Capacity (I): is the upper limit on the load that an operating unit can handle.

Capacity (II): the upper limit of the quantity of a product (or product group) that an operating unit can produce (= the maximum level of output)

Capacity (III): the amount of resource inputs available relative to output requirements at a particular time

Type of Measures of CapacityOrganization Inputs Outputs

Manufacturer Machine hoursper shift

Number of unitsper shift

Hospital Number of beds Number ofpatients treated

Airline Number of planesor seats

Number ofseat-miles flown

Restaurant Number of seats Customers/timeRetailer Area of store Sales dollarsTheater Number of seats Customers/time

Design capacity maximum output rate or service capacity an

operation, process, or facility is designed for = maximum obtainable output = best operating level

Effective capacity Design capacity minus allowances such as

personal time, maintenance, and scrap (leftover) Actual output = Capacity used

rate of output actually achieved. It cannot exceed effective capacity.

Actual outputEfficiency =

Effective capacity

Actual outputUtilization =

Design capacity

Facilities, layout Product and service factors Process factors Human factors Policy (shifts, overtime) Operational factors Supply chain factors External factors

level of capacity in excess of the average utilization rate or level of capacity in excess of the expected demand.

Capacity cushion = (designed capacity / capacity used) – 1

Sources of Uncertainty ManufacturingCustomer deliverySupplier performanceChanges in demand

1.Available capacity2.Expertise3.Quality considerations4.Nature of demand5.Cost6.Risk

1. Design flexibility into systems2. Take stage of life cycle into account

(complementary product)

3. Take a “big picture” approach to capacity changes

4. Prepare to deal with capacity “chunks”5. Attempt to smooth out capacity

requirements6. Identify the optimal operating level

DEMAND

PRODUCTION RATE (CAPACITY)

DEMAND

CAPACITY

Inventory accumulation

Inventory reduction

DEMAND

PRODUCTION (CAPACITY)

SUBCONTRACTING

DEMAND

PRODUCTION (CAPACITY)

DEMAND

PRODUCTION (CAPACITY)

Economies of scale If the output rate is less than the optimal level, increasing

output rate results in decreasing average unit costs Diseconomies of scale

If the output rate is more than the optimal level, increasing the output rate results in increasing average unit costs

Production units have an optimal rate of output for minimal cost.

Minimum cost

Ave

rag

e co

st p

er u

nit

0 Rate of output

Minimum average cost per unit

Minimum cost & optimal operating rate are functions of size of production unit.

Av

era

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co

st

per

un

it

0

Smallplant Medium

plant Largeplant

Output rate

CD= N ∙ sn ∙ sh ∙ mn ∙ 60 (mins / planning period)

CD= designed capacity (mins / planning period)N = number of calendar days in the planning

period (365)sn= maximum number of shifts in a day (= 3 if

dayshift + swing shift + nightshift)sh= number of hours in a shift

(in a 3 shifts system, it is 8 per shift)mn= number of homogenous machine groups

C’D= N ∙ sn ∙ sh ∙ mn ∙ 60 (mins / planning period)

C’D= designed capacity (mins / planning period)N = number of working days in the planning

period (≈ 250 wdays/yr)

sn= number of shifts in a day (= 3 if dayshift + swing shift + nightshift)

sh= number of hours in a shift (in a 3 shifts system, it is 8)

mn= number of homogenous machine groups

CE = CD - tallowances (mins / planning period)

CD= designed capacitytallowances = allowances such as personal time, maintenance, and scrap (mins / planning period)

b = ∙ CE

b = expected capacity (that we use in product mix decisions)CE = effective capacity = performance percentage

A company produces a product in 2 shifts pattern and 250 days in a given year. Two machines are available in the workstation. The maintenance needs 8 hours in a month. The performance rate in the first shift is 90%, in the second shift 80%. Each product needs 25 minutes to be finished.

a) Determine the designed capacity for one year.a) Determine the designed capacity for one year. b) Determine the effective capacity for one year.b) Determine the effective capacity for one year. c) Determine the expected capacity for one year.c) Determine the expected capacity for one year. d) Determine the number of products we can d) Determine the number of products we can

produce.produce. e) Determine the utilization and efficiency if the e) Determine the utilization and efficiency if the

actual output is 15 800 pieces.actual output is 15 800 pieces. d) Determine capacity cushion.d) Determine capacity cushion.

Set up the product-resource matrix using the following data!

RP coefficients: a11: 10, a22: 20, a23: 30, a34: 10 The planning period is 4 weeks (there are no holidays in it, and no work on weekends) Work schedule:

R1 and R2: 2 shifts, each is 8 hour long R3: 3 shifts

Homogenous machines: 1 for R1 2 for R2 1 for R3

Maintenance time: only for R3: 5 hrs/weekPerformance rate:

90% for R1 and R3 80% for R2

Ri = N ∙ sn ∙ sh ∙ mn ∙ 60 ∙ N=(number of weeks) ∙ (working days per week)

R1 = 4 weeks ∙ 5 working days ∙ 2 shifts ∙ 8 hours per shift ∙ 60 minutes per hour ∙ 1 homogenous machine ∙ 0,9 performance

= = 4 ∙ 5 ∙ 2 ∙ 8 ∙ 60 ∙ 1 ∙ 0,9 = 17 280 minutes per planning period

R2 = 4 ∙ 5 ∙ 2 ∙ 8 ∙ 60 ∙ 2 ∙ 0,8 = 30 720 mins

R3 = (4 ∙ 5 ∙ 3 ∙ 8 ∙ 60 ∙ 1 – 5 hrs per week ∙ 60 minutes

∙ 4 weeks) ∙ 0,9= (28 800 – 1200 ) ∙ 0,9= 24 840 mins

   PP11 PP22 PP33 PP44 b (b (mins/ymins/y))

RR11 1010 17 28017 280

RR22 2020 3030 30 72030 720

RR33 1010 24 84024 840

Complete the corporate system matrix with the following marketing data: There are long term contract to produce at least:

50 P1 100 P2 120 P3 50 P4

Forecasts says the upper limit of the market is: 10 000 units for P1 1 200 for P2 1 000 for P3 2 000 for P4

Unit prices: P1=100, P2=200, P3=330, P4=100 Variable costs: R1=5/min, R2=8/min, R3=11/min

   PP11 PP22 PP33 PP44 b (mins/y)b (mins/y)

RR11 1010 17 28017 280

RR22 2020 3030 30 72030 720

RR33 1010 24 84024 840

MIN (MIN (pcs/ypcs/y)) 5050 100100 120120 5050

MAX (pcs/y)MAX (pcs/y)

10 10 000000 1 2001 200 1 0001 000 2 0002 000

priceprice 100100 200200 330330 100100

Contr. Marg.Contr. Marg. 5050 4040 9090 -10-10

P1= 17 280 / 10 = 1728 < 10 000

PP22: : 200/20=10200/20=10

PP33: : 330/30=11330/30=11

PP44=24 840/10=2484>2000=24 840/10=2484>2000

PP22= 100= 100 PP33= = (30 720-100∙20-)/30= (30 720-100∙20-)/30=

957<MAX957<MAX

The only difference is in P4 because of its negative contribution margin.

P4=50

   PP11 PP22 PP33 PP44 PP55 PP66 b (hrs/y)b (hrs/y)

RR11 66                2 0002 000

RR22    33 22          2 0002 000

RR33          44       1 0001 000

RR44             66 33 6 0006 000

RR55             11 44 5 0005 000

MIN (pcs/y)MIN (pcs/y) 00 200200 100100 100100 400400 100100

MAX (pcs/y)MAX (pcs/y) 2000020000 500500 400400 200200 20002000 200200

p (HUF/pcs)p (HUF/pcs) 200200 100100 400400 100100 5050 100100

cm (HUF/pcs) cm (HUF/pcs) 5050 8080 4040 -30-30 2020 -10-10

Revenue max. P1=333 P2=400 P3=400 P4=200 P5=1000

Contribution max.

P1=333 P2=500 P3=250 P4=100 P5=1000