Strategic Capacity Planning Prepared by Bhakti Joshi June 20, 2014

Capacity

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?

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

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

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

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 Maximum (Potential) Output X100 = 50% =

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: Effective (Expected) Output X100 = = Demonstrated (Actual) Output 20% The capacity of the office enables every employee to cater to 12 customers per day. What is the capacity utilisation rate?

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?

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 units per month Effective Capacity is units per month Find Utilisation and Efficiency rates? Maximum capacity = (30 X 8) X (1200) = 288,000 units Utilisation Rate = Efficiency Rate = / = 51.38% / = 84.57%

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

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

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

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

Case Study: McDonalds

Calculating Maximum (Design) Capacity Product: McAloo Tikki Preparation Time: 42 seconds Preparation Time in Hours: 42/3600 = hours Operating hours = 15 No. of McAloo Tikkis in a day = about 1286

Calculating Utilization Rates Actual output per day = 352 McAloo Tikkis Utilization Rate = Actual Output / Maximum output = (352/1286) X 100 = 27%

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.

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

Resource Availability No. of Workers Available = 25 Absenteeism = 2% Workers Capacity (weekly) = No. of working days X 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

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

PROCESS MAPING

Questions 1.Explain which strategy may have been considered by this McDonald’s outlet? Lead, Lag or Match? And Why? 2.Explain on what factors will the efficiency of the outlet be dependent upon? 3.If the demand for McAloo Tikis 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 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%

Answers (352/600) X 100 = 58.66% Operational Constraints (Discuss) The company uses lead strategy Bun inventory- 2 days advance FCD(Fried chilled dried) inventory- 3 days advance Coke inventory- 15 days advance The company uses lead strategy Bun inventory- 2 days advance FCD(Fried chilled dried) inventory- 3 days advance Coke inventory- 15 days advance

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