Capacity and Facilities

Need for Facility Capacity Planning

To find the optimal capacity of
the facility so that the total costs
of under-capacity and overcapacity is the minimum

To satisfy the future

demand of products
without any shortages

Need for Facility

Capacity Planning

Investments in facility
capacity are long-term and
cannot be reversed easily
over the period of time

To keep the initial investment

in the facility as low as
possible to achieve lesser
break-even volume

Steps in the Capacity Planning Process

When to increase C and how much to increase
are critical decisions
Estimate the capacity of the present facilities.
Forecast the long-range future capacity needs.
Identify and analyze sources of capacity to meet
these needs.
Select from among the alternative sources of
capacity.

Definitions of Capacity
In general, production capacity is the maximum
production rate of an organization.
Capacity can be difficult to quantify due to
Day-to-day uncertainties such as employee
absences, equipment breakdowns, and
material-delivery delays
Products and services differ in production
rates (so product mix is a factor)

Types of Capacity
Design capacity represents the maximum rate of output that
can be achieved under ideal conditions.
Effective capacity is the maximum rate of output which can be
practically achieved under the constraints of time consumed in
set-ups, oiling & cleaning, defective items, etc. Effective
capacity is always lesser than the design capacity.
Actual capacity is the maximum output rate which is actually
achieved under the constraints of machine breakdowns, labor
inefficiencies & absenteeism, defective products, late deliveries
of materials by the supplier, and so on. Actual capacity can be
equal to or less than the effective capacity.
There are 2 measures of system performance based on these
types of capacity
Efficiency = Actual Output / Effective Capacity
Capacity utilization = Actual Output / Design Capacity
Actual capacity cannot be increased beyond the effective
capacity as it is the maximum limit of actual capacity

Definitions of Capacity
Sustainable practical capacity can be defined as
the greatest level of output that a plant can
maintain
within the framework of a realistic work
schedule
taking account of normal downtime
assuming sufficient availability of inputs to
operate the machinery and equipment in
place

Capacity
Maximum capability to produce
Capacity planning
establishes overall level of productive
resources for a firm
3 basic strategies for timing of capacity
expansion in relation to steady growth in
demand (lead, lag, and average)

Copyright 2011 John Wiley & Sons, Inc.

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Capacity Expansion Strategies

Copyright 2011 John Wiley & Sons, Inc.

7-8

 Capacity lead Strategy

C is expanded in anticipation of demand growth
Lure customers from competitors who are C constrained
Gain foothold in a rapidly expanding market
Provide superior levels of service during peak demand periods
Capacity lag Strategy
C increased after an increase in demand has been
documented
Produces a higher ROI but may lose customers
Used in ind. With standard products & cost-based or weak
competition
Assumes that customers will return from competitors after C
has expanded
Copyright 2011 John Wiley & Sons, Inc.

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 Average Capacity S
C expanded to coincide with average
expected demand
Moderate strategy in which managers are
certain that they will be able to sell at least
some portion of expanded output and endure
some periods of unmet demand
Atleast half of the time capacity leads demand
and half of the time C lags demand
Incremental vs One-step Expansion
Copyright 2011 John Wiley & Sons, Inc.

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Capacity
Capacity increase depends on
volume and certainty of anticipated demand
strategic objectives
costs of expansion and operation

Best operating level

% of capacity utilization that minimizes unit costs

Capacity cushion
% of capacity held in reserve for unexpected
occurrences

Copyright 2011 John Wiley & Sons, Inc.

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Expansion of Long-Term Capacity

Subcontract with other companies
Acquire other companies, facilities, or resources
Develop sites, construct buildings, buy
equipment
Expand, update, or modify existing facilities
Reactivate standby facilities

Economies of Scale
Best operating level - least average unit cost
Economies of scale - average cost per unit
decreases as the volume increases toward the
best operating level
Diseconomies of scale - average cost per unit
increases as the volume increases beyond the
best operating level

Economies of Scale
Unit cost decreases as output volume increases
fixed costs can be spread over a larger number of
units
production or operating costs do not increase linearly
with output levels
quantity discounts are available for material
purchases
operating efficiency increases as workers gain
experience

Copyright 2011 John Wiley & Sons, Inc.

7-14

Economies of Scale
Declining costs result from:
Fixed costs being spread over more and more
units
Longer production runs result in a smaller
proportion of labor being allocated to setups
Proportionally less material scrap
and other economies

Diseconomies of Scale
Increasing costs result from increased
congestion of workers and material, which
contributes to:
Increasing inefficiency
Difficulty in scheduling
Damaged goods
Reduced morale
Increased use of overtime
and other diseconomies

Best Operating Level for a Hotel

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Analyzing Capacity-Planning Decisions

Break-Even Analysis
Computer Simulation
Linear Programming
Decision Tree Analysis

Process Selection With

Break-Even Analysis
Total cost = fixed cost + total variable cost
TC = cf + vcv
Total revenue = volume x price
TR = vp
Profit = total revenue - total cost
Z = TR TC = vp - (cf + vcv)
cf = fixed cost
V = volume (i.e., number of units produced and sold)
cv = variable cost per unit
p = price per unit
6-19

Copyright 2011 John Wiley

& Sons, Inc.

Process Selection With

Break-Even Analysis
TR = TC
vp = cf + vcv
vp - vcv = cf
v(p - cv) = cf

cf

v = p - cv

6-20

Copyright 2011 John Wiley

& Sons, Inc.

Example
Travis and Jeff own Right paddlers, a new start up company with the goal
of designing, making and marketing stand-up paddle boards for streams
and rivers. A new fitness craze, stand-up paddle boards are similar to
surfboards in appearance, but are used by individuals to navigate down
rivers in an upright position with a single long pole (paddle) instaed of
sitting in tubes or rafts and floating down.
The boards are constructed from heavy duty raft material that is inflatable,
rather than the fiberglass material used in surfboards. Unlike surfboards
that market for $500 to $1000 each, paddle boards are typically sold for
between $100 and $400. Since Travis and Jeff are just starting out and
the demand for paddle boards on East Cost has not been firmly
established, they anticipate selling their product for $100 each. Travis
estimates the fixed cost for equipment and space will be $2000 and the
material and labor costs will run $50 per unit. What of demand will be
necessary for Travis and Jeff to break even on their new venture?

6-21

Copyright 2011 John Wiley

& Sons, Inc.

Break-Even Analysis
Fixed cost = cf = $2,000
Variable cost = cv = $50 per unit
Price = p = $100 per unit
Break-even point is
v=

6-22

= 40 units

Copyright 2011 John Wiley

& Sons, Inc.

Break-Even Analysis: Graph

Dollars
Total
cost
line

$3,000
$2,000
$1,000
Total
revenue
line
40
Break-even point

6-23

Units

Copyright 2011 John Wiley

& Sons, Inc.

Decision Tree Analysis

Structures complex multiphase decisions, showing:
What decisions must be made
What sequence the decisions must occur
Interdependence of the decisions
Allows objective evaluation of alternatives
Develops expected values
Small rectangles used to represent the points of decision
called decision nodes
Small circles used to represent the points of outcomes
which are called event or outcome nodes
The tree is analysed for the best decision sequence by
the rollback technique, nodes in the latter part are
analysed first and then those in the earlier part

Example: Good Eats Caf

Decision Tree Analysis
Good Eats Caf is about to build a new
restaurant. An architect has developed three
building designs, each with a different seating
capacity. Good Eats estimates that the average
number of customers per hour will be 80, 100, or
120 with respective probabilities of 0.4, 0.2, and
0.4. The payoff table showing the profits for the
three designs is on the next slide.

Example: Good Eats Caf

Payoff Table
Average Number of Customers Per Hour
c1 = 80 c2 = 100 c3 = 120
Design A
Design B
Design C

$10,000
$ 8,000
$ 6,000

$15,000
$18,000
$16,000

$14,000
$12,000
$21,000

Example: Good Eats Caf

Expected Value Approach
Calculate the expected value for each decision.
The decision tree on the next slide can assist in this
calculation. Here d1, d2, d3 represent the decision
alternatives of designs A, B, C, and c1, c2, c3 represent
the different average customer volumes (80, 100, and
120) that might occur.

Example: Good Eats Caf

d1

d2
d3

Payoffs

Decision Tree

c1

(.4)

10,000

c2
c3

(.2)
(.4)

15,000

c1

(.4)

8,000

c2
c3

(.2)
(.4)

c1
c2

(.4)
(.2)

c3

(.4)

14,000
18,000
12,000
6,000
16,000
21,000

Example: Good Eats Caf

Expected Value For Each Decision

d1

d2

EV = .4(8,000) + .2(18,000) + .4(12,000)

= $11,600

Design A

Design B

Design C

EV = .4(10,000) + .2(15,000) + .4(14,000)

= $12,600

d3
EV = .4(6,000) + .2(16,000) + .4(21,000)
= $14,000

Choose the design with largest EV -- Design C.

Copyright 2011 John Wiley & Sons, Inc.

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Facility Layout
Refers to the arrangement of activities,
processes, workstations, storage areas and
common areas within an existing or proposed
facility.

Copyright 2011 John Wiley & Sons, Inc.

7-31

Objectives of Facility Layout

Minimize material-handling costs
Utilize space efficiently
Utilize labor efficiently
Eliminate bottlenecks
Facilitate communication and interaction
Reduce manufacturing cycle time
Reduce customer service time
Eliminate wasted or redundant movement
Copyright 2011 John Wiley & Sons, Inc.

7-32

Objectives of Facility Layout

Facilitate entry, exit, and placement of material,
products, and people
Incorporate safety and security measures
Promote product and service quality
Encourage proper maintenance activities
Provide a visual control of activities
Provide flexibility to adapt to changing conditions
Increase capacity

Copyright 2011 John Wiley & Sons, Inc.

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Basic Layouts
Process layouts
group similar activities together according to process or
function they perform

Product layouts
arrange activities in line according to sequence of
operations for a particular product or service

Fixed-position layouts
are used for projects in which product cannot be moved
Hybrid Layouts: Cellular layouts, flexible manufacturing
systems, and mixed-model assembly lines

Copyright 2011 John Wiley & Sons, Inc.

7-34

Process (Job Shop) Layouts

Equipment that perform similar processes are grouped
together
Used when the operations system must handle a wide
variety of products in relatively small volumes (i.e.,
flexibility is necessary)
General-purpose machines are arranged in no
particular sequence as the processing requirements
and sequences are different for the various types of
products to be manufactured
These machines include lathe machine, drilling
machine, milling machine, grinding machine etc. which
handle different types of processing requirements

Process Layout of an Automobile Service Station

Final
Inspection

Underbody
Repairs

Engine
Repairs

Paint
Booth

Car washing
& cleaning

Office

Spare
Parts
Store

Oil
Replacement

Wheel
Alignment

Electrical
Repairs

Interiors,
Door Repairs,
etc.

Dents
Repair

Process Layout of an Automobile Service

Station
Here separate departments or areas with general purpose
machines are assigned for dent corrections, painting, wheel
alignment, oil replacement, engine correction, electrical
check up, interiors washing , cleaning etc. Different Maruti
cars have different service requirements and are hence
taken to different departments according to a schedule
decided on by the service supervisor.
Process layout is particularly suitable when different
products are produced in lots or batches which is called
intermittent manufacturing
Demand of products not high enough to warrant continuous
manufacturing
Commonly found in service set-ups like banks, hospitals,
post-offices etc.

Characteristics of Process Layouts

Changeover is rapid
Material flow is intermittent
Material handling equipment is flexible
Operators are highly skilled
. . . more

Characteristics of Process Layouts

Technical supervision is required
Planning, scheduling and controlling functions
are challenging
Production time is relatively long
In-process inventory is relatively high

Advantages & Disadvantages of Process Layout

Work-In-Process
(WIP) Inventory is
usually high in batch
processing
Material handling is
time consuming as no
fixed route is there

Maintenance cost is
low because of low
cost general purpose
machines

A low output rate

and, thus, high cost
of item per unit

Disadvantages
Process
Layout
Advantages

The system is flexible to

design changes in products
or processes in comparison
to product layout

Routing & scheduling

is tedious and time
consuming for
different products
High cost of supervision
because of special treatment
to every product to be
processed

The system promotes

creativity on part of workers
due to variety of tasks
performed by them

Breakdown of a machine
does not lead to halt in
production as substitute
machines are kept ready for
such situations

Process Layout in Services

Copyright 2011 John Wiley & Sons, Inc.

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Manufacturing Process Layout

Copyright 2011 John Wiley & Sons, Inc.

7-42

Product (Assembly Line) Layouts

Operations are arranged in the sequence
required to make the product
Used when the operations system must handle a
narrow variety of products in relatively high
volumes
Operations and personnel are dedicated to
producing one or a small number of products

Characteristics of Product Layouts

Changeover is expensive and lengthy

Material flow approaches continuous
Material handling equipment is fixed
Operators need not be as skilled
. . . more

Characteristics of Product Layouts

Little direct supervision is required
Planning, scheduling and controlling functions
are relatively straight-forward
Production time for a unit is relatively short
In-process inventory is relatively low
An assembly line has a mechanized moving
platform or the conveyor which moves at regular
intervals of time
Across the conveyor there are work stations or
sub-assemblies

An Assembly Line (Product Layout)

Racks containing headlight

sub-assembly
Workstation 1

Car 1

Conveyor

Racks containing backlight

sub-assembly
Workstation 2

Car 2

Racks containing
steering wheels
subassembly
Workstation 3

Car 3

Advantages & Disadvantages of Product Layout

Lesser supervision &

labor training costs (as
labor is trained only for
a specialized task)

A high output
rate and, thus,
low cost of item
per unit

No need of routing or
scheduling once the line is
operational (as it is already
done during the design of the
line)

Advantages

Easier material
handling and lesser
inventory costs
Maintenance cost is
fairly high to ensure
smooth running of the
line

High efficiency
of labor &
equipment

Product
Layout
Disadvantages

Inflexible to design
changes in products or
processes (the changes in
line are usually expensive)

Monotonous repetitive tasks

lead to frustration on part of
workers

Breakdown of a machine or
high absenteeism of workers
leads to halt in production

A U-shaped Assembly Line

3
4

The entry &

exit points
are nearby

A single worker

5
6

A Product Layout
In

Out

Copyright 2011 John Wiley & Sons, Inc.

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Comparison of Product
and Process Layouts
Description
Description

Type
Type of
of process
process

Product
Product
Demand
Demand
Volume
Volume
Equipment
Equipment
Copyright 2011 John Wiley & Sons, Inc.

Product

Process

Sequential
arrangement of
activities
Continuous, mass
production, mainly
assembly

Functional
grouping of
activities
Intermittent, job
shop, batch
production, mainly
fabrication
Varied, made to
order
Fluctuating
Low
General purpose

Standardized,
made to stock
Stable
High
Special purpose

7-50

Comparison of Product
and Process Layouts
Product
Workers
Workers
Inventory
Inventory

Limited skills
Low in-process, high
finished goods
Small
Storage
Storage space
space
Material
Material handling Fixed path (conveyor)
Narrow
Aisles
Aisles
Part of balancing
Scheduling
Scheduling
Layout
Layout decision
decision Line balancing
Equalize work at each
Goal
Goal
station
Efficiency
Advantage
Advantage

Copyright 2011 John Wiley & Sons, Inc.

Process
Varied skills
High in-process, low
finished goods
Large
Variable path (forklift)
Wide
Dynamic
Machine location
Minimize material
handling cost
Flexibility

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Fixed-Position Layouts

Typical of projects
Fragile, bulky, heavy items
Equipment, workers & materials brought to site
Low equipment utilization
Highly skilled labor
Typically low fixed cost
Often high variable costs

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Schematic Diagram to show Fixed-position Layout of a

Space Shuttle

Raw
Materials

Equipments

Technicians

Computer
Experts

Assemblies

Fuel

Fixed-position Layout
Here the product is very bulky, heavy, large or
has a fixed position
Construction of a building, dam, an aero plane,
ship or a rocket etc.
Machines, equipment, raw materials, workers
etc. have to be taken to the site of the product
Very important is the placement of all these
things inside or around the product so that no
overcrowding takes place

Designing Service Layouts

Must be both attractive and functional
Free flow layouts
encourage browsing, increase impulse purchasing,
are flexible and visually appealing

Grid layouts
encourage customer familiarity, are low cost, easy
to clean and secure, and good for repeat customers

Loop and Spine layouts

both increase customer sightlines and exposure to
products, while encouraging customer to circulate
through the entire store
Copyright 2011 John Wiley & Sons, Inc.

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Types of Store Layouts

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Designing Product Layouts

Objective
Balance the assembly line

Line balancing
tries to equalize the amount of work at each
workstation

Precedence requirements
physical restrictions on the order in which operations
are performed

Cycle time
maximum amount of time a product is allowed to
spend at each workstation
Copyright 2011 John Wiley & Sons, Inc.

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Cycle Time Example

Suppose a company wanted to produce 120 units in an 8 hr day, the
cycle time necessary to achieve the production quota is
production time available
Cd =
desired units of output

Cd =

(8 hours x 60 minutes / hour)

(120 units)

Cd =

Copyright 2011 John Wiley & Sons, Inc.

480
120

= 4 minutes

7-58

Designing Process Layouts

Goal: minimize material handling costs
Block Diagramming
minimize nonadjacent loads
use when quantitative data is available

Relationship Diagramming
based on location preference between areas
use when quantitative data is not available

Copyright 2011 John Wiley & Sons, Inc.

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Cellular Layouts
1. Combines the flexibility of a process layout
with the efficiency of a product layout
2. Identify families of parts with similar flow paths
3. Group machines into cells based on part
families
4. Arrange cells so material movement is
minimized
5. Locate large shared machines at point of use

Copyright 2011 John Wiley & Sons, Inc.

7-60

Characteristics of Cellular Manufacturing

Relative to Process Layouts

Equipment can be less general-purpose

Material handling costs are reduced
Training periods for operators are shortened
In-process inventory is lower
Parts can be made faster and shipped more
quickly

Characteristics of Cellular Manufacturing

Relative to Product Layouts
Equipment can be less special-purpose
Changeovers are simplified
Production is easier to automate

Original Process Layout

Assembly

7
8

5
2

Copyright 2011 John Wiley & Sons, Inc.

12

10
3

11
Raw materials

7-63

Part Routing Matrix

Parts

A
B
C
D
E
F
G
H

Machines
4 5 6 7

8 9 10 11 12

x
x

x
x

Figure
5.8
Copyright
2011 John Wiley & Sons, Inc.

x
x
x
x

x
x

x
x

x
x
x

x
x

x
x

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Revised Cellular Layout

Assembly
8

10

12
11

Cell 1

Cell 2

Cell 3
7

A B C
Raw materials

Copyright 2011 John Wiley & Sons, Inc.

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Copyright 2011 John Wiley & Sons, Inc.

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Cellular Layouts
Advantages
Reduced material handling
and transit time
Reduced setup time
Reduced work-in- process
inventory
Better use of human
resources
Easier to control
Easier to automate

Copyright 2011 John Wiley & Sons, Inc.

Disadvantages
Inadequate part families
Poorly balanced cells
Expanded training and
scheduling of workers
Increased capital
investment

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Automated Manufacturing Cell

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Flexible Manufacturing Systems (FMS)

Consists of
Numerous programmable machine tools connected by an
automated material handling system and controlled by a
common computer network
automated tool changing
automated material handling system
controlled by computer network
Combines flexibility with efficiency
Layouts differ based on
variety of parts the system can process
size of parts processed
average processing time required for part completion

Copyright 2011 John Wiley & Sons, Inc.

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Mixed Model Assembly Lines

Produce multiple models in any order on one
assembly line
Factors in mixed model lines

Line balancing
U-shaped lines
Flexible workforce
Model sequencing

Copyright 2011 John Wiley & Sons, Inc.

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