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Chapter 6
Capacity Planning
What is capacity?
The Merriam-Webster Dictionary defines capacity as: “the largest amount or number that can be held or contained.” 36 This does not really help when looking at capacity and capacity planning for operations management. APICS defines capacity a couple of ways that are relevant to operations management: “1) The capability of a system to perform its expected function. 2) The capability of a worker, machine, work center, plant, or organization to produce output per time period.” 37 A simpler definition for an introduction to operations management is that capacity is the maximum amount of quality output that can be produced. It is important to mention the link to quality as any output that is not quality is not productive output. The capacity of a system is critical to the planning and production phases of products and services. Capacity is not just a production or storage concept. If you think of your favorite restaurant as a service, the capacity of restaurant is not the maximum capacity as determined by the fire department inspection; it is the maximum amount of customers that the restaurant can serve in an acceptable time. This is may explain why you may visit a restaurant and there are vacant tables but there is still a wait time—the capacity is dictated by the number of servers and cooks not the number of tables. In the manufacturing sector, the first stage in capacity planning is to determine the maximum capacity of the plant or shop floor. The most discussed concept for this phase is known as Rough Cut Capacity Planning (RCCP). RCCP is defined by APICS as: “the process of
(^36) "Capacity." Merriam-Webster.com. Merriam-Webster, n.d. Accessed July 17, 2020.
. (^37) Blackstone, John H., Jr., APICS Dictionary, Fourteenth Edition, APICS, Chicago, IL, 2020, p. 21.
converting the master production schedule into requirements for key resources, often including labor; machinery; warehouse space; suppliers’ capabilities; and in some cases, money.” 38 RCCP is a preliminary stage to determine, if all resources are available, if the company can meet the needs for the Master Production Schedule. The Master Production Schedule is the anticipated build schedule based on adjusted forecasts and firm orders from customers. Often enough cut capacity planning will indicate that a set production level is doable for the company, but when constrained by available resources the company may find that actual capacity is exceeded. RCCP leads to capacity planning which is simply determining how much capacity the company needs to meet the production schedule. Capacity planning includes Capacity Requirements Planning. During this phase of the planning process, the company looks at constrained capacity to determine the actual capacity available and how to use that capacity to meet the Master Production Schedule requirements. Constrained capacity takes into consideration worker absences (vacation, sick time, appointments), machine maintenance time, and known material shortages or delays. Capacity Requirements Planning is the process of establishing the overall level of productive resources needed in the facility or system to meet the demands of the Master Production Schedule (MPS). One of the outputs of this process may be the determination that additional capacity is needed and when it is needed. Failure to properly conduct this phase of the planning process may impact the responsiveness of the company to the customers which in turn could impact the competitiveness of the company and maybe even the life of the company. Capacity Planning includes a series of decisions for the company as shown in Figure 6.1. The goal is to try to maintain as level a production process as possible. Designing a facility that can be used for manufacturing more than one product is helpful in this goal – this will be discussed in greater detail in Chapter 7.
(^38) Ibid., p. 153.
holiday season and add seasonal help. Lawn and garden centers and services do the same thing with summer hires to account for the seasonal increase in demand. The least favorable option for the company when demand exceeds capacity is to backorder the product to the customer. Backordering is not a good option as it forces the company to violate the concepts of perfect order fulfillment and means the customer will have to wait longer for the product. Since most companies do not have a monopoly on products, this may mean losing a customer or an order to a competitor. When capacity exceeds demand for the product there are a few options to consider. The first and most drastic is to reduce capacity. This may be in the form of plant closures, forced vacations, furloughs or employee layoffs. The second remedy may be to reduce operational hours. Many companies have adopted this option during the pandemic to keep workers employed while meeting the needs of the customers.
Aggregate Planning
Aggregate capacity planning is a long-term look at capacity needs and requirements. Usually aggregate planning looks 18 months or eighteen to twenty-four months into the future. Why should we be concerned that far out? The forecasted demand for the product is going to drive long-term planning for resources. The need to look far into to the future is based on the lead times necessary to increase capacity. This does not happen overnight. An increase in capacity may require a new facility or new equipment. New facilities take time to design and build and time to hire and train the employees to staff the facility. Aggregate planning allows the company to start the process of creating new capacity without waiting until the last minute.
Master Production Schedule
Short-term capacity planning is driven by the Master Production Schedule. This anticipated build schedule helps to formalize the production plan and helps the company translate specific parts/components/finished products requirements into a work schedule and capacity plan. The near-term capacity plan has to extend out at least as long as the longest lead time (lead time is the time from you order a product or component until the time you receive it) for the components or materials for the product (this ties to the inventory concept that we will discuss in Chapter 16 and the Bill of Materials concept that we will discuss in Chapter 13).
Figure 6.2 Utilization
Utilization Rate = (Actual output rate/available capacity) x 100 Or (Hours worked/hours available) x 100
System Capacity versus Department Capacity
When calculating a capacity for a system or facility it is important to look at the total system as well as the capacities of individual operations. The Theory of Constraints (as discussed in Chapter 18 in more detail) states that the throughput capacity of a system is the capacity at the constraint or bottleneck. Therefore, it is important to look at the total system by walking the process starting with the capacities of the component operations. The Theory of Constraints states the adding capacity anywhere but at the constraint will not increase the capacity of the system – it must be increased at the constraint. For example: the US Army has a system known as the Fuel System Supply Point. Each individual system contains up to six 50,000 gallon fuel containers. However, the capacity of the system is not the total of the storage containers (up to 300,000 gallons) but the capacity of the fuel hoses, the filters and the pumps that deliver the fuel from the containers to the customers’ fuel trucks. The system uses a series of hoses and pumps to distribute the fuel. The primary constraint is the capacity of the filter separator which is only 150 gallons per minute.
Capacity Utilization versus Capacity Efficiency
What is Utilization? Utilization is a manufacturing measurement of how much of a company’s available capacity is being used. Many textbooks will make you believe that the closer a company is to 100% utilization the better the company is managed. Figure 6.2 shows calculations for utilization.
Figure 6.2: Utilization Calculation Then, why is 100% or as close to 100% not always a good number? The utilization rate should match the consumption rate or sales rate. Consider the following scenarios:
the demand rate for products. This can be accomplished in a variety of ways. Demand planning, production planning, product design and capacity planning must be balanced. Shift demand into slow periods. This may be the result of sales promotions or advertising campaigns to convince the customer to buy the products or services in an off period. Disney used to do this with their Florida Resident Salute Pass. This pass allowed unlimited visits during the periods that Disney had identified as off-peak periods. This provided a win-win. Disney had guests in the park and Florida residents got to enjoy the park in less-crowded times. Offer the product or manufacturing in off cycle or counter-cyclic times. Burlington Coat Factory made an entire market this way. They started off by offering winter clothes in the summer and summer clothes in the winter. Toro attempts to balance the workload in the manufacturing. They make lawn mowers in the winter and snow blowers in the summer on the same assembly line. Another variation of this model is to work with customers to offer them incentives to commit to the purchase of seasonal items in the off season with guaranteed delivery in time for the seasonal sales. Requiring Reservations. From a services perspective, demand planning and capacity planning can be seen in restaurants that require reservations. The use of reservations allows the restaurant to control the capacity of guest coming into the restaurant. It can also be seen at Disney World with the use of the queues for rides. Disney is a master of this concept by continuing to move the guests through a series of rooms as part of the queue to keep the wait from seeming as long as it is. This can be seen in Figure 6.4.
Figure 6.4: Queueing System at Disney World
Scheduling
Scheduling may be the most difficult part of the planning process. Scheduling operations
must consider capacity. But it also must consider personnel and personnel skills, materials
availability, machine availability, and customer priorities. This makes scheduling difficult.
In the absence of any other guidance, the best method of scheduling operations is first in
and first out. This means that the first order received is the first order worked on and completed.
Summary
Capacity planning is critical to the success of the operation whether it is a service
industry or a manufacturing industry. The Theory of Constraints states the throughput capacity of
the system is the capacity at the bottleneck. It is important before embarking on a capacity
planning activity to walk the process and identify any bottlenecks or constraints. The entire
capacity planning process is driven by the Master Production Schedule and if there is an
Discussion Questions/Thinking Questions on Capacity
- Why or why not is 100% utilization important?
- What are some of the reasons for not working at 100% utilization?
- Why is it important to have a plan for when there is more capacity than demand?
- What is the difference between utilization and efficiency?
- From your perspective, what is one example of the Theory of Constraints?
- What is the purpose of the Master Production Plan?
