CAPACITY PLANNING AND CONTROL

2A. CAPACITY PLANNING

A.1 CAPACITY

Capacity is defines as the ceiling on the maximum load a production unit can handle at a given

point of time. In other words, capacity is defined as an upper limit on the rate of output.

The capacity question does not arise alone. It comes in conjunction with:

New facility planning

Leasing or buying the equipment required to maintain the output.

Expansion of the existing facilities

While introducing new product or services

While finalizing the fund and energy requirements

The above mentioned situations, if come across alone, are easy to tackle. It becomes complicated

when more than one situation is encountered at the same time.

A facility’s Capacity is the rate of productive capability of a facility. Capacity is usually expressed as

maximum productive volume of output per time period. Operations managers are concerned with capacity

for capability, usually several reasons. First, they want sufficient capacity to meet customer demand in a

expressed as volume of out put per period of timely manner. Second, capacity affects the cost efficiency of

operations, the case or time. Difficulty of scheduling output, and the costs of maintaining the facility.

Finally, capacity requires an investment. Since managers seek a good return on investment, both the costs

and revenues of a capacity planning decision must be carefully evaluated.

2A.2 DEFINITION OF PRODUCTION CAPACITY

Facility planning includes, determination of how much long-range production capacity is needed,

when additional capacity is needed, where production facilities should be located and the layout and

characteristics of the facilities.

Capacity in general is the maximum production rate of a facility or a firm. It is usually expressed as

volume of output per period of time.Capacity indicates the ability of a firm to meant market demand.

Operations managers are concerned with capacity because.

(a) They want sufficient capacity to meet customer demand in time

(b) Capacity affects cost efficiency of operations, the case or difficulty of scheduling output and the

costs of maintaining the facility.

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(c) Capacity requires an investment of capital.

2A.3 Capacity planning

Capacity planning design is the first level planning for the inputs, conversion activities and outputs

of a production operation. Design decisions are very important because they re often associated with

significant investment of funds. The initial outlay and operating expenses are established based on design

decisions, and these in turn affect productivity of the concern in future. So they affect fixed cost and

variable cost.

DESIGN CAPACITY: preliminary estimate of capacity is done based on long-range forecast extending 5 to

10 years into the future.

The design capacity of a system is the rate of output of goods or services under full scale

operating conditions. For example, a cement factory may be designed to produce 200 tons per day. The

projected demand for period anywhere from 5 to 10 years is taken as the estimate for the design capacity,

since frequent expansion will lead to productivity loss.

SYSTEM CAPACITY: In practice, it may not be possible to achieve production to the extent of design

capacity mainly because of mismatch between required resources and available resources. The maximum

output of a specific product or product mix that the system of workers and equipments is capable of

producing as an integrated whole is called system capacity. This may be less than that of the design

capacity.

The actual output may be even less than the system capcity since it is affected by short-range factors such

as actual demand, equipment breakdowns, and personal absenteeism or productivity.

2A.5 NEED FOR CAPACITY PLANNING

Capacity planning is necessary when an organization decides to increase its production or

introduce new products into the market. Once capacity is evaluated and a need for new or expanded

facilities is determined, decisions regarding the facility location and process technology selection are taken.

Capacity planning is the first step when an organization decides to produce more or a new product.

Once capacity is evaluated and a need for new or expanded facilities is determined, facility location and

process technology activities occur. Too much capacity would require exploring ways to reduce capacity,

such as temporarily closing, selling, or consolidating facilities. Consolidation might involve relocation, a

combining of technologies, or a rearrangement of equipment and process.

2A.6 IMPORTANCE OF CAPACITY PLANNING

The importance of capacity planning lies in the fact that it is more fundamental. Every organization

looks at the future with its’ own focus and develop and adjusts ‘its’ strategies to reach the goal. Capacity

planning relates to the organization potential impact on the ability of the organization to meet the future

demands for it’s product / service. This is because of the fact that the possible rate of output is limited by

the capacity.

a. There is also link between the capacity and the operating cost. Every managers wants to minimize

the operating cost of the final product. Also they are interested in utilizing the established capacity

to the fullest possible extent. This trade – off puts the whole process, into a vicious circle.

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b. Minimizing the operating cost is not possible always, as the demand is a variable factor. The

demand variation is due to:

Increased competition (through the entry of new players; (or) due to the change in the strategies of

the existing players).

Technological changes (through some inventions (or) entry of MNC’s through joint ventures)

User’s perception (which changes from time to time)

Nature of the product (accordingly the demand will be seasonal or cyclical)

Possible demand patterns are:

Growth

Decline

Cyclical

Stable

c. The Initial Investment involved. This is due to the fact that, the capacity is a major determinant of

the cost of a product, which will decide about the organization’s position in the market.

d. Long term commitment of resources. Once a capacity is created, it is very difficult – not impossible

– to modify. In future, if modification is needed, it calls for heavy investment.

2A.7 CAPACITY PLANNING DECISIONS

Capacity planning involves activities such as:

(a) Assessing existing capacity

(b) Forecasting future capacity needs

(c) Identifying alternative ways to modify capacity

(d) Evaluating financial, economical and technological capacity alternatives

(e) Selecting a capacity alternative most suited to achieve the strategic mission of the firm.

Capacity planning involves capacity decisions that must merge consumer demands with human,

material and financial resources of the organization.

Often decisions about capacity are inseparable from decisions about locations: Capacity depends

upon demand and demand often depends on location. Commercial banks, for example, simultaneously

expand capacity and demand by building branch banks. Decisions about the size and location of the

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branch are made according to projections about neighborhood population densities and growth,

geographic locations of market segments, transportation (traffic) flows, and the locations of competitors.

Adding a new branch offers greater convenience to some existing customers and, management hopes,

attracts new customers as well. Obviously this decision affects the revenues, operating costs and capital

costs of the organisatoin.

In the public sector, the capacity decision involves similar considerations. Municipalities face

ever-increasing demands for public services, strong public sentiment for tightening budgets, and greater

performance accountability. Consequently, officials have increased their efforts to rearrange public

resources so that service capacity is increased but the cost of operating is not. Municipal emergency

services, for example, are periodically expanded by adding to show population growth and shifts. Next,

municipal officials plan where to locate new stations, taking into consideration both areas of greatest need

and costs of operation and facilities. Although the capacity may not involve direct revenues, cost savings

for citizens can be considered a form of indirect revenues. These cost savings can result in reduced tax

burdens of lower insurance rates in areas with improved emergency services.

Modeling techniques, are playing a central role in these planning processes. One study, for

example, explain how mathematical programming is used for greater ambulance effectiveness considering

time-to-scene, time-to-hospital, an distance-to-hospital factors, thereby increasing effective service

system capacity. Another study shows how mathematical modeling can determine optimal fleet sizes and

vehicle routes for a commercial common carrier. Yet another study demonstrates the value of queuing

models in a computer-based information system for the St. Louis County Police Department. The system

gives a way to allocate police patrols, thereby using existing capacity more efficiently or reducing the size

of operations without diminishing existing service levels. All these examples show how systematic analysis

and planning can lead to effective use and improvement of capacity.

2A. 8 CAPACITY PLANNING STRATEGIES

Capacity is a measure of the ability to produce goods or services or, it may be called as the rate of

output. Capacity planning is the task of determining the long – and short – term capacity needs of an

organization and then determining how these needs will be satisfied.

Long-term capacity strategies: Top management may have the following strategies to cope up with major

changes in products and services that it can provide to customers in the long run which will have

significant impact on the capacity. The major changes will altogether revise the demand and resource

requirements. There are:

develop new product lines

expand existing facilities

construct or phase out production plants

Technological obsolescence may force some industries to use phase-in strategy for introducing the next

model of the same product or service to retain and/or improve its market segment. The phase – in

strategy is nothing but het planning for the next model even when the present model is moving well.

Especially, in electronics industry, any company should do continuous research and development to

improve the operational features of the product through advanced technology so that the company will be

in a position to bring out products into the market with the latest technology without any time lag.

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At the same time, all the products will not have continued demand for ever. Moreover, continuing the

production of some products will be uneconomical over a period of time. This will force a company to

diversify and/or phase out some of the existing products. Phasing out of a product should be done over a

period of time properly by taking the re-employment features into account.

Short – term capacity strategies: In short-term planning, horizon, capacity decisions are taken by

considering the fluctuations in demand caused by seasonal and economic factors. The purpose of

short-term capacity planning is to respond to variations in demand during the short-term planning

horizon. Strategies like, overtime, subcontracting, hiring firing, etc. can be used to cope up with the

fluctuations in demand.

2A.9 FACTORS AFFECTING CAPACITY PLANNING

The capacity variables are:

(a) CONTROLLABLE FACTOR’S such as amount of labour employed, facilities installed, machines,

tooting, shifts worked per day, days worked per week, overtime work, sub-contracting, alternative

routing of work, preventive maintenance and number of production set-ups.

(b) LESS CONTROLLABLE FACTORS are absenteeism, labour-performance, machine break-down,

material shortage, scrap and rework and unexpected problems such as strike, lockout, fire

accidents etc.

2A 10 WAYS OF CHANGING CAPACITY

Once the long-range capacity needs are estimated through long-range forecasts, there are many

ways to provide for the needed capacity. Firms may have a capacity shortage situation where present

capacity is insufficient to meet the forecast demand for their products and services or have excess capacity

i.e., capacity in excess of the expected future needs. Long-range capacity planning hence may require

either expansion or reduction of present capacity levels.

2A 11 TYPES OF CAPACITY

1. FIXED CAPACITY: The capital asset (buildings and equipments) the company will have at a particular

time is known as the fixed capacity. They cannot be easily changed within the intermediate time

range. Capacity represents an upper limit to the internal capacity, that the company concentrates

can use in its efforts to meet demand

2. ADJUSTABLE CAPACITY: It is on and the size of the workforce, the number of hours per week they

work, the number of shifts and the extent of sub-contracting.

3. DESIGN CAPACITY: it is the planned rate of output of goods or services under normal full-scale

operating conditions. It is also known as installed capacity. It sets the maximum limit to capacity

and serves to judge the actual utilization of capacity.

4. SYSTEM CAPACITY: It is the maximum output of a specific product or product-mix that the system

of workers and machines i.e., the productive system is capable of producing as an integral whole. It

is less than or equal to the design capacity of the individual components because the system may

be limited by:

(a) The product mix

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(b) Quality specifications and

(c) The current balance of equipment and labor

5. POTENTIAL CAPACITY: It is that, which can be made available within the decision horizon of the top

management.

6. IMMEDIATE CAPACITY: It is that, which can be made available within the current budgeted period.

7. EFFECTIVE CAPACITY: is the capacity, which is used within the current budget period. It is also

known as practical capacity or operating capacity. No plant can work upto the maximum or the

theoretical capacity (installed or design capacity) because of the loss of capacity due to scheduling

delays, machine break-down and preventive maintenance. This result in the plant working at an

efficiency of loss than 100%. Also, the actual output will be less than the designed output due to

rejections and scrap.

8. NORMAL CAPACITY OR RATED CAPACITY: This is the estimated quantity of output or production,

that should be usually achieved as per the estimation done by the Industrial Engineering

department. Actual capacity is usually expressed as a percentage of rated capacity. For example,

the rated capacity of a steel plant may be expressed as 1 lakh ton of steel per month. This is also

sometimes called as average capacity of the plant.

9. ACTUAL OR UTILIZED CAPACITY: This is the actual output achieved during a particular time period.

The actual output may be less than the rated output because of short-range factors such as actual

demand, employed absenteeism, labour inefficiency and low productivity levels.

Design capacity is Reduced by long-range effects, and System capacity is Reduced by short-range

effects.

Long-range effect: Product-mix, long range market conditions, tight quality specifications,

inherent imbalance between equipment and labour.

Short-range effect: Actual demand, management performance vis scheduling, staffing, strategy and

control, labour inefficiencies, wear scrap loss machine breakdown etc.

System efficiency is the ratio of the actual measured output of goods/services to the system

capacity.

2A. 12 CAPACITY DECISIONS

Major considerations in capacity decisions are:

(a) What size of plant? How much capacity to install?

(b) When capacity is needed? When to phase-in capacity or phase-out capacity?

(c) At what cost? How to budget for the cost?

2A. 13 FACTORS AFFECTING DETERMINATION OF PLANT CAPACITY

Market demand for a product service

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The amount of capital that can be invested

Degree of automation desired

Level of integration (i.e. vertical integration)

Type of technology selected

Dynamic nature of all factors affecting determination of plant capacity, viz., changes in the product

design, process technology, market conditions and product life cycle, etc.

Difficulty in forecasting future demand and future technology

Obsolescence of product and technology over a period of time

Present demand and future demand both over short-range, intermediate-range and long-range

time horizons.

Flexibility for capacity additions.

2A. 14 EQUIPMENT SELECTION

Equipment selection is the process of identifying a set of suitable equipments which are most

suitable for processing a set of products.

In the case of mass production, our task is to establish a product line for a single product or for a

set of products which are having similar processing requirements. While determining the process sequence,

the equipment availability must be taken into account. At each and every stage of a product line, it is

possible to identify different equipments to satisfy the processing requirements. But, one should carefully

select a machine which can fully satisfy the processing requirement. But, one should carefully select a

machine which can fully satisfy the processing requirements at a particular operation, or can club

processing of two or more consecutive operations in the line. This will reduce the line length. In fact, this

is the concept followed in machine centres. Machine centres will have several processing capabilities. If a

product line is formed with few machine centres, then the products will travel minimum distance before

they are completed. For this type of production, it is obvious that the production volume of the products

should be high enough to utilize the capacities of the machine/machine centers in the product line.

In the case of batch production using process layout, it is very difficult to dedicate a special

machine for a particular product. Several products will be snaring a given machine. So, at the time of doing

process planning, we should select the machines by simultaneously taking the availability of the machines

and processing requirements of the products into consideration, so that the products travel minimum

distance and they are produced with minimum set-up times.

In all the situations, the economy of cost must be taken into consideration. So, we will have to list

out different alternatives for equipment selection and finally, the best one is to be selected.

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2A. 15 DETERMINATION OF CAPACITY

Capacity determinations is a strategic decisions in plant planning or factory planning. Capacity

decisions are important because:

(a) They have a long-term impact.

(b) Capacity determines the selection of appropriate technology, type of labor and equipments, etc.

(c) Right capacity ensures commercial viability of the business ventures.

(d) Capacity influences the competitiveness of a firm.

2A. 16 CAPACITY MEASUREMENT

Capacity of a plant can be expressed as the rate of output viz., units per day or per week or per

month, tones per month, gallons per hour, labour hours/day, etc. But for organizations whose product

lines are more diverse, it is difficult to find a common unit of output. More appropriate measure of

capacity for such firms is to express the capacity in terms of money value of output per period of time (day,

week or month).

Capacity may be measured in terms of inputs or outputs of the conversion process.

Since, capacity is defined along with the constraints, the capacity measurements becomes

subjective, as different interpretations of the terms are made by different people in the organization.For

example, if the capacity is measured on the sale of products in rupees ro dollars, the forex fluctuations

will result in different results on capacity.

In situations where the organization has more than one product in the product mix, a question

arises on which product the capacity should be measured? If done on one product alone, it may not cover

the whole infrastructure created and may mislead.For example, if a refrigeration company produces Deep

Freezers and Refrigerators using the same machineries, capacity has to be expressed by taking into

consideration of both the products and not a single one.

Details of the industries and the capacity measurements are given in Table 2.1

Table 2.1

Examples of Commonly used measured of capacity

Type of business Measurement of capacity

Resource available output

Education Faculty, Infrastructure Number of Students Year

Automobile Man-Machine hours Number of cars / shift

Agriculture Acres

Cows

Tone of Grains / Year

Litres of Milk / day

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Steel Mill Furance Size Tons / Shift

Theatre Number of Seats Number of Tickets sold / day

Restaurant Number of Tables Number of meals sold / day

Oil Refining Size of Refinery Fuel oil / day

2A. 17 MEASURING CAPACITY

For more organizations capacity is simple to measure. Amul can use “tons of cheese per year”.

General Motors Corporation can use “number of automobiles per year.” But what about organizations

whose product lines are more diverse? For these firms, it is hard to find a common unit of output.

As a substitute, capacity can be expressed in terms of input. A legal office may express capacity in

terms of the number of attorneys employed per year. A custom job shop or an auto repair shop may

express capacity in terms of available labor hours and / or machine hours per week, month, or year.

Capacity, then, may be measured in terms of the inputs or the outputs of the conversion. Some

common example of capacity measures are shown:

Measures of operating capacity

Output

Automobile manufacturer-number of autos

Brewery-Barrels of beer

Cannery-Tons of food

Steel producer-Tons of steel

Power company-Megawatts of electricity

Input

Airline-Number of seats

Hospital-Number of beds

Job shop-Labour and/or machine hours

Merchandising-Square feet of display or sales area

Movie theater-Number of seats

Restaurant-Number of seats or tables

Tax office-Number of accountants

University-Number of students and/or faculty

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Warehouse-Square or cubic feet of storage space.

It’s often difficult to measure capacity realistically because of day-to-day variations. Employees are absent

or late, equipment breaks down, facility downtime is needed for maintenance and repair, machine setups

are required for product change over and vacations must be scheduled. Since all these variations occur

from time to time, you can see that the capacity of a facility can rarely be measured in precise terms, so

measurements must be interpreted cautiously. It’s not unusual, for example, for a facility to operate at

more than 100% capacity.

2A. 18 CLASSIFICATION OF CAPACITY PLANNING

Capacity planning can be classified as:

(a) Long-term capacity planning

(b) Short-term capacity planning

(c) Finite capacity planning

(d) Infinite capacity planning

2A . 19 LONG-TERM AND SHORT-TERM CAPACITY PLANNING

Long-term or long-range capacity planning is concerned with accommodating major changes that

affect the overall level of output in the longer run. Major changes could be decisions to develop new

product lines expand existing facilities and construct or phase out production plants.

Short-term or short-range capacity planning is concerned with responding to relatively

intermediate variations in demand. In the short-term planning horizon, capacity concerns involve the

fluctuations in demand caused by seasonal or economic factors.

Ways of adjusting the capacity to the varying demands in the short-term time horizon are:

(i) Use of overtime or idle time

(ii) Increasing the number of shifts per day to meet a temporary strong demand.

(iii) Sub-contracting to other firms.

Service industries use flexible work hours, part-time employees and overtime work scheduling to meet

peaks in demands.

2A. 20 FINITE AND INFINITE CAPACITY PLANNING

In operations planning, two conflicting constraints are time and capacity. If time is fixed by the

customer’s required delivery date or processing cycle. It is possible to accept time as the primary

constraint and plan backwards to accommodate these times. In such cases, planning backwards to infinite

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capacity offers a potential solution to the problem. On the other hand, if the processing time is not a

constraint in cases where products are produced to stock and sell, it is simpler to use a forward plan

based on finite capacity i.e., based on available resources.

2A. 22 CAPACITY PLANNING MODELS

Several models are useful in capacity planning Present value analysis is helpful whenever the time

value of capital investments and fund flows must be considered. Aggregate planning models are useful for

examining how best to use existing capacity in the short term. Breakeven analysis can identify the

minimum breakeven volumes when comparing projected costs and units produced per time period (output

rate).

2A. 23 “CRP’ INPUTS

The major inputs for CRP process are:

(a) Planned orders and released orders from MRP system

(b) Loading information from the work centre status file

(c) Routing information from the routing file

(d) Changes which modifies the capacity, give alternative routings or altered planned orders.

All these inputs must be given in time if the system is to function effectively.

2A. 24 ESTIMATING FUTURE CAPACITY NEEDS

Capacity requirements can be evaluated from two extreme perspectives-short-term and long-term.

SHORT-TERM REQUIREMENTS: Managers often use forecasts of product demand to estimate the

short-term work load the facility must handle. By looking ahead up to 12 months, managers anticipate

output requirements for different products or services. Then they requirements with existing capacity and

detect when capacity adjustments are needed.

2A.25 PLANNING THE CONVERSION SYSTEM

Estimated cost for building the entire addition now are $50/Square foot. If expanded incrementally,

the initial 50,000 square feet will cost $60/Square foot. The 50,000 square feet to be added later are

estimated at $80/square foot. Which alternative is better? At a minimum, the lower constructions costs

plus excess capacity costs of total construction now must be compared with higher costs of deferred

construction. The operations manager must consider the costs, benefits, and risks of each option.

The costs, benefits, and risks of expansion pose an interesting decision problem. By building the

entire addition now, the company avoids higher building costs, the risk or accelerated inflation (and even

higher future construction costs), and the risk of losing additional future business because of inadequate

capacity. But there may also be disadvantages to this alternative. First, the organization may not be able to

muster the financial investment. Second, if the organization expands now, it may find later that its demand

forecasts were incorrect, if ultimate demand is lower than expected, the organization has overbuilt. Finally,

even if forecasted demand is accurate, it may not fully materialize until the end of the five-year planning

horizon. If so, the organization will have invested in an excess-capacity facility on which no return is

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realized for several years. Since funds could have been invested in other ways, the organization has

forgone the opportunity of earning returns elsewhere on its investment.

LONG-TERM RESPONSES

Contraction

Constant Capacity

Capacity Contraction most often involves selling off existing facilities, equipment, and inventories, and

firing employees. as serous declines in demand occur, we may gradually terminate operations. Permanent

capacity reduction or shutdown occurs only as a last resort. Instead, new ways are sought to maintain and

use existing capacity. Why? Because a great deal of effort, capital, and human skills have gone into

building up a technology. Often this technology and skill base are transferable to other products or

services. As one product reaches the decline phase of its life cycle, it can be replaced with others without

increasing capacity. This phasing in and out of new and old products is not by accident. Staff for product

research and development and market research should engage in long-range planning to determine how

existing capacity can be used and adapted to meet future product demand.

PLANNING ACTIVITY

Planning is of two types:

Infinite loading

Finite loading

Infinite loading is the process of loading work centres with all the loads when they are required without

regard to the actual capacity of work centres. This given information about actual released order, demands

upon the production system, so that, decisions about overtime, using alternative routings, delaying

selected orders, etc., can be taken.

FINITE LOADING can be done automatically with computerized loading systems, limiting the load assigned

to work centres in each period as per the installed/available capacity at each work centre. This method of

loading forces changes back into the MPS, which is not always the best solution to scheduling problems

and hence not useful at CRP stage. Finite loading is more useful to single work-centres in the capacity

control stage where jobs are being scheduled.

2A. 26 “CRP’ OUTPUTS

1. Rescheduling information which calls for capacity modifications or revision of MPS.

2. Verification of planned orders for MRP system

3. Load reports

2A. 27 AGGREGATE CAPACITY PLAYING STRATEGIES

Aggregate capacity planning involves planning the best quantity to produce during time periods in

the intermediate-range horizon and planning the lowest-cost method of providing the adjustable capacity

to accommodate production requirements.

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Traditional aggregate plans for a manufacturing operation involve planning the work force size,

production rate (working hours per week) and inventory levels. Two types of aggregate plans that are

commonly used are:

1. ‘Level capacity’ plan

2. ‘matching capacity with aggregate demand plan

2A. 28 LEVEL CAPACITY PLAN

Level capacity plans have uniform capacities per day from time period to time period. The

underlying principle of level capacity plan in produce to stock and sell firms is ‘operate production

systems at uniform production levels and let finished goods inventories rise and fall as they will, to buffer

the differences between aggregate demand and production levels from time period to time period’.

The capacity of a unit is its ability to produce or do that which the consumer requires, and clearly

there must be some match between needs characterized by market forecast and abilities characterized by

capacity. A statement of capacity is rarely simple, and it is useful to distinguish between three different

capacity levels:

Potential capacity is that which can be made available within the decision horizon of the most

senior executive. Immediate capacity is that which can be made available within the current budget period.

Effective capacity is that which is used within the current budget period. The production/operations

controller is generally concerned with the second and third of these levels, since he must deal with

immediate, rather than long-term, problems. Furthermore, it should also be recognized that one of the

objectives of the marketing department is to try to ensure that the effective and immediate capacities

coincide. It should be noted that the more ‘nearly effective’ approaches ‘immediate’, the more rigid must

the organization become flexibility can only be achieved when immediate capacity is not fully used.

2A. 29 CONSTRAINTS ON IMMEDIATE CAPACITY

Immediate capacity is limited by:

(a) The plant/equipment size;

(b) Availability of equipment;

(c) Availability of manpower;

(d) Availability of cash;

(e) Financial policies;

(f) Purchasing policy;

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(g) Sub-contracting policy;

(h) The technical demands of the tasks;

(i) The number of different tasks being undertaken.

For example, the capacity of a restaurant is limited by the size of the ‘eating’ area, or the number

of tables.

2A. 30 INFLUENCES ON EFFECTIVE CAPACITY

Effective capacity can be influenced by:

(a) Technical abilities in the pre-operations stages;

(b) Organizational skills in the planning stages;

(c) Purchasing skills;

(d) Sub-contracting skills;

(e) Maintenance policies and abilities;

(f) Versatility of workforce;

(g) Efficiency of workforce.

2A. 31 DIFFERENCES BETWEEN EFFECTIVE AND IMMEDIATE CAPACITIES

A great deal to work has been carried out on the utilization of equipment, i.e. the differences

between effective and immediate capacity. Frequently these studies have involved the use of activity

sampling to establish the proportion of time the equipment was being used productively, and to identify

the reasons for and quantify the extent of non-productive time. These reasons range across preparation

time, planned maintenance, emergency maintenance, idle (no planned work), idle (operator absent), and so

on. The picture that emerges is that effective capacity is frequently less than 50 percent of immediate

capacity. While it is unlikely that these two capacities will ever coincide, it is clear that significant increases

in capacity are possible, often by improved production/operations control. It is also clear that to measure

capacity solely on the basis of available time is likely to give gross errors. Allowance must always be made

for current local performance.

2A. 32 CAPACITY CHANGE

Within a production / operations environment, it seems probable that:

1. The ability of an individual to chance capacity is directly related to that individual’s position in the

organization’s hierarchy

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2. The time necessary to implement a capacity increase in proportional to the magnitude of the

increase.

3. The number of acceptable capacity changes which can be handled at any one time is finite.

Every programme implies a certain level of capacity and, if the above statements hold true, it is

important that the implicit capacity decisions are made by an individual at the correct level in the

organization. To present he production/operations controller with a programme which requires a capacity

change greater than his hierarchical position will permit him to effect, can only result in frustration and the

non-achievements of the programme. Similarly, if the need for a capacity change is recognized too late, it

will not be achieved either, and failure must again result.

Capacity changes may be achieved in a number of ways and stages, ranging from a number of

small incremental changes to a large step changes depending on environmental constraints. If a university

reached the limit of its physical teaching capacity, it could increase the hours of availability (from

9.00-5.00 to 8.00-7.00) or by constructing further buildings.

2A. 33 THE MEASUREMENT OF CAPACITY

Capacity, being the ability to produce work in a given time, must be measured in the units of work, i.e.

resource-standard time units available in unit time. Thus, a work centre with a capacity of 1,000 machine

hours in a 40-hour week should be able to produce 1,000 standard hours of work of the type appropriate

to that work station during a 40-hour week. In order to calculate the volume of actual work, it is necessary

to know:

(a) The work content of the product;

(b) The ancillary times involved in the production;

(c) The effectiveness of the work station

The measurement of capacity and the above factors is frequently undertaken by the production

engineering department in manufacturing organizations, and it is useful to confirm these measurements

by records of actual performance.

The above comments can also be interpreted in non-manufacturing contexts. Consider measuring

the capacity of a small taxi firm which has four cars available from 9.00 to 5.00 five days per week. It

could be argued that the capacity is 4 X 5 X 8 hours per week (ignoring breaks). The work (or number of

‘trips’) will depend on the start and finish locations, traffic conditions, and so on.

As with load, it is not uncommon to find capacity quoted in terms of quantity of products made in

unit time. Such statements should be treated with great caution; changes in methods, procedures,

materials, quantities etc. can result in changes in effective capacity. Unless the work unit is dedicated to a

single product, it is safer always to refer to units of work rather than to units produced.

2A. 34 FINITE OR INFINITE CAPACITY PLANNING

In detailed planning, two conflicting constraints – time and capacity – have to be considered. If time

is fixed, for example by the customer’s required deliver date or transaction-processing cycle, then it is

possible to accept time as the primary constraint and also plan backwards to accommodate these times.

However, this can be somewhat difficult in practice, since it is not generally possible to determine

PRODUCTION AND OPERATIONS MANAGEMENT

beforehand whether all of the tasks can be fitted in with the currently available capacity, and much time

can be spent trying to solve an insoluble problem. Indeed, even after recognition that capacity needs to be

temporarily increased, the extent of this increase and its timing still has to be established, clearly there are

variety of options open to the decision-maker, all with different cost implications.

Planning backwards to infinite capacity offers a partial solution to this problem. Man manufacturing

and transaction-handling proceses go through a number of stages in a sequential manner. If the plan is

being prepared on a period-by-period basis (say week), then the backward plan can be prepared on the

basis of one stage per period. This means that the final stage (operation) of the task is allocated to the

period representing the delivery date, the penultimate task is allocated one period earlier, and so on. This

produces a slightly more realistic plan of what might happen. This pro indicates where overloads are likely

to be and give a far better picture of when and to what extent extra resources will be required. However, to

confirm or propose revised delivery dates, a finite capacity plan must be developed. Generally, it is far

simpler to produce a forward (rather than a backward) plan to finite capacity. For this, tasks are put into

some priority order and, following this sequence, added to the plan in such as way that they are started as

soon as possible at each stage, but only using as much resource as is available. Clearly the criterion used

for prioritizing the tasks will have a significant effect on the performance of the plan. This will be

discussed in a later section.

2A. 35 SCHEDULING AND LOADING

A schedule is a representation of the time necessary to carry out a task, and should take account of

the technical requirements of the task, marketing forecast and available capacity. It is not simply a list of

the operations required, since additionally it takes into account the technological relationships between

these various operations.

2A. 36 INFORMATION REQUIREMENTS

The nature of a product may allow several operations in its manufacture to be carried out

concurrently, whilst other operations may need to be completed before the next one can be started. A

route or list of work to be done would not show this situation, whereas a schedule would take this into

account. The graphical presentation of the bar chart for the schedule is essential for this clarity. With

complex interdependencies between operations, use of a ‘precedence diagram’ rather than a bar chart may

be desirable.

A job schedule shows the plan for the manufacture of a particular job. This is the work study input

into production / operations control, indicating method and times insufficient detail for the function to be

adequately carried out. Once this schedule has been produced, it need not be changed unless there is a

change in either the job (for example in the product being produced) or in the method of manufacture. A

company which makes a range of products cold draw up a number of schedules which are kept filed and

used as the basis for production/operations control. These schedules should show elapsed time the time

between successive – operations – rather than specific.

2A. 37 INTERRELATIONSHIP BETWEEN CAPACITY AND OTHER FUNCTIONS

1. Relationship between capacity and locations decisions : Decisions about capacity are often

inseparable from location decisions. Usually, capacity is expanded by installing new units at new

locations taking into consideration location factors such as market segment, transportation costs,

location of competitors etc.

PRODUCTION AND OPERATIONS MANAGEMENT

2. Relationship between capacity and plant layout The plant capacity determines the physical relation

between various processes used in the conversion process, which in turn determines the layout of

the plant. In product-layout or product-focused productive system, the capacities of various work

centres or machines have to be balanced to get approximately the same rate of output from

various work centres or machines. Once the layout is installed, it is not possible to change the

capacity in the short tern time horizon.

3. Relationship between capacity and process design: In some cases, the rated capacity depends on

the type of conversion process selected. for eg., the conversion processes selected for manufacture

of steel is different for the mini-steel plants from that used for major steel plants.

4. Relationship between capacity and equipment selection: The installed capacity of plant determines

the standard labour or equipment hours that can be achieved and also determines the number of

machines or equipments that must be installed to get the desired output capacity.

2A. 38 SERVICE CAPACITY

Service organizations, for the capacity measurement, can be divided into the companies offering:

Homogenous Services

Heterogeneous Services

In the case of Insurance companies, the service offered is homogenous i.e. it is based on the

number of policies serviced per year.

Banks and Transport companies offer heterogeneous services. Their offer is restricted by the

availability of limited resources under their possession. For example, in banks, it is measured by the

man hours available per week; and in case of transport companies, it is tonnage per kilo-meter.

2A. 39 DIFFICULTY IN CAPACITY PLANNING IN SERVICE ORGANIZATIONS

The nature of service itself, i.e. the output cannot be stored.

Average demand for the service will be far less than the peak demand. This will lead to lower

capacity utilization during the off-peak demands. This results in low productivity. (Example:

Electricity Production and Consumption)

Demand fluctuation during the course of time. (Example: Placement of funds by the Financial

Institutions)

2A. CAPACITY PLANNING PROCESS IN SERVICE ORGANIZATIONS

i) Predict future demands

ii) Determine the available capacity

iii) Translate prediction into physical capacity requirement.

iv) Develop alternate capacity plans for matching required and available capacities.

v) Analyse the economic effects of alternate capacity plans.

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vi) Analyse the risk and other Strategic consequences of alternate plans

vii) Recommend a course of action

viii) Implementation of the selected course of action.

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2B. Facility Planning

2B. Facility Planning

One of the major strategy decisions that must be made by any organization is where to locate its

producing and storage facilities. For manufacturers, the problem is broadly categorized into factory

location and ware house location; within this categorization, we may be interested in locating the firm’s

first factory or warehouse or locating a new factory or warehouse relative to the locations of existing

facilities. The general objective in choosing a location is to select that site or combination of sites that

minimizes two classes or costs – regional and distribution or sites that minimizes two classes or costs –

regional and distribution costs. Regional costs are those associated with a given locate and include land,

construction, manpower, and state and local expenses and regulations. Distribution costs are those

directly related to the shipping of supplies and products to customers and other branches of the

distribution network. Since the location of the firm, economic analysis of facility location has focused on

the problem of adding warehouses or factories to the existing production-distribution system.

In service organization, the facility location decision is also a major one, but as a rule, the choice of

a locate is based upon nearness to the customer rather than on resource considerations. With the shift in

the U.S. economy away from manufacturing and toward service, there is little questions that opening of

new service facilities has become for more common that opening new factories and warehouses. Indeed,

there are few communities in rapid growth in public private branch offices, franchises, and entertainment

facilities.

2B. LOCATION OF FACILITIES

Location decisions represent an integral part of the strategic planning process of virtually every

organization. Although it might appear that location decisions are mostly one-time problems pertaining to

new organizations, the fact is that existing organizations often have a bigger stake in these kinds of

decisions than new organizations have.

Existing organizations become involved in location decisions for a variety of reasons. Firms such as

banks, fast food restaurants, super market and retail stores view locations as a marketing strategy, and

they look for locations that will help them to expand their markets. A similar situation occurs when an

organization experiences a growth in demand for its products or services that can not be satisfied by

expansion at an existing location. The addition of a new location to complement an existing system is

often a realistic alternative.

Some firms become involved in location decision through depletion of raw materials. For example,

in the case of mining, in the long run, the company has to change its place of operation due to reduced

availability of minerals.

Location decisions for many types of businesses are made rather infrequently, but they tend to

have a significant impact on the organization. There are two primary reasons that make location decisions

a highly important part of production systems design. One is that they entail long-term commitment,

which makes mistakes difficult ot overcome. The other is that location decisions often have an impact on

operating costs (both fixed and variable) and revenues as well as on operations. For instance, a peer choice

of location might result in excessive transportation costs, shortage of qualified labour, loss of competitive

advantage, inadequate supplies of raw materials or some similar conditions which would be detrimental to

operation.

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Profit oriented organizations base their decisions on profit potential, while non-profit organization

strive to achieve a balance between cost and the level of customer service they provide. The organizations

will try to identify the best location available.The location options for nay organization are as follows:

Expanding the existing facility

Add new locations while retaining existing ones, as is done in many retail stores

Shut down one location and move to another.

Option of doing nothing and maintaining the status quo.

2B. 3 LOCATIONAL FLEXIBILITY

(a) Availability of Raw Material: Nearness to the place of the raw material will give advantage on the

transportation cost, so that overall profitability can be improved. When the raw material is heavy or

is consumed in bulk, then plant location has to be nearer to the raw material site.

(b) Nearness to Markets: It reduced the cost of transportation as well as the chances of the finished

products getting damaged and spoiled on the way, especially the perishable products. Moreover, a

plant being near to the market can capture a big market share and render quick service to the

customers.

(c) Transport Facilities: A lot of money is spend both in transporting the raw materials and the finished

goods. Depending upon the size of raw material and finished goods, a suitable method of

transportation like roads, rail, water or air is selected and accordingly the plant location is decided.

One point which must be kept in mind is that cost of transportation should remain fairly small in

proportion to the total cost.

(d) Availability of Labour: Stable labour force, of right kind, of adequate size and at reasonable rates

with its proper attitude towards work are a few factors which govern plant location to a major

extent.

(e) Availability of Fuel and Power: The main sources of energy are electrical power, coal, oil, etc. In the

case of power intensive industries like steel manufacturing units or continuous process industries

like petrochemical and cement, the availability of fuel and power will be one of the major deciding

factories in plant location.

(f) Climate: Depending on the type of industry and the products that are being manufactured, this is a

different factor. For instance, in the case of textile mills climatic conditions with adequate humidity

is a basic essential criterion. That is the reason many textile mills have been put up in Bombay,

Coimbatore region.

(g) Water Availability: In industries like textile dying, paper or chemicals, the requirements of good

quality water is one of the basic requirement for plant location. The water is required for

processing or for effluent rejection into the rivers or specifically for waste disposal.

(h) Government Policies: The central and state governments may declare many talks as backward and

give numerous concessions like tax holiday, uninterrupted power supply, capital subsidy, easy

availability of loans, etc. for balanced development of regions in the country.

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(i) Land: Topography, area, the shape of the site, cost, drain age and other facilities, the probability of

floods and earthquakes will influence the selection of the location.

(j) Community Attitude: Industries like matches, crackers, hosiery and leather have flourished because

of the positive attitude of the community towards these.

(k) The presence of related industries will give many advantages like availability of skilled labourers,

standard components.

(l) Housing facilities

(m) Security

(n) Local by-laws, taxes, building restrictions

(o) Existence of other service facilities like hospital marketing centres, schools, banks, post offices,

clubs.

These factors, depending on the product to be manufactured or the industry, may separately or

collectively have to be given the required weightage. In the process, many alternatives may emerge. The

management decisions will be taken after weighing all the alternatives and selecting the best among them.

2B.4 COST FACTOR

In plant location, apart from the availability of technology, etc. the major deciding factor will be the

cost of the final product. The ideal plant location is the one which results in lowest cost of production and

distribution of the items in the market. For some production facilities, the basic necessity itself may be

that it has to be located nearer to the market, that is, the facility has to be created in the urban area. For

some others, it can be located at remote rural areas. Cost is associated with each decision. Other than this,

there are other advantages as well as disadvantages.

2B. 5 PLANT LOCATION IN TOWN

The following are the advantages that can be derived by locating the plant in the urban area:

Close to the market where the product can be sold.

Skilled/specialized labour force is available

Well connected by air/rail/road which is an essential one, if the raw material is brought from other

places (or) finished goods are transported to other metros.

Easy availability of power and water;

Already established service facilities like hospitals, schools, banks etc.

Existing buildings can be hired or can be taken on lease for factory/office usage.

Accessibility to the various skilled professional, well equipped laboratories for testing purpose, etc

is easy.

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For making purchases of standard items, market is readily available.

Many small scale industries, with spare capacities, are available, which can be converted into

ancillary units.

There are a few disadvantages also if we decide an urban location:

The overall cost of establishing the facility is high compared to locating it in a rural area.

Land available is limited. Future expansion, sometimes may not be possible.

Land cost and construction cost will be high.

Cost of labour is high due to high cost of living in towns

Local taxes are high, like corporate tax which may not be there in rural centres.

Labour unions and their related problems are more

Conductive industrial climate may not prevail.

2B. Site selection in rural area

Advantages

Easy availability of land for present construction and future expansion

Land cost is cheap.

Unskilled labour availability is more. But they have to be trained to make them skilled/semi –

skilled

Government subsides/concessions are there

Not much union problem; good industrial relations

Taxes will be low; at some places tax holidays are also made available by the respective

government.

The disadvantages are:

Cost involved in training the unskilled labour into skilled will involve high cost..

Proper rail/road links may not be there; to establish them, high cost is involved.

Availability of power may be a problem.

Far away from the actual markets

Ancillary services may not be available

Facilities like hospitals, banks, post offices have to be established.

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The manpower turnover among the top executive will be more because of their attitude towards

living in rural areas.

2B..7 PLANT LOCATION IN SUB-URBAN AREAS

The advantages of both urban and rural areas can be combined and derived if we decide about a

location in the sub-urban area. From the cost point of view, the exorbitant cost involved in the purchase of

land in case of urban selection and the non-availability of work force in rural area can be offset by locating

the plant in the semi-urban area.

2B. 8 FACILITY DESIGN PROCESS

1. Define the location objectives and associated constraints

2. Identify the relevant decision criteria, which may be:

Quantitative

Qualitative

3. Relate the objectives to the criteria using appropriate models like

Economics cost models

Break Even analysis

Linear Programming

Qualitative Factor Analysis

4. Fox for undertake research to generate relevant data and use the models to evaluate the

alternatives.

5. Select the location that satisfies the criteria.

2B. .9 TECHNIQUES USED FOR FACILITY LOCATION

a. Industry Precedence – Succeedence Technique

Basic Assumption: If the location is best for many companies in the same industry, then it holds

good for a new company too.

No need for conducting detailed location study

Locations choice is subject to the “Principle of Precedence.”

b. Preferential Factor

Decision is dictated by Personal factor

Individual preference

Not a Professional approach; but widely used

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c. Dominant Factor

Availability of raw material may be a dominant factor in case of Cement, Oil exploration, Mining

industries.

Contrast to preferential factor

Existence of good infrastructure and skilled personnel is a dominant factor for establishing IT

companies

For evaluating qualitative factors, the techniques used are:

Factor Ranking

Factor Weight Rating

The specific methods that can quantify the qualitative decisions are:

Equal weights method

Variable weights method

Weight cum Rating method

Factor point Rating method

Composite measure method.

2B. 10 LOCATIONAL BREAK-EVEN ANALYSIS

We have already seen the factors which will influence the site selection for putting up the plant. The

economic comparison of location alternatives is facilitated by the use of Cost-Volume-Profit analysis which

is also known as ‘Locational Break-even Analysis’. The graphical approach will enhance the understanding

of the concept, and it provides an indication of the ranger over which one of the alternative is superior to

the others.

Location Location

Location

80,0

total

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FIGURE : 2.1 LOCATIONAL BREAK EVEN ANALYSIS

The procedure for the locational break – even analysis involves the following steps.

(i) Determine the fixed cost and variable costs associated with each location alternative.

(ii) Plot the total cost lines for all location alternatives on the same graph.

(iii) Determine which location has the lowest total cost for the expected level of output.

Following the above steps, the total costs of rural, semi-urban and urban site locations can be fixed.

In the case of urban location, the initial fixed is very high and the variable cost is comparatively low.

In the case of rural location, the initial cost is low but there is an increase in the slope, which is due to the

high variable cost. The semi-urban locational cost will be in between the two.

To conclude, if the volume (i.e. annual output) is low, then we can select the rural locations for the

purpose of establishing the factory. If the volume lies beyond a point, we can choose the urban centre for

locating the plant. If the annual output lies between, it is better to locate the factory in a semi-urban area

so as to reap the maximum benefits.