Strategic Capacity Planning

Prepared by Bhakti JoshiJune 20, 2014

Capacity

Capacity – Organisational Context• A typist can type 500 words in 2 minutes• The widget manufacturer may be able to produce

150,000 widgets in a month• A theatre has a seating capacity for 400

customers• An office employee can work at least 5 working

hours per working day• A worker can produce 50 glass bottles every 1

hourAre these examples on capacity subjective or objective?

Capacity is…

…maximum level of output of goods and services that a given system can potentially produce over a set period of time.

Types of Capacity

Effective Actual (Demonstrated)

Maximum or Design

The highest rate of output that a process achieves

The actual level of output for a process over a period of time

The expected rate of output that a process can achieve

How can we determine these capacities?

Ideal Capacities: Actual and Effective

• Maximum capacity minus allowances such as personal time, maintenance and scrap (or wastes)

- EFFECTIVE CAPACITY– Facilities– Product and Service Factors– Human factors– Operational factors– Supply chain factors– External factors

• Rate of output actually achieved but cannot exceed effective capacity – ACTUAL CAPACITY

Measuring Capacity: Capacity Utilisation

If a firm could produce 1200 units per month, but is actually producing 600 per month, how much capacity is the firm using?

Capacity Utilisation Rate:

Demonstrated (Actual) Output

Maximum (Potential) Output

X 100=

50%=

Measuring Capacity: Capacity Efficiency A network service branch office has a potential capacity of catering to an average of 500 customers in a business day with each employee expected to cater to an average of 50 customers per day. In reality, each employee caters to about 10 customers per day. What is the capacity efficiency per day? Capacity Efficiency Rate:

Effective (Expected) Output

X 100=

=

Demonstrated (Actual) Output

20% The capacity of the office enables every employee to cater to 12 customers per day. What is the capacity utilisation rate?

Questions for Capacity Planning

• What is demand for a product/service?• What resources are required to

produce/provide?• How many (or much) inputs required to

produce/provide?• Will the organization be able to cater to the

changing demand?

Measuring Capacity: Another Example

A production unit that operates 7 days/week in 8 hour shifts. • Maximum capacity is 1200 units per hour• Actual production is 148000 units per month• Effective Capacity is 175000 units per monthFind Utilisation and Efficiency rates?

Maximum capacity = (30 X 8) X (1200) = 288,000 units

Utilisation Rate =

Efficiency Rate =

148000/288000 = 51.38%

148000/175000 = 84.57%

Utilisation & Efficiency

FIXED CAPITAL OPERATIONS &

(possible) CONSTRAINTS

The level of output produced from the utilized equipment /design/ resources of a firm/unit

How well you produce within the capacity a firm/unit is utilizing

Strategic Capacity Planning• Balance in use of available resources

• Attention to every step of production or service

• Minimal or no wastes

• Minimal or no inventory

• Optimum level of output

• Cater to consumer demand

Strategies: Lead, Lag or Match?

A toy manufacturer believes a certain toy would become popular during Eid and started increasing capacity from May onwards.

A toy manufacturer increases capacity after demand for toys and operations run at full stream

A toy manufacturer adds capacity in incremental or small amounts in response to changing demand

Lead strategy: Aggressive

Lag strategy: Conservative

Match strategy: Moderate

Steps for Capacity Planning

• Estimate future capacity requirements• Evaluate existing capacity• Identify alternatives• Conduct financial analysis• Assess key qualitative issues• Select and implement chosen alternative/s• Monitor results

Case Study: McDonalds

Calculating Maximum (Design) Capacity

• Product: McAloo Tikki• Preparation Time: 42 seconds• Preparation Time in Hours: 42/3600 =

0.011667 hours• Operating hours = 15• No. of McAloo Tikkis in a day = about 1286

Calculating Utilization Rates

• Actual output per day = 352 McAloo Tikkis

• Utilization Rate = Actual Output / Maximum output = (352/1286) X 100 = 27%

Estimating Available Working Hours

• No. of working days in the outlet = 7• No. of working hours per day = 15 hrs.• System Availability (WEEKLY) = 7x15= 105

hrs.

Estimating Labor Requirements

• Labor requirements depends fully on sales • Peak Time (1pm- 4pm) & (7pm-10pm) Expected Guest Count- 400• Weekends: Expected Guest Count- 600• Holidays• Fridays

Resource Availability

• No. of Workers Available = 25• Absenteeism = 2%• Workers Capacity (weekly) = No. of working days X

No. of hours X No. of Available Workers X (1- (Absenteeism rate/100)

= 7 X 15 X 25 X 0.98 = 2572 hours in a week

Estimating Machine Requirements

• Machines for burgers, french fries, coke, Ice-cream, Cold-coffee & Ice Tea, McPuff Pizza

• No. of Machines Available = 17• Machine capacity = 7 X 15 X 17 = 1785 hours

PROCESS MAPING

Questions1. Explain which strategy may have been considered by this

McDonald’s outlet? Lead, Lag or Match? And Why?

2. Explain on what factors will the efficiency of the outlet be dependent upon?

3. If the demand for McAloo Tikis is 600 because of a holiday, can you calculate the efficiency rate of this outlet?

• The outlet uses lead strategy Bun inventory- 2 days advance FCD(Fried chilled dried) inventory- 3 days advance Coke inventory- 15 days advance

• Operational Constraints (Discuss)

• (352/600) X 100 = 58.66%

Answers

• (352/600) X 100 = 58.66%

• Operational Constraints (Discuss)

• The company uses lead strategy Bun inventory- 2 days advance FCD(Fried chilled dried) inventory- 3 days advance Coke inventory- 15 days advance

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