Strategic Capacity Planning

1. Strategic Capacity Planning Prepared by Bhakti Joshi June 20, 2014

2. Capacity

3. 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 hour Are these examples on capacity subjective or objective?

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

5. Types of Capacity Maximum or Design Effective Actual (Demonstrated) The highest rate of output that a process achieves The expected rate of output that a process can achieve The actual level of output for a process over a period of time How can we determine these capacities?

6. 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

7. 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 X 100 = Maximum (Potential) Output = 50%

8. 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: Demonstrated (Actual) Output X 100 = Effective (Expected) Output = 20% The capacity of the office enables every employee to cater to 12 customers per day. What is the capacity utilisation rate?

9. 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?

10. 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 month Find 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%

11. 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

12. 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

13. 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

14. 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

15. Case Study: McDonalds

16. Calculating Maximum (Design) Capacity • Product: McAlooTikki • Preparation Time: 42 seconds • Preparation Time in Hours: 42/3600 = 0.011667 hours • Operating hours = 15 • No. of McAlooTikkis in a day = about 1286

17. Calculating Utilization Rates • Actual output per day = 352 McAlooTikkis • Utilization Rate = Actual Output / Maximum output = (352/1286) X 100 = 27%

18. 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.

19. 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

20. Resource Availability • No. of Workers Available = 25 • Absenteeism = 2% • Workers Capacity (weekly) =No. of working daysX 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

21. 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

22. PROCESS MAPING

23. Questions • Explain which strategy may have been considered by this McDonald’s outlet? Lead, Lag or Match? And Why? • Explain on what factors will the efficiency of the outlet be dependent upon? • If the demand for McAlooTikis 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%

24. Answers • The company 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%

25. Email: bhaktij@gmail.comWebsite: www.headscratchingnotes.net