Managing Capacity &
Constraint…
P R E PA R E D B Y M R . K H U S H N O O D K H A L I D
SENIOR LECTURER
BAHRIA UNIVERSITY
What is Capacity
•Capacity is the “throughput,” or the number of units a facility can hold, receive, store, or produce in
a given time. Capacity decisions often determine capital requirements and therefore a large portion
of fixed cost
•If a facility is too large, portions of it will sit unused and add cost to existing production. If a facility is
too small, customers—and perhaps entire markets—will be lost
Capacity
Design and Effective Capacity
Design capacity is the maximum theoretical output of a system in a given period under ideal
conditions. It is normally expressed as a rate, such as the number of tons of steel that can be
produced per week, per month, or per year
Effective capacity is the capacity a firm expects to achieve given the current operating
constraints. Effective capacity is often lower than design capacity because the facility may have
been designed for an earlier version of the product or a different product mix than is currently
being produced
Design and Effective Capacity
Efficiency & Utilization
DETERMINING CAPACITY
UTILIZATION AND EFFICIENCY
DETERMINING CAPACITY
UTILIZATION AND EFFICIENCY
Capacity Considerations
•Forecast demand accurately: Product additions and deletions, competition actions, product life
cycle, and unknown sales volumes all add challenge to accurate forecasting
•Match technology increments and sales volume: Capacity options are often constrained by
technology. Some capacity increments may be large (e.g., steel mills or power plants), while
others may be small (hand-crafted Louis Vuitton handbags). Large capacity increments
complicate the difficult but necessary job of matching capacity to sales
•Find the optimum operating size (volume)
•Build for change
Capacity Considerations
Matching Demand
•Demand Exceeds Capacity: When demand exceeds capacity , the firm may be able to curtail
demand simply by raising prices, scheduling long lead times (which may be inevitable)
•Capacity Exceeds Demand: When capacity exceeds demand , the firm may want to stimulate
demand through price reductions or aggressive marketing, or it may accommodate the market
through product changes.
Matching Demand
Adjusting Seasonal Demand
Bottleneck Analysis
A bottleneck is an operation that is the limiting factor or constraint. The term bottleneck refers to
the literal neck of a bottle that constrains flow or, in the case of a production system, constrains
throughput. A bottleneck has the lowest effective capacity of any operation in the system and thus
limits the system’s output
Bottleneck Analysis
Bottleneck Time:
•The bottleneck time is the process time of the slowest workstation (the one that takes the longest)
in a production system.
Throughput Time:
The throughput time , on the other hand, is the time it takes a unit to go through production from
start to end, with no waiting .
Production Flow in an assembly line
2 mint/unit 4 mint/unit 3 mint/unit 2 mint/unit
Station A Station B Station C Station D
Total production time = throughput time+[(n-1)*bottleneck time]
If we want to estimate the time of three units, after starting production line
Total production time = 11+[(3-1)*4]
Total Production time = 19 mints
Production Flow in an assembly line
Suppose the production starts at 8:00am morning
The difference is 4 units
2 mint/unit 4 mint/unit 3 mint/unit 2 mint/unit
Station A Station B Station C Station D Finish Product
8:00am 8:02am 8:06am 8:09am 8:11am
8:02am 8:04am 8:10am 8:13am 8:15am
8:04am 8:06am 8:14am 8:17am 8:19am
Production Flow in a assembly line
Break-Even Analysis Single Product
Case
Break-even analysis is the critical tool for determining the capacity a facility must have to achieve
profitability. The objective of break-even analysis is to find the point, in dollars and units, at
which costs equal revenue. This point is the break-even point. Firms must operate above this
level to achieve profitability.
Break-Even Analysis Single Product
Case
Stephens, Inc., wants to determine the minimum dollar volume and unit volume needed at its
new facility to break even. Firm first determines that it has fixed costs of $10,000 this period.
Direct labor is $1.50 per unit, and material is $.75 per unit. The selling price is $4.00 per unit.
Break-Even Analysis Multiple Product
Case
Break-Even Analysis Multiple Product
Case
Break-Even Analysis Multiple Product
Case
Break-Even Analysis Multiple Product
Case
Expected Monitory Value
Determining expected monetary value (EMV) requires specifying alternatives and various states
of nature. For capacity-planning situations, the state of nature usually is future demand or
market favorability. By assigning probability values to the various states of nature, we can make
decisions that maximize the expected value of the alternatives.
Expected Monitory Value
Southern Hospital Supplies, a company that makes hospital gowns, is considering capacity
expansion. Southern’s major alternatives are to do nothing, build a small plant, build a medium
plant, or build a large plant. If a large plant is built and a favorable market exists, a profit of
$100,000 could be realized. An unfavorable market would yield a $90,000 loss. However, a
medium plant would earn a $60,000 profit with a favorable market. A $10,000 loss would result
from an unfavorable market. A small plant, on the other hand, would return $40,000 with
favorable market conditions and lose only $5,000 in an unfavorable market
Expected Monitory Value
Southern Hospital Supplies, a company that makes hospital gowns, is considering capacity
expansion. Southern’s major alternatives are to do nothing, build a small plant, build a medium
plant, or build a large plant. If a large plant is built and a favorable market exists, a profit of
$100,000 could be realized. An unfavorable market would yield a $90,000 loss. However, a
medium plant would earn a $60,000 profit with a favorable market. A $10,000 loss would result
from an unfavorable market. A small plant, on the other hand, would return $40,000 with
favorable market conditions and lose only $5,000 in an unfavorable market. Recent market
research indicates that there is a 0.4 probability of a favorable market, which means that there is
also a 0.6 probability of an unfavorable market.
Expected Monitory Value
Capacity Cushion
The capacity cushion is the amount of spare capacity a business has expressed as a percentage of
the total capacity.
Capacity Requirement
Capacity Requirement
Capacity Requirement for multiple
products
Capacity Requirement for multiple
products
A copy center in an office building prepares bound reports for two clients. The center makes
multiple copies (the lot size) of each report. The processing time to run, collate, and bind each copy
depends on, among other factors, the number of pages. The center operates 250 days per year,
with one 8-hour shift. Management believes that a capacity cushion of 15 percent (beyond the
allowance built into time standards) is best. It currently has three copy machines. Based on the
following table of information, determine how many machines are needed at the copy center
Capacity Requirement for multiple
products
