Chapter 4: Capacity Design

¨ Introduction
¨ Long-term Capacity Planning
¨ Short-term Capacity Planning
 1. Introduction
¨ Capacity = maximum capability to produce/serve= maximum
output
¨ Capacity planning applies to both manufacturing and service
organizations
¨ Capacity options can be categorized as short-term or long-term
¨ Volatile demand can further complicate capacity planning
¨ Capacity needs determined on the basis of demand forecast
¨ Rated/Designed Capacity
¨ Theoretical output that could be attained if a process were operating at full
speed without interruption, exceptions, or downtime
¨ Effective Capacity
¨ Takes into account the efficiency with which a particular product or
customer can be processed and the utilization of the scheduled hours or
work
Effective Daily Capacity = (no. of machines or workers) x (hours
per shift) x (no. of shifts) x (utilization) x ( efficiency)
 Introduction (cont.)
¨ Utilization
¨ Percent of available time spent working
¨ Efficiency
¨ How well a machine or worker performs compared to a standard
output level
¨ Load
¨ Standard hours of work assigned to a facility
¨ Load Percent
¨ Ratio of load to capacity

load
Load Percent = x 100%
capacity
 2. Long-Term Capacity Planning
¨ Definitions

¨ Capacity Strategies

¨ Main Steps in Capacity Planning

¨ Tools for Capacity Planning

 2.1. Definitions
Capacity of a supply chain sets the
maximum amount of product that can be
delivered to final customers in a given time.
Designed Capacity is the maximum possible
throughput/output in ideal conditions.
Effective Capacity is the maximum realistic
throughput/output in normal conditions.
Actual Throughput (output) is normally lower
than effective capacity.
Utilization is the degree to which equipment,
space or labor is currently being used.
 Bottlenecks

Not all parts of a supply chain have the same capacity.

There must be some part that limits overall throughput,
and this forms a bottleneck.
The bottlenecks in a supply chain limit its overall capacity.
http://www.baskent.edu.tr/~kilter
 Bottlenecks-
Example
• The main bottling plant at J&R Softdrinks has a capacity of
80,000 litres a day, and works a seven-day week.
• It fills standard bottles of 750 ml, and these are passed to a
packing area which can form up to 20,000 cases a day with
12 bottles each. The packing area works a five-day week.
• The cases are taken to warehouses by a transport
company whose 8 lorries can each carry 300 cases, and
make up to 4 trips a day for 7 days a week. There are two
main warehouses, each of which can handle up to 30,000
cases a week. Local deliveries are made from the
warehouses by a fleet of small vans that can handle
everything passed to them by the warehouse.
• What is the capacity of this part of the distribution system?
How can J&R increase the capacity?
 Solution
• The bottling plant has a capacity of 80,000 litres a day, or:
7 × 80,000/0.75 = 746,666 bottles a week

• The packing area has a capacity of 20,000 cases a day,

or:
5 × 12 × 20,000 = 1,200,000 bottles a week

• The transport company’s lorries can handle 300 cases on

each journey, so their capacity is:
7 × 4 × 8 × 300 × 12 = 806,400 bottles a week

• Each warehouse can handle 30,000 cases a week, giving

a capacity of:
2 × 30,000 × 12 = 720,000 bottles a week

We know that the capacity of the delivery vans is greater

Solution (Cont.)
 Solution (Cont.)

¨ The capacity of this part of the supply chain is the smallest of

these separate capacities, and this is 720,000 bottles a week
in the warehouses.

¨ J&R can only increase capacity by expanding the

warehouses. Improving other parts of the supply chain will
have no effect at all.
 V-curve

C2= 115%-120%C1 C2= 115%-120%C1

C1= 115%-120%C
C1=115%-120%C

C
 2.2. Capacity Strategies
¨ Sizing Capacity Cushions: capacity cushion is the amount of reserve capacity
that a firm maintains to handle sudden increases in demand or temporary
losses of production capacity. It measures the amount by which the average
utilization (in terms of effective capacity) falls below 100%
Capacity cushion, C = 100% - Utilization rate (%)
¨ Timing and Sizing Expansion

Lost sale

Long-term capacity

Expansionist strategy Wait-and-see strategy

13
 Matching Capacity and Demand

¨ The aim of capacity planning is to match the available capacity of

facilities to the demands put on them. Any mismatch can be
expensive.

¨ If capacity is less than demand, bottlenecks restrict the movement

of materials, and customer service declines;

¨ if capacity is greater than demand, the organization can move all its
materials but it has spare capacity and underused resources.
 Example
• Anne Jenkins has a contract to deliver 100 computer
systems a week to schools in South Wales.

• The systems have customized software installed,

which takes an hour to test before delivery. The testing
is done by trained staff, who achieve an average
efficiency of 75%.
They work a single eight-hour shift five days a week, but
could move to double shifts or have overtime at
weekends.

• How many testers should Anne employ?

 Solution
¨ Each tester is available for 8 × 5 = 40 hours a week.
Average efficiency is 75%, so their useful time is 40 × 0.75 = 30 hours a
week.
Each computer takes 1 hour to test, so each employee can test 30
systems a week.

Hence:
■ designed capacity = 40 units a tester a week
■ effective capacity = 30 units a tester a week
 Solution (Cont.)

There are several ways of meeting the demand of 100 units a week:

■ Working a single shift on weekdays would need 100/30 = 3.33 testers. If Anne
only employs full-time testers, she has to round this up to 4. Then the utilization
of each would be 3.33/4 = 0.83 or 83%.

■ Employing 3 testers full-time, and one part-time tester for 1/3 time would meet all
capacity with 100% utilization.

■ Using overtime at the weekends would need 3 full time testers who are willing to
finish 10 tests at the weekend (working 10 / 0.75 = 13.3 hrs).
2.3.The main steps in capacity planning
1. Examine forecast demand and translate this into a capacity
needed, estimate future capacity requirements

2. Find the capacity available in present facilities

3. Identify gaps between capacity needed and that available

4. Suggest alternative plans for overcoming any gap

5. Compare these plans (qualitatively and quantitatively) and

choose the best

6. Implement the best and monitor performance  simulation

 Estimate Capacity Requirements
¨ Demand forecast has to be converted to a number that can be compared
directly with the capacity measure being used, say, number of machines
required (for 1 product or service):

Where D= number of units (customers) forecast per year

p = processing time (hrs/unit or hrs/customer)
N = total number of hours per year during which the process operates
C = desired capacity cushion
¨ For multiple products or services  setup time

Where Q = number of units in each lot

s = setup time (hrs) per lot
 Example
¨ A copy center in an office building prepares bound reports for two clients. The
center makes multiple copies (the lot size) of each report. The processing time
to run, collate, and bind each copy depends on, among other factors, the
number of pages. The center operates 250 days per year, with one eight-hour
shift. Management believes that a capacity cushion of 15% is best. It currently
has three copy machines. Based on the following table of information,
determine how many machines are needed at the copy center
Item Client X Client Y
Annual demand forecast (copies) 2000 6000

Standard processing time (hrs/copy) 0.5` 0.7

Average lot size (copies/report) 20 30

Standard setup time (hrs) 0.25 0.4

 Solution

=
=3.12  4 machines
 Identify Gaps Example
¨ Grandmother’s Chicken Restaurant is experiencing a boom in business. The
owner expects to serve a total of 80,000 meals this year. Although the kitchen
is operating at 100% capacity, the dining room can handle a total of 105,000
diners per year. Forecasted demand for the next 5 years is as follows
year 1: 90,000 meals
year 2: 100,000 meals
year 3: 110,000 meals
year 4: 120,000 meals
year 5: 130,000 meals
What are the capacity gaps in Grandmother’s kitchen and dining room through
year 5?
 Solution
¨ The kitchen is currently the bottleneck at a capacity of 80,000 meals/year. Based
on the demand forecast, the capacity gap for the kitchen is
Year 1: 90,000 meals – 80,000 meals = 10,000 meals
Year 2: 100,000 meals – 80,000 meals = 20,000 meals
Year 3: 110,000 meals – 80,000 meals = 30,000 meals
Year 4: 120,000 meals – 80,000 meals = 40,000 meals
Year 5: 130,000 meals – 80,000 meals = 50,000 meals
¨ Before year 3, the capacity of the dining room (105,000) is greater than demand.
In year 3 and subsequently, there are capacity gaps for the dining room:
Year 3: 110,000 meals – 105,000 meals = 5,000 meals
Year 4: 120,000 meals – 105,000 meals = 15,000 meals
Year 5: 130,000 meals – 105,000 meals = 25,000 meals
¨ Management decided to act now by developing and evaluating several
alternatives for expanding capacity, because operating at 100% capacity is
already creating some customer dissatisfaction and because the capacity gaps
are projected to increase
 Evaluating the Alternatives Example
¨ One alternative for Grandmother’s Chicken Restaurant is to
expand both the kitchen and the dining room now, bringing their
capacities up to 130,000 meals/year. The initial investment would
be $200,000, made at the end of this year (year 0). The average
meal is priced at $10, and before-tax profit margin is 20%. The
20% figure was arrived at by determining that, for each $10 meal,
$6 covers variable costs and $2 goes toward fixed costs (other
than depreciation). The remaining $2 goes to pretax profit.
¨ What are the pretax cash flows from this project for the next five
years compared to those of the base case of doing nothing?
 Solution
¨ Recall that the base case of doing nothing results in losing all potential sales
beyond 80,000 meals. With the new capacity, the cash flow would equal the extra
meals served by having a 130,000 meals capacity, multiplied by a profit of
$2/meal. In year 0, the only cash flow is -$200,000 for the initial investment. In
year 1, the 90,000-meal demand will be completely satisfied by the expanded
capacity, so the incremental cash flow is (90,000-80,000)(2) = $20,000. for the
subsequent years:
Year 2: Demand =100,000; Cash flow = (100,000 – 80,000)2 = $40,000
Year 3: Demand =110,000; Cash flow = (110,000 – 80,000)2 = $60,000
Year 4: Demand =120,000; Cash flow = (120,000 – 80,000)2 = $80,000
Year 5: Demand =130,000; Cash flow = (130,000 – 80,000)2 = $100,000
¨ Because the owner is evaluating an alternative that provides enough capacity to
meet all demand through year 5, the added meals served are identical to the
capacity gaps. That would not be true is the new capacity were smaller than the
expected demand in any year. To find the added meals in that case, we would
subtract the base case capacity from the new capacity (rather than the demand).
The result would be smaller than the capacity gap.
 Complete Example
¨ A&B Coaches of Blackpool plan their capacity in terms of ‘coach-days’.
¨ Forecasts show expected annual demands for the next five years to
average 400,000 full-day passengers and 750,000 half-day passengers.
¨ A&B have 61 coaches, each with an effective capacity of 40 passengers a
day for 300 days a year. Breakdowns and other unexpected problems
reduce efficiency to 90%.
¨ They employ 86 drivers who work an average of 220 days a year, but
illness and other absences reduce their efficiency to 85%.
¨ If there is a shortage of coaches the company can buy extra ones for
$110,000 or hire them for $100 a day. If there is a shortage of drivers they
can recruit extra ones at a cost of $20,000 a year, or hire them from an
agency for $110 a day.
¨ How can the company plan for the required demand?
 Solution
¨ Step 1 Translate forecasts and other information into a demand for
resources
■ 400,000 full-day passengers are equivalent to 400,000/40 = 10,000
coach days a year, or 10,000/300 = 33.33 coaches.

■ 750,000 half-day passengers are equivalent to 750,000 / (40 × 300 × 2)

= 31.25 coaches.

■ Adding these two gives the total demand as 64.58 coaches. Each
coach needs 300/220 drivers, so the company needs a total of 88.06
drivers.

¨ Step 2 Find the resources currently available

■ The company has 61 coaches, but the efficiency of 90% gives an
availability of 61 ×0.9 = 54.9 coaches.

■ There are 86 drivers, but an efficiency of 85% reduces this to 86 × 0.85

= 73.1 drivers.
 Solution (Cont.)
¨ Step 3 Identify mismatches between resources needed and available
Without details of the timing. There is a total shortage of:
64.58 – 54.9 = 9.68 coaches and 88.06 – 73.1 = 14.96 drivers.
¨ Step 4 Suggest alternative plans for overcoming any mismatches
■ To buy 10 coaches would cost $1,100,000. To hire coaches to make up
the shortage would cost 9.68 × 300 × 100 = $290,400 a year. There is, of
course, the alternative of buying some coaches and hiring others.
■ To hire 15 drivers would cost $300,000 a year, while using temporary
drivers from an agency would cost 14.96 × 220 × 110 = $362,032 a year.
There is also the option of hiring some drivers and making up shortages
from an agency.
¨ Step 5 Compare these plans and find the best
We do not have enough information to make the final decisions, and we
have only outlined some of the alternatives. This very limited analysis
might suggest a reasonable solution of buying eight coaches and making
up any shortages by hiring, and hiring 12 drivers and making up the
shortage from the agency.
2.4. Tools for Capacity Planning

¨ Waiting-line Systems: random system (arrival

time and processing time)
¨ Simulation: random system (arrival time and
processing time)
¨ Decision trees: anticipate to the competitors’
actions
Waiting Line Systems
Kendall’s Notation for Queuing Systems
A/B/X/Y/Z
Where:
A = inter-arrival time distribution
B = service time distribution
X = number of parallel service channels
Y = limit on system pop. (in queue + in service); default is ∞
Z = queue discipline; default is FCFS (first come first served)
Others are LCFS, random, priority…
Notes: Time distributions are G = general (i.e., not specified); M = Markovian
(exponential); D = deterministic
 Elements of Waiting Lines
¨ The customer population: finite vs. infinite
¨ The service system:
¨ The number of waiting lines
¨ The number of servers
¨ The arrangement of the servers
¨ The arrival and service patterns:
- Arrival rate: The average number of customers arriving per time period.
- Service rate: The average number of customers that can be served per
time period.
¨ The service priority rules: best customers first, highest-profit customer
first, quickest-service requirement first, largest-service requirement first,
emergencies first, …
Waiting Line Performance Measures

¨ The average number of customers waiting in line

and in the system
¨ The average time customers spend waiting, and
the average time a customer spends in the
system.
¨ The system utilization rate
Single-Server Waiting Line Model M/M/1
¨ Assumptions:
¨ The customers are patient (no balking, reneging, or jockeying)
and come from a population that can be considered infinite.
¨ Customer arrivals are described by a Poisson distribution with a
mean arrival rate of  (lambda). This means that the time
between successive customer arrivals follows an exponential
distribution with an average of 1/.
¨ The customer service rate is described by a Poisson distribution
with a mean service rate of (mu). This means that the service
time for one customer follows an exponential distribution with
an average of 1/.
¨ The waiting line priority rule used is first-come, first-served.
Model
 Example
The computer lab at State University has a help desk to assist students working on
computer spreadsheet assignments. The students patiently form a single line in
front of the desk to wait for help. Students are served based on a first-come, first-
served priority rule. On average, 15 students per hour arrive at the help desk.
Student arrivals are best described using a Poisson distribution. The help desk
server can help an average of 20 students per hour, with the service rate being
described by an exponential distribution. Calculate the following operating
characteristics of the service system.
(a) The average utilization of the help desk server
(b) The average number of students in the system
(c) The average number of students waiting in line
(d) The average time a student spends in the system
(e) The average time a student spends waiting in line
(f) The probability of having more than 4 students in the system

= 15 sts/hr; = 20 sts/hr 1/ =1/20 =0.05 (hr/st)

 Solution
(a) Average utilization:
(b) Average number of students in the system:
(c) Average number of students waiting in line:
(d) Average time a student spent in the system:
(e) Average time a student spent waiting in line:
(f) The probability that there are more than four students in the system equals one
minus the probability that there are four or fewer students in the system. We use
the following formula
 Multi-Server Waiting Line Model M/M/s
¨ Customers form a
single line and are
served by the first
server available.
¨ There are s identical
servers, the service
time distribution for
each server is
exponential, and the
mean service time is
1/.
¨ Note: The total service
rate s >. If  
the waiting line would
eventually grow
infinitely large.
 Example
State University has decided to increase the number of computer assignments in
its curriculum and is concerned about the impact on the help desk. Instead of a
single person working at the help desk, the university is considering a plan to have
three identical service providers. It expects that students will arrive at a rate of 45
per hour, according to a Poisson distribution. The service rate for each of the three
servers is 18 students per hour, with exponential service times. Calculate the
following operating characteristics of the service system:
(a) The average utilization of the help desk
(b) The probability that there are no students in the system
(c) The average number of students waiting in line
(d) The average time a student spends waiting in line
(e) The average time a student spends in the system
(f) The average number of students in the system
Solution
 Practice

= 32 customers/hr
1/= 4 min/customers  = 60/4 =15 customers/hr

s = 3 servers

How many customers in system in average?

 Midterm

¨ 90min,
¨ opened book: no mobile phone, no computer
¨ offline
¨ 4 questions: 1 theory question, 3 calculation
¨ c1- c4
 4. Adjusting Capacity- Short Term
Capacity Planning (reading)
¨ Problems with capacity planning

¨ Short-term adjustments to capacity

¨ Changing capacity over time

 Problems with capacity planning
¨ Demand comes in small quantities and can take almost any
value, while capacity comes in large discrete amounts.
¨ There is no way of exactly matching the discrete capacity to
a continuous demand. Use one of three basic strategies:
(a) more or less match capacity to demand, so that there is sometimes
excess capacity and sometimes a shortage
(b) make capacity at least equal to demand by early expansion, which
needs more investment in facilities and gives lower utilization.
(c) only add capacity when the additional facilities would be fully used,
which has lower investment and high utilization, but restricts
throughput.
Short-term
Short-term Adjustment to Capacity Planning

There are two ways of making these short-term

adjustments to capacity:

capacity management adjusts capacity

to match demand

demand management adjusts demand

to match available capacity.
 Ways of adjusting capacity
(reading)
¨ Changing the work pattern to match demand
¨ Employing part-time staff to cover peak demands
¨ Using outside contractors
¨ Renting or leasing extra facilities
¨ Adjusting the speed of working
¨ Rescheduling maintenance periods
¨ Making the customer do some work, such as packing their
own bags in supermarkets
 Ways of adjusting demand

¨ Vary the price

¨ Limit the customers served, by demanding specific ‘qualifications’
¨ Change the marketing effort
¨ Offer incentives to change demand patterns, such as off-peak
travel rates
¨ Change related products to encourage substitution, such as
holiday destinations
¨ Vary the lead time
¨ Use a reservation or appointment system
¨ Use stocks to cushion demand.
 Changing Capacity over Time
¨ In practice, the effective capacity of a supply chain can
change quite markedly.
¨ Learning curve: The more often you repeat something, the
easier it becomes and the faster you can do it
 Changing Capacity over Time (Cont.)
¨ Preventive maintenance and rational replacement policies.
Bottlenecks in Sequential
Operations
 Efficiency and Output Increase
when Machines are Being Added
Product and Service Flows

11-53
Process Flow Map for a Service

11-54
 Relationship between Capacity
and Scheduling
¨ Capacity is oriented toward the acquisition
of productive resources
¨ Scheduling related to the timing of the use of
resources
Gantt Charts for Capacity Planning
and Scheduling (Infeasible)

11-56
Gantt Charts for Capacity Planning
and Scheduling (Feasible)

11-57
Short-Term Capacity Alternatives

¨ Increase Resources
¨ Improve Resource Use
¨ Modify the Output
¨ Modify the Demand
¨ Do Not Meet Demand
 Increase Resources

¨ Overtime
¨ Add shifts
¨ Employ part-time workers
¨ Use floating workers
¨ Subcontract
 Improve Resource Use

¨ Overlap or stagger shifts

¨ Schedule appointments
¨ Inventory output
¨ Backlog demand
 Modify the Output

¨ Standardize the output

¨ Have recipient do part of the work
¨ Transform service operations into
inventoriable product operations
¨ Cut back on quality
 Demand Options

¨ Modify the Demand

¨ change the price
¨ change the promotion
¨ Do Not Meet Demand
 Capacity Planning for Services

¨ Large fluctuations in demand

¨ Inventory often not an option
¨ Problem often is to match staff availability
with customer demand
¨ May attempt to shift demand to off-peak
periods
¨ Can measure capacity in terms of inputs
The Learning Curve (reading)
 Background

¨ In airframe manufacturing industry observed

that each time output doubled, labor hour
per plane decreased by fixed percentage
 Learning Curve Function

M = mNr

M = labor-hours for Nth unit

m = labor-hours for first unit
N = number of units produced
r = exponent of curve
= log(learning rate)/0.693
Typical Pattern of Learning and
Forgetting

11-67
 Capacity Requirements
Planning (CRP)
¨ Creates a load profile
¨ Identifies under-loads and over-loads
¨ Inputs
¨ Planned order releases
¨ Routing file
¨ Open orders file
 CRP

MRP planned
order
releases

Capacity Open
Routing requirements orders
file planning file

Load profile for

each process
 Load Profiles
¨ Graphical comparison of load versus
capacity
¨ Leveling underloaded conditions:
¨ Acquire more work
¨ Pull work ahead that is scheduled for later time
periods
¨ Reduce normal capacity
 Reducing Over-load Conditions

1. Eliminating unnecessary requirements

2. Rerouting jobs to alternative machines, workers,
or work centers
3. Splitting lots between two or more machines
4. Increasing normal capacity
5. Subcontracting
6. Increasing efficiency of the operation
7. Pushing work back to later time periods
8. Revising master schedule
 Initial Load Profile
120 –
110 –
100 –
Hours of capacity

90 –
80 –
70 –
60 –
50 –
Normal
40 – capacity
30 –
20 –
10 –
0–
1 2 3 4 5 6
Time (weeks)
 Adjusted Load Profile
120 –
110 –
100 –
Hours of capacity

90 –
80 –
70 – Work
an
60 – extra Push back
Pull ahead
50 – shift
Overtime Push back Normal
40 – capacity
30 –
20 –
10 –
0–
1 2 3 4 5 6
Time (weeks)
¨ Load leveling
¨ process of balancing underloads and overloads