Estimating and Altering Capacity
After completing this chapter, you should be able to:
• De!ne capacity as a measure of an organization’s ability to provide customers with the requested service or good.
• Explain that capacity estimation is dif!cult because many management decisions affect capacity.
• Describe how overall capacity of the system is dependent on the capacities of the departments and machines that form the production system.
• Determine the bottleneck in a system and demonstrate how that information can be used.
• Describe key capacity decisions, such as how much capacity to add; when, where, and what type (process) of capacity to add; when to reduce capacity and by how much.
8 ©Fotosearch/SuperStock
Capacity Decisions
CHAPTER 8Section 8.1 Capacity De!ned
8.1 Capacity Defined
Capacity is a measure of an organization’s ability to provide customers with the demanded services or goods in the amount requested and in a timely manner. Capacity is also the maximum rate of production. An organization marketing and selling rotisserie chicken should be able to produce and deliver chicken in sufficient quan- tities to satisfy consumer demand during lunch and dinner times when demand peaks. Meeting customer demand requires the acquisition of physical facilities, the hiring and training of qualified people, and the acquisition of materials to achieve the desired pro- duction level. The following important questions about capacity planning are addressed in this chapter:
• How can management estimate capacity? • What is system capacity, and why is it important? • How can capacity decisions be made to gain a competitive advantage for the
organization?
Role of Capacity Planning Capacity planning is very important because significant capital is usually required to build the facilities and purchase the equipment to build capacity. Creating a series of large server farms to support the Internet and data communications requires substantial invest- ment. Millions of dollars are required to build a brewery, a hospital, or a knitting produc- tion line to make sweaters. These expenditures are for fixed assets that are expensive to maintain and even more expensive to change. Capacity decisions require careful consid- eration of an organization’s long-term objectives and the market demand. Capacity deci- sions must be consistent with current and anticipated demand.
Organizations should be flexible in order to meet future as well as present capacity require- ments. Flexibility can allow managers to:
• Adjust production volume to respond to changes in customer demand. • Produce different products on the same equipment (product mix) to respond to
changing customer needs. • Alter product technology and process technology to maintain or improve an
organization’s competitive position.
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CHAPTER 8Section 8.2 Estimating and Altering Capacity
8.2
Before estimating capacity, it is necessary to recognize the difference between theoretical or ideal capacity and achievable capacity. Theoretical capacity is what a service firm or a manufacturer can produce under ideal conditions for a short period of time. Under ideal conditions there are no equipment breakdowns, main- tenance requirements, mate- rial problems, or worker errors. While organizations strive to eliminate these unproductive delays, allowances for these ele- ments must be made in order to develop realistic estimates of capacity.
Meijer superstores provide consumers with a full range of food products as well as a diverse range
Meijer’s concept is twofold: 1) build big stores that have high sales; and 2) aggressively expand the
.Thinkstock
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CHAPTER 8Section 8.2 Estimating and Altering Capacity
To estimate capacity, managers must first select a way to measure it. In some cases, the choice is obvious, for example, tons per hour of steel or kilowatt-hours of electricity. A hospital can use beds as a measure of capacity. Thus, a hospital with 100 beds that are available 365 days per year has a capacity of 36,500 patient-days each year. Hospitals measure the number of patients admitted and how long each stays so they can calculate patient-days consumed. A comparison of patient-days consumed and patient-days avail- able gives the operating ratio shown below.
Hospital’s operating ratio ! 24,000 patient-days consumed 36,500 patient-days available
” 100
! 65.8%
In general, the operating ratio is calculated according to the following equation:
Operating ratio ! capacity consumed capacity available
” 100
Finding a yardstick to estimate capacity is more difficult in a restaurant than in a hospital because there is no uniform product on which the measurement can be based. Capacity could be measured in terms of people served, meals prepared, or the ability to gener- ate sales dollars. It is management’s responsibility to select the appropriate measure and apply it.
Once the measure has been selected, estimating capacity involves the following steps:
1. Determine the maximum rate per hour of the production equipment. 2. Determine the number of hours worked in a given time period. 3. Multiply those two numbers.
Capacity/period ! (maximum production rate/hour) ” (number of hours worked/period)
Production rate ! number of units produced
amount of time
Capacity can be changed by changing the number of hours worked in a time period, or by changing the production rate. The number of hours worked per time period is affected by several factors, including overtime, multiple shifts, downtime for preventive mainte- nance, and allowances for unplanned equipment failure.
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CHAPTER 8Section 8.2 Estimating and Altering Capacity
Several management decisions affect capacity. For example, increases in the amount and quality of preventive mainte- nance could increase capacity by reducing unexpected equip- ment failure. Other decisions affect capacity by changing the production rate. The following decisions are examined in this section:
• Changing the mix of products produced by the facility.
• Adding people to the production process.
• Increasing the moti- vation of production employees.
• Increasing the machine production rate.
• Improving the quality of the raw materials and the work in process. • Increasing product yield.
An organization’s product mix is the percentage of total output devoted to each prod- uct. For example, an agency may sell life, house, and automobile insurance. How does
.Associated Press/AP Images
!
Number of hours !
!
!
! 2% of planned hours
! # 0 $ $
!
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CHAPTER 8Section 8.2 Estimating and Altering Capacity
Type
Life insurance
Automobile insurance
!
Life ! !
! !
Auto ! !
PR ! # #
!
product mix effect capacity? It may take more of an agent’s time to sell life insurance than automobile insurance. Consequently, a shift in demand toward life insurance poli- cies reduces an agent’s selling capacity. In theory, the agent should earn more money sell- ing life insurance to compensate for the extra time. Otherwise, the agent will favor house and auto insurance.
Product mix issues are also relevant in manufacturing. A steel company produces steel of many alloys, shapes, and sizes, and these differences require different production pro- cesses and times. For example, the sheet steel that forms the body of an automobile or an appliance is produced in many widths. A 60-inch piece may be needed for the hood, and a 40-inch piece may be needed for a door panel. The mill that rolls these widths takes about the same amount of time per foot regardless of width. Therefore, a mill with a heavy mix of 40-inch pieces will be able to produce fewer tons per hour than a mill with many 60-inch pieces. What is the capacity of the processing equipment, and what are the units of
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CHAPTER 8Section 8.2 Estimating and Altering Capacity
40 inches 80%
20%
PR) !
PR 40
) can be determined as follows:
PR 40
!
!
!
PR ! #
! #
!
PR ! 1 8,280 0 lbs/hr
2,000 lbs/ton
!
Capacity for Mix 1 ! (PR
!
!
capacity? Steel is measured in tons per hour, but those who estimate capacity realize that capacity changes as the mix of steel changes because different products have different pro- duction rates. Therefore, product mix must be estimated before capacity can be estimated.
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CHAPTER 8Section 8.2 Estimating and Altering Capacity
Adding people to an operation may increase the maximum production rate. This increase occurs when the operation is constrained by the amount of labor assigned to the job. The capacity of both service operations and manufacturing operations is affected by adding or eliminating people. Organizations that are successful need to be willing and able to adapt to change. Part of being able to adapt is having flexibility to meet changes in demand. The following example illustrates the flexibility available to an organization in meeting vary- ing levels of demand.
!
!
!
!
! New Capacity 2 Old Capacity
Old Capacity ” 100
! 14 2 0
0 ” 100
!
