BEPx = = = 5,714
P–V 4.00 – (1.50 + .75)
Break-Even Example

50,000 –

Revenue
40,000 –
Break-even
point Total
30,000 –
costs
Dollars

20,000 –

Fixed costs
10,000 –

| | | | | |
0 2,000 4,000 6,000 8,000 10,000
Units