Capacity Planning & Management

8/8/2019 Capacity Planning & Management

1/75

CAPACITY PLANNING ANDMANAGEMENT

25 January 2010 Group-3 Capacity Planning Sec: A 1


2/75

CONTENTS

Meaning and Definition of CapacityPlanning

Needs of Capacity planning Types of Capacity Break Even Analysis Role of forecasting in Capacity

planning Decision Analysis Tree

Capacity Expansion Strategies Case Study Conclusions



3/75

CAPACITY

Capacity" is the maximum amount of workthat an organization is capable of

completing in a given period of time.

325 January 2010 Group-3 Capacity Planning Sec: A


4/75

BASIC QUESTIONS

The basic questions in capacity handlingare:What kind of capacity is needed?

How much is needed?When is it needed?



5/75

Capacity can be increased through:-

Introducing new techniques

Equipment and materials

Increasing the number of workers ormachines

Increasing the number of shifts, oracquiring additional production facilities.



6/75

Example

If a machine can run 200hrs in a month & 2000washers per hour are made, then the capacity ofmachine can be expressed 4lakhs washers permonth.

Classical formulaC = T * E * U where,C = actual measured capacity (in standard hours)T = real time available

E = efficiencyU = utilisation



7/75

CAPACITY PLANNING

Capacity planning is the process ofdetermining the production capacity

needed by an organization to meetchanging demands for its products

.



8/75

NEED OF CAPACITY

PLANNING To keep low production cost

To minimize loadings

To meet expected demand

Optimum utilization of resources

To manage change in production

To avoid loss of productivity



9/75

Measurement of capacity

Capacity can be measured in terms of

output or input of the conversion

process.

9

Organisation ofcapacity

Measures

Automobile industry No. of vehicles

Steel mill No. of tonnes of steel

Hospital No. of beds



10/75

CLASSES OF CAPACITYPLANNING

Lead strategy

Lag strategy

Match strategy



11/75

Types Of Capacity

There are three types of capacity:

1.Design Capacity:

Maximum rate at which a process can operate

on continuous basis under ideal condition.This is the capacity designed for thefacility.It depends upon the number ofmachines and equipment, coupled with

labor. It represents the maximum rate ofoutput that can be achieved under idealconditions.



12/75

2. Effective Capacity:

The production rate which can be achieved undernormal conditions taking into a/c product mix,scheduling methods, breakdowns, minor powerfailures, employee trg, rest pauses etc.



13/75

25 January 2010Group-3 Capacity Planning Sec: A

13

Waysof

increasing

effective

capacity

Proper process quality control so that thereare lesser defective items requiring rework.

Proper facilitylocation, layout &internal working

condition

Making products &services as uniform

as possible indesign so that the

no. of set-ups

required are less.

Properly following the environmental &pollution norms.

Good training.high

motivation,lessabsenteeism &

turnover on the part ofworkers.

Good coordinationwith suppliers for

timely & defects freesupplies,& proper

scheduling of

products onmachines.


14/75

This is maximum output rate which is actuallyachieve under the constraints of machinebreakdowns, labor inefficiencies & absenteeism,defective products, late deliveries of materials bythe supplier & so on..

Actual Capacity can be equal to or less than effectivecapacity.

ACTUAL CAPACITY



15/75

Capacity Utilization= Actual capacityDesign capacity

x100%

Capacity Efficiency= Actual capacityNormal capacity

x 100%



16/75

Actual output = 36 units/dayEfficiency = = 90%

Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day= 72%

Design capacity 50 units/day

Efficiency/Utilization Example

Design capacity = 50 trucks/day

Effective capacity = 40 trucks/day

Actual output = 36 units/day

25 January 2010 16Group-3 Capacity Planning Sec: A


17/75

BREAK EVEN ANALYSIS

It determines the level of output at whichadditional revenue equals the additional

cost of adding capacity.

We have to know how large Q i.e. outputrate would have to be for the additionalcapacity to become profitable.



18/75

BREAK EVEN ANALYSIS

Piper Industries is considering opening a new manufacturing

plant to produce shoes .The new facility will have a capacity

of 2,00,000 pairs of shoes per year and an annual cost

function ofCost = Rs. 25,00,000 + 12 Q

Piper expect to sale the shoe for Rs. 27 per unit, so annual

revenue will beAnnual revenue = Rs. 27 Q

where, Q is the output rate.



19/75

SOLUTION

Rs. 27Q = Rs. 25,00,000+Rs. 12 Q

Rs. 15Q = Rs. 25,00,000

Q = 166,667

Unless new facility produces more than166,667 units per year, it will losemoney.



20/75

Loss

Cost&

Revenue(Rs.)

1,66,667

Q (output rate in units)0 BEP=

Profit

Total

reve

nue=

27Q

Totalc

ost=Rs.25

,00,00

0+12Q

BREAK-EVEN ANALYSIS


CAPACITY PLANNING PROBLEM


21/75

Annual demand for a Product A being mfd. By XYZ Ltd is expected

to be as follows:Demand : 8000 10000 15000 20000Probability : 0.5 0.2 0.2 0.1

Annual Fixed Cost are Rs.2,00,000Revenue/Unit is Rs 35Variable cost/Unit Output Level

=Rs 7.758,000 units

=Rs 5.50 10,000 units

=Rs 5.33 15,000 units25 January 2010 21Group-3 Capacity Planning Sec: A




22/75



Annual Fixed Cost are Rs.2,50,000

Variable cost/Unit Output Level=Rs 9.40

8,000 units=Rs 5.20 10,000 units

=Rs 3.80 15,000 units

=Rs 4.90 20,000 unitWhich facilit would ou recommend?

An expected facilityunder consideration wouldrequire


23/75

SOLUTION

EXISTING : 8000X0.5X7.75 = 31,00010,000X0.2X5.0 = 10,000

15,000X0.2X5.33 = 15,990

20,000X0.1X7.42 = 14,840TOTAL = 71,830

EXPANDED: 8000X0.5X9.40 = 37,600

10,000X0.2X5.2 = 10,40015,000X0.2X3.8 = 11,40020,000X0.1X4.9 = 9,800

TOTAL = 69,200


VARIABLE COST


24/75

SOLUTION


EXPECTED SALES

8000 X 0.5 = 400010000 X 0.2 = 2000

15000 X 0.2 = 300020000 X 0.1 = 2000 11000


25/75

SOLUTION

EXISTING EXPANDED

FC 2,00,000 2,50,000

VC 71,830 69,200

TC 2,71,830 3,19,200REVENUE 11000 X 35 =3,85,000

PROFIT 1,13,170 65,800

Ans. Existing facility is recommended



26/75

ECONOMIES AND DISECONOMICSOF SCALE

Economies of scaleIf the output rate is less than the optimallevel, 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 rateresults in increasing average unit costs



27/75

BEST OPERATING LEVELAVG.COST/U

NIT

ECONOMIES OF SCALE


OPTIMAL OUTPUT

RATE


28/75

Different demand patterns/trends are possible indemand forecast.

Growth trend

Decline trendCyclical trend

Stable trend



29/75

Growth trend

TIME

DF



30/75

Decline trend

TIME

DF



31/75

Cyclic trend

DF

TIME



32/75

Stable trend

DF

TIME



33/75

The avg unit cost of productiondecreases as the output rate increases.

When output is increased beyond a

particular limit the avg cost of productionstart increasing.

The output rate at which cost is

minimum is called optimum output rate

OPTIMAL CAPACITYDETERMINATION



34/75

Optimumoutput rate

ACPU



35/75

Used to analyze decision situations thatare sequential in nature.

Decision is taken one after the another

in the sequence.Rectangles-decision nodes

Circles-points of outcomes

DECISION TREEANALYSIS



36/75

USING DECISION TREES TO EVALUATECAPACITY ALTERNATIVESQuestion:

The owner of the Hackers Computer Store is considering what

to do

with his business over the next 5 years. Sales growth over the

past couple of years has been good, but sales could grow

substantially if major electronics firm is built in his area asproposed. Hackers owner sees three options. The first is to

enlarge his current store, the second is to locate at a new site,

and the third is to simply wait and do nothing. The decision to

expand or move would take time, and therefore, the store

would not lose revenue. If nothing were done the first year and

strong growth occurred, then the decision to expand

reconsidered. Waiting longer than one year would allow

competition to move in& would make expansion no longer

feasible.



37/75

Contd

The assumption & conditions are as follows:1. Strong growth as a result of the increased population of

computer fanatics from the new electronics firm has a55% probability.

2. Strong growth with a new site would give annualreturns of $195,000 per year. Weak growth with a newsite would mean annual returns of $115,000.

3. Strong growth with an expansion would give annual

returns of $190,000 per year. Weak growth with anexpansion would mean annual return of $100,000.



38/75

Contd..

4. At the existing store with no changes,there would be returns of $170,000 peryear if there is strong growth and

$105,000 per year if the growth is weak.5. Expansion at the current site would cost

$87,000.

6. The move to the new site would cost$210,000.



39/75

Contd

7. If the growth is strong and the existing site isenlarged during the second year,the cost wouldstill be $87,000

8. Operating costs for all options are equal.



40/75

Solution:

We construct a decision tree to advice Hackersowner on the best action.

Values of each alternatives calculated are asfollows:



41/75

ALTERNATIVE REVENUE COST VALUE

Move to new location,strong $195,000*5 $210,000 $765,000

Growth(975000-210000=765000)

Move to the new location,weak $115,000*5 $210,000 $365,000growthExpand store,strong growth $190,000*5 $87,000 $863,000Expand store,weak growth $100,000*5 $87,000 $413,000Do nothing now,strong growth $170,000*1 $87,000 $843,000

$190,000*4

Do nothing now, strong growth $170,000*5 $0 $850,000Do not expand next year

Do nothing now,weak growth $105,000*5 $0 $525,000


ec s on ree


42/75

ec s on reefor Hackers Computer Store

Problem

Hackerscomputer store

Move

Expand

Do nothing

Revenue move cost

Revenue move cost

Revenue expansion cost

Revenue expansion cost

ExpandRevenue expansion

costDo nothing (revenue)

revenue

Strong growth .55

Weak growth .45

Strong growth .55

Weak growth .45

Strong growth .55

Weak growth .45



43/75

for Hackers Computer Store

Problem

11/21/10 SEC. B PGDM -III 43

Hackers computer

store

Move

Expand

Do nothing

Strong growth .55

Weak growth .45

Strong growth .55

Weak growth .45

Strong growth .55

Weak growth .45$525,000

$765,000

$365,000

$863,000

$413,000

$843,000

$850,000

$585,000

$660,500

$703,750



44/75

The primary purpose of capacity planning isto match the companys productioncapability with customer demand in the mostprofitable way. The capacity strategy should

consider the demand pattern as well assupply capabilities.

Fundamental aspects of capacity decisionsis whether facilities are organized aroundproducts, processes or markets.

44

Capacity Expansion Strategies


Diff t t f


45/75

Different types oforganization facility

Production organized facility

Process organized facility

Market organized facility


Th diff i


46/75

1)Demand Leading

2) Demand Trailing

3)Demand Matching

4)Steady Expansion

46

The different capacityexpansion strategies are:-



47/75

47

CAPACITY

CAPAC

ITY/DE M

AND

TIME

EXCESSCAPACITY

DEMAND LEADING



48/75

48

TIME

CA

PAC

ITY/DEMA

ND

CAPACITY SHORTAGEDEMANDCAPACITY

DEMAND TRAILING



49/75

49

TIME

CAPACITY/DE

MAND

CAPACITY

DEMAND

DEMAND MATCHING



50/75

50

TIME

CAPAC

IY/DEM

AND

DEMAND

CAPACITY

STEADY EXPANSION

CAPACIT ADDED AT REGULARTIME INTERVALS



51/75

Glaxo SmithKline India

Ltd..



52/75

Introduction

Glaxo Smith Kline India Ltd. is one ofthe most important and growing parts ofpharmaceutical manufacturing giant

Glaxo Smith Kline, UK (known as GSK,worldwide).

It has more than 20% of the market

share of pharmaceutical products inIndia.



53/75

Operations

It has its own 4 manufacturing units andrest of its manufacturing is outsourced to23 partner pharmaceuticalmanufacturing companies throughoutIndia.

It has 5 warehouses strategically locatedto cater to distributors (CFAs) who are

located in widely scattered geography ofIndia. The total number of distributors(CFAs) is 31.



54/75

Transportations

Transportation part of the whole distributionsystem is outsourced to many independentprivate goods carriers.

These carriers are grouped as trucking (with

varying carrying capacities ; railroad, surfacecouriers and air couriers.

The lead-time varies from 15 days for a railroadconnection from the western part of India to the

far eastern part of India to 5 7 days for mostroad connections for trucks to 2 days for aircourier.



55/75

Applications

Glaxo Smith Kline India Ltd. hadimplemented ERP system from vendorJD Edwards.

While this system has been proving veryuseful for their manufacturingprocesses, they did not had a

satisfactory solution for their producttransportation and distribution processes



56/75

The Challenge

1. Planning used to take at least 2 weeks andrequired input from many people. A lot of

effort was required to make these plans.

2. By the time the plan was made, it became obsolete

as initial requirements got changed.When any change in plan was required, it wasimpossible to incorporate these changes

in the plan.

3. The whole product distribution system wasinefficient.



57/75

Challenges

4. There were many under fill movementsof trucks.

5. No transparency In distribution system.

6. Late orders were creating a lot ofproblems.



58/75

The Solution

1. When Optimization Engine isimplemented in an organization wherethere is already an implementation of

any ERP system, Optimization Engineworks as the brains behind the businessoperations whereas the ERP systemworks as the business enabler.



59/75

Contd..

2. Our Optimization Engine softwareconsolidates all sales forecasts made bydifferent sales units as well as the

purchase orders; the company receives.Based on this consolidated figure, thecompany can do any supply chainrelated planning



60/75

Contd..

3. Our Optimization Engine Software isbased on Genetic Algorithm basedcomputation. The plan it generates is

the most optimal solution for the givenscenario and no other solution caneasily beat it.



61/75

Contd..

4. Optimization Engine software takes intoaccount stock out cost (loss of order dueto unavailability of stock), inventory cost

and transportation cost, raw materialcosts, human resources costs, and itgenerates a plan to minimize all of thesecosts.



62/75

Contd..

5. Optimization Engine software takes intoaccount lead time and other constraints.It takes them into account completely

when it generates the most optimal plan.6.User has a choice to assign weight age

and the software generates the most

optimal plan accordingly.



63/75

Contd..

7. Our experience shows that even at placeslike big and reputed multinationalcompanies; the efficiency of their business

processes is not optimal even after goodimplementation of ERP systems. In mostcases our software can improve theirbusiness processes by at least 10% and

it can go even to 300%. This translates tocorresponding cost savings and effectivecapacity planning.



64/75

Benefits of the solution:

1. When a company is looking to cut itsoperational costs to be competitive.

2. When a company is looking to expand

and wants to make capacity planning forthe new facilities.

3. When a company wants to revise the

capacities for the merged facilities afteracquisitions.



65/75

Highlights of implementations:

The total distribution cost savingsexperienced by the company stood atmore than 150% compared to their

earlier distribution costs. The servicelevels were achieved more than 95% forall products.



66/75



67/75

Conclusion

1. To update the model a specified namingconvention needs to be followed for e.g.Purchases should be named as PU,

Transfers as TR, Sales as SL, stocksas ST, and receipts as RT. All thesefiles need to be stored in the Integratefolder on D: drive of the machine..



68/75

Contd..

To start replication user needs to selectreplicate option from the OptimizationIcon in the Start button Programs list.

The application can either use thecurrent stock as the opening stock forthe whole month if the stocks areupdated at the start of the month or just

let the daily update run as per theregular routine.



69/75

Contd..

2. After running the Replication model, usercan create a new plan.

3. To create a new plan, user can select theOptimization Engine icon and login into theapplication. Planning for some selectedproducts or all the products depends uponthe users choice, he may also select theoption of medicines or vaccines before

creating the plan and accordingly theproduct, source and destination lists arehandled.



70/75

Contd..

Planner also has the option of settingthe objectives of the plan by selectingthe Advanced button where theconstraints like:

optimizing on high or low stock outcosts

what percent of excess quantity of

products at various locations should beconsidered for movement on the basisof availability



71/75

Contd..

the kind of weekly distribution patternthat needs to be followed for logistics ofgoods.

Week wise distribution describes theshipment of products over the month.


Capacity Planning


72/75

Capacity PlanningChallenges

Inability to create a steady flow of demand to fullyutilize capacity

Idle capacity always a reality for services. Customer arrivals fluctuate and service demands

also vary. Customers are participants in the service and the

level of congestion impacts on perceived quality.

Inability to control demand results in capacity

measured in terms of inputs.


Importance of Capacity


73/75

1. Impacts ability to meet future demands2. Affects operating costs

3. Major determinant of initial costs

4. Involves long-term commitment5. Affects competitiveness

6. Affects ease of management

7. Globalization adds complexity8. Impacts long range planning

Importance of CapacityDecisions



74/75

CONCLUSION

The primary purpose of capacity planningis to match the companys production

capability with customer demand in themost profitable way.



75/75

1

111

Capacity Planning & Management

Documents

Transcript of Capacity Planning & Management