Capacity Planning

Chapter 05 - Strategic Capacity Planning for Products and Services
CHAPTER 05
STRATEGIC CAPACITY PLANNING FOR PRODUCTS AND
SERVICES
Teaching Notes
Capacity is an upper bound on the load that a facility or a plant can serve or manufacture. We measure
the capacity of a plant, machine department, worker, hospital, etc., either in terms of output (number of
units or number of pounds manufactured) or in terms of input (number of machine hours or machines
needed to satisfy demand).
Capacity planning refers to the activities of the firm in determining the capacity of a plant or a facility
in terms of equipment, machines, space, workers and processes based on the resource constraints of
the facility. In other words, a major function of capacity planning is to match the capacity of the
machine or facility with the demand for the products of the firm.
Capacity planning can be classified into three planning horizons:
1. Long range
2. Medium range
3. Short range
The amount of time covered by each of the above planning horizons can vary from industry to
industry. Therefore, the lines of demarcation between the three different levels of planning horizons
can be very imprecise. Nevertheless, the long range planning generally considers planning horizons of
one year or longer. A time period of one year or longer is needed to provide sufficient time to build a
new facility, to expand the existing facility or to move to a new facility due to forecasted changes in
demand.
Medium range capacity planning horizon ranges approximately from one month to six months. At this
level of planning, decisions or activities include acquisition of a major piece of machinery and
subcontracting.
Short range planning horizon covers capacity planning activities on a daily or a weekly basis and are
generated as a result of disaggregation of the long or medium range capacity plans. These activities
include machine loading and detailed production scheduling.
The main quantitative technique covered is cost-volume analysis. It may be skipped or may need only
light review if students have had it in another course.
Answers to Discussion and Review Questions

1. Design capacity is the maximum possible output. Effective capacity is the maximum output
given product mix, scheduling realities, machine maintenance requirements, and so on.
2. Student answers will vary.
3. Long-term considerations related to the overall level of capacity, while short-term
considerations related to variations in capacity requirements caused by seasonality,
randomness, and so on.
5-1
4. a. Annual seasonality in demand for campgrounds, Christmas trees, Mother’s Day cards,
snow skis, lawn and garden equipment, snow tires.
b. Monthly seasonal patterns are often created by welfare and social security checks being
sent out and deposited in banks or increased spending, demand for examinations and
registrations at motor vehicle bureaus, subscription renewals and delinquent payment
notices.
c. Weekly seasonal patterns can be noted in motor vehicle traffic, hotel registrations,
supermarket traffic, telephone calls, and demand for auto repair.
d. Daily patterns can be noted in restaurants, telephone calls, motor vehicle traffic,
supermarket traffic, and so on.
5. Examples of built-in flexibility include buying more land than is currently needed, building
larger plants/offices/homes than currently needed, designing facilities in such a way that future
expansion will require minimal cost and effort (e.g., electrical, plumbing hookups), room for
expanded parking, and so on.
6. This amounts to a systems approach: the different parts of the system are interrelated, so
unless the entire system is considered, it is likely that the overall system capacity will suffer.
The example used in the book is expansion of a motel without regard to the resulting need to
consider expansion of parking, eating and recreational facilities. Similar examples include
increased air flights into a city, housing construction (impact on roads, sewers, schools,
shopping, etc.) and increasing the capacity of one machine in a series of machines.
7. Capacity in “chunks” refers to the large stepwise increases that are frequently encountered in
capacity decisions. An example would be adding a new machine. It is important because it
means that small capacity increases may not be feasible, or that other alternatives (e.g.,
working overtime instead of buying another machine) may be worthy of consideration.
8. Many schools are attempting to “scale-down” capacity due to the decrease in school-age
children. They are selling or leasing school buildings and consolidating classes. In addition,
many districts are laying off teachers and administrators. In contrast, some areas of the sunbelt
(e.g., Houston) are experiencing increases in enrollments, and are faced with the opposite
problem.
9. Failure to take all aspects of a system into account can result in uneven capacity, which is
evidenced by bottlenecks. The systems approach helps to avoid this by a “big picture”
perspective and by dealing with interrelationships.
10. Capacity designs establish constraints within which operations must function. They offer an
opportunity to achieve productivity improvements if done carefully. However, mistakes here
can hamper future productivity improvements because poor design can be very difficult to
overcome.
5-2
11. It is the most efficient position. If a producer should choose some other combination, such as
an assembly line for a customized product or service, he would find that the highly customized
requirements of the various products were in direct conflict with the more uniform
requirements needed to effectively operate in the assembly-line mode. Matching process
capabilities with product requirements can provide insights to those making process selections
as well as to those managing existing operations. For process choice, decision-makers should
make every attempt to achieve the aforementioned matching of product and process
requirements. For an ongoing operation, a manager should examine existing processes in light
of the table in order to see how well processes and products are matched. Poor matches would
suggest the potential for improvement, perhaps with a substantial increase in efficiency and
lowering of cost.
A second important concept is that products and services often go through life cycles that
begin with low volume that increases as products or services become more well known. When
that happens, a manager must know when to shift from one type of process (e.g., job shop) to
the next (e.g., batch), and perhaps to the next (e.g., assembly line). Of course, some operations
remain at a certain level (e.g., magazine publishing), while others increase (or decrease as
markets become saturated) over time. Again, it is important for a manager to assess his or her
products and services and make a judgment on whether to plan for changes in processing over
time.
12. Uncertainty could have an effect on demand which in turn would have an effect on volume or
desired production which in turn would determine the capacity of the operation. As the level
of uncertainty increases, the need for flexibility in scheduling and the need for larger capacity
also increases.
13. Capacity of government, not-for-profit service operations such as the number of police
officers, the number of firefighters and the number of emergency vehicles is somewhat
different than the capacity of manufacturing or other types of service operations. In the above
listed not-for-profit service areas, the service need is immediate (i.e., fire, emergency, crime,
weekend, Thanksgiving or Christmas travel) and cannot be delayed or deferred to a later
period. However, in many cases involving manufacturing operations, in the absence of
sufficient capacity, it may be possible to delay production to a later period as long as
backorders are allowed. Therefore, in the above-mentioned cases, the decision-maker may
want to provide additional capacity since the consequences of having inadequate capacity can
be disastrous.
14. The long-term strategic implications of capacity planning can be enormous. If we do not
obtain the necessary capacity when we need to, our firm can be at a significant disadvantage.
On the other hand, we could commit our company to a major capacity expansion that was
unnecessary. In this scenario, we are faced with the opportunity cost of having our money
invested in an unnecessary capacity expansion project in lieu of another, wiser investment
alternative.
15. a. The need to be near customers, b. inability to store services, and c. volatility of demand.
16. a. Among university measures are: The number and sizes of classrooms, the capacity of
computer facilities, the size and number of labs, equipment capacities, the number of faculty
members by area of specialization, the number of staff people, the number of offices, the
number of parking spaces, library space and the size of library collections, the capacity of
dining facilities, the amount of recreational facilities, and the capacity of maintenance
services.
5-3
b. Among hospital capacity measures are: The number of doctors, nurses, and other health care
providers and their specialties, the number of beds, the capacity of the emergency room,
surgery capacity and recovery capacity, equipment capacity by type, the capacity of
maintenance services, and food and pharmaceutical capacities.
c. Among computer repair shop measures are the number of repair people and their abilities,
the capacity to handle incoming work, and the average rate at which the shop can complete
repairs.
d. Among farm capacity measures are the acreage, capacities for different types of crops,
planting and harvesting capacities, and possibly irrigation capacity
17. Having capacity measures enables a business organization to know its capabilities and, when
combined with forecasts of future demand, use that knowledge to assess how capacity does or
does not equal demand, and if it does not correlate, develop plans for altering capacity and/or
changing demand through pricing, promotion, etc.
Taking Stock
1. The major trade-off in capacity planning is having too much capacity vs. not having sufficient
capacity. Having too much capacity will result in idle time and wasted resources. On the other
hand, not having enough capacity will result in backorders or lost sales.
2. Some of the employees that are involved in forecasting should also be involved in capacity
planning. The capacity planning should also be a team effort and include representatives from
production, marketing and finance areas. If capacity planning involves major expansion or a
major purchasing decision, top management must be involved.
3. Automation and computer operated machinery have revolutionized the manufacturing and
service industries. However, these machines and equipment are very expensive. Therefore the
consequences of making a mistake (buying the machinery when we should not have) can be
very costly for the firm. On the other hand, these machines tend to be powerful and produce
large number of quantities of a given product. Therefore, if we do not purchase the machinery
and the demand turns out to be high, then our losses due to lost sales or backorders will be
larger than usual.
Critical Thinking Exercises

Actual output 62
1. Efficiency    97%
Effective capacity 64
Actual output 62
Utilization    77.50%
Design capacity 80
5-4
Efficiency is very high, but utilization is not. The implication is that the potential for
increasing output by improving efficiency is quite limited, whereas the potential for doing so
by improving the effective capacity is much greater. Of the factors listed, scheduling and
balancing are in the category of factors that affect effective capacity, so they would have the
higher potential to be investigated for potential improvements.
2. Answers will vary.
3. Having capacity measures enables a business organization to know its capabilities and, when
combined with forecasts of future demand, use that knowledge to assess how capacity does or
does not equal demand, and if it does not correlate, develop plans for altering capacity and/or
changing demand through pricing, promotion, etc.
Memo Writing Exercises

1. As the investment in automation increases, most likely the fixed cost will increase and the
variable cost decrease. It will probably take a higher volume of output to offset the cost of
investment in automation.
2. Due to variability of demand, it is not a good idea to be at or near full utilization of capacity
because if demand increases, there is a good chance of running out of capacity. There is an
obvious trade-off between cost of idle time due to under utilization of capacity and cost of
shortages/expediting/subcontracting/overtime due to over utilization of capacity. The higher
the variability of demand, the higher the need for excess capacity.
Solutions
Actual output 7
1. a. Utilization    70%
Design capacity 10
Actual output 7
Efficiency    87.5%
Actual output 4
b. Utilization    67%
Design capacity 6
Actual output 4
Efficiency    80%
c. This is not necessarily true. If the design capacity is relatively high, the utilization could
be low even though the efficiency was high.
5-5
Actual output
2. Efficiency   80%
Effective capacity
Actual output = .8 (Effective capacity)

Effective capacity = .5 (Design capacity)
Actual output = (.5)(.8)(Effective capacity)
Actual output = (.4)(Design capacity)
Actual output = 8 jobs
Utilization = .4
Actual output
Utilizatio n 
Design capacity
Actual output 8
Design Capacity    20 jobs
Effective capacity .4
Actual output 8
Design Capacity    20 jobs
Effective capacity .4
3. FC = $9,200/month
VC = $ .70/unit
Rev = $ .90/unit
FC $9,200
a. Q BEP    46,000 units
Rev  VC $.90  $.70
b. Profit = Rev x Q – (FC + VC x Q)
1. P61,000 = $.90(61,000)  [$9,200 + $.70(61,000)] = $3,000
2. P87,000 = $.90(87,000)  [$9,200 + $.70(87,000)] = $8,200
Specified profit  FC $16,000  9,200 / month
c. Q   126,000 units.
Rev  VC $.90 / unit  $.70 / unit
Total Revenue $23,000
d. Total Revenue = Rev x Q, so Q =   25,556 units
R $.90 / unit
5-6
e. $100,000 TR = $90,000 @ Q = 100,000 units

TC = $79,200 @ Q = 100,000 units TR
Cost TC
$50,000
$9,200
0
100,000
Volume
1.
(units)
4. FC Rev VC
A: $40,000 $15/unit $10/unit
B: $30,000 $15/unit $11/unit
FC $40,000
a. Q BEP  Q BEP ,A   8,000 units
Rev  VC $15 / unit  $10 / unit
$30,000
Q BEP ,B   7,500 units
$15 / unit  $11 / unit
5-7
b. Profit = Q(Rev – VC) – FC

[A’s Profit] [B’s Profit]
Q($15 – $10) – $40,000 = Q($16 – $12) – $30,000
Solving, Q = 10,000 units
c. PA = 12,000($15 – $10) – $40,000 = $20,000 [A is higher]
PB = 12,000($16 – $12) – $30,000 = $18,000
5. Demand = 30,000 = Q
FC = $25,000
VC = $.37/pen
a. Rev = $1.00/pen
FC $25,000
Q BEP    39,683 units
Rev  VC $1.00  $.37
b. specified profit = $15,000
specified profit  FC $15,000  $25,000
Q   30,000
Rev  VC Rev  $.37 / unit
Solving for Rev: Rev = $1.71 [rounded up]
5-8
6. a. Cost for Plan A: $20 + $.45(120) + $.20(40) = $82

Cost for Plan B: $20 + $.55(120) + $.15(40) = $92
Cost for Plan C: $20 + $80 = $100
b.
Plan B
$140
Plan A
Monthly cost
$120
Plan C
$100
$80
$60
$40
$20
0 200 300
Minutes of daytime calls
c. Plan A is optimal for zero to less than 178 minutes. Plan C is optimal from 178 minutes or
more. Plan B is never optimal.
d. A: $20 + $.45D + $.20E
B: $20 + $.55D + $.15E
Setting these equal and solving, D = 1/2 E. Thus, if E = 100 minutes, then D = 50 minutes.
Hence, for 1/3 daytime minutes, the agent would be indifferent between the two plans.
5-9
7. Source FC VC TC
Process A $160,000 $5 160,000 + 5Q
Process B 190,000 4 190,000 + 4Q
Vendor 7 7Q
Answer: For Q less than 63,333, the total cost is less for Vendor.
For larger quantities, Process B is better.
BEP: 7Q = 190,000 + 4Q; Q = 63,333
Cost ($000)
500 A B
400
300
200
Vendor
100
0
10 20 30 40 50 60 70 80
Q (x1000)
8. Source FC VC
Internal 1 $200,000 $17
Internal 2 240,000 14
Vendor A 20 up to 30,000 units
Vendor B 22 for 1 to 1,000; 18 each if larger amount
Vendor C 21 for 1 to 1,000; 19 each for additional units.
a. TC for 10,000 units TC for 20,000 units

Int. 1: 200,000 + 17(10,000) = $370,000 $200,000 + $17(20,000) = $540,000
Int. 2: 240,000 + 14(10,000) = $380,000 $240,000 + $14(20,000) = $520,000
Vend A 20(10,000) = $200,000 $20(20,000) = $400,000
Vend B 18(10,000) = $180,000 (opt.) $18(20,000) = $360,000 (opt.)
Vend C 21,000 + 19(9,000) = $192,000 $ 21,000 + $19(19,000) = $382,000
5-10
O
b.Range pt
i
m
al
C
h
oi
ce
1 to 999 A @ $20 each
1,000 to 59,999 B @ $18 each
60,000 or more Int. 2 @ $14 each + 240,000
9. Actual output will be 225 per day per cell;

240 Working days/year
Projected annual demand = 150,000
Annual capacity per cell = 225 units/day x 240 days/year = 54,000
150,000
Cells :  2.78, round to 3 cells
54,000
10. a. Given: 10 hrs. or 600 min. of operating time per day.

250 days x 600 min. = 150,000 min. per year operating time.
Total processing time by machine

Product A B C
1 48,000 64,000 32,000
2 48,000 48,000 36,000
3 30,000 36,000 24,000
4 60,000 60,000 30,000
Total 186,000 208,000 122,000
186,000
NA   1.24  2 machine
150,000
208,000
NB   1.38  2 machine
150,000
122,000
NC   .81  1 machine
150,000
5-11
You would have to buy two “A” machines at a total cost of $80,000, or two “B”
machines at a total cost of $60,000, or one “C” machine at $80,000.
5-12
b. Total cost for each type of machine:

A (2): 186,000 min  60 = 3,100 hrs. x $10 = $31,000 + $80,000 = $111,000
B (2) : 208,000  60 = 3,466.67 hrs. x $11 = $38,133 + $60,000 = $98,133
C(1): 122,000  60 = 2,033.33 hrs. x $12 = $24,400 + $80,000 = $104,400
Buy 2 Bs—these have the lowest total cost.
11. R = $45 per customer, VC = $20 per customer

FC
FC Range Q BEP 
R  VC
One machine $2,000 1 to 100 80 = 2000 / (45 – 20)
Two machines 3,800 101 to 200 152 = 3800 / (45 – 20)
b. Since BEP for 1 machine is 82 and 82 < 90 and BEP for 2 machines is 152 > 120, we
should purchase 1 machine, because even at the upper limit (120) we have not reached the
break-even point associated with two machines.
12. R = $5.95, VC = $3. One line would have a fixed cost of $20 (6,000  300) per hour and two
lines would have a fixed cost of $35 (10,500  300) per hour.
Volume No. of lines Profit
14 1 $21.30 = 14 (5.95 – 3) – 20
15 1 24.25 = 15 (5.95 – 3) – 20
16 2 12.20 = 16 (5.95 – 3) – 35
17 2 15.15 = 17 (5.95 – 3) – 35
18 2 18.10 = 18 (5.95 – 3) – 35
Choose one line. Assumption: Little or negligible cost of manufacturing.
13. a. 11/hr.
b. Operation 3 by 1 hour. Beyond that, Operation 1 would become the limiting (bottleneck)
operation.
14. a. 5 units per hour (10 upper branch and 5 lower branch).
b. Increase #4 by 5 units/hour and #5 by 2 units/hour will increase overall capacity to
10 units/hour
5-13
Case: Outsourcing of Hospital Services
1. The hospital’s workers felt a connection with the hospital. Perhaps in a larger hospital
with a larger staff, that might not be an issue. Also, there might be large cost savings
involved.
2. There could be a cost savings in having an outside firm manage the service, or the
motivation for outsourcing could be avoidance of the burden of managing
housekeeping.
3. Economies of scale.
Enrichment Module: Solving Capacity Planning Problems

Capacity planning problems can be classified in a number of different ways. One such classification
for intermediate and short-range problems is given below:
1. Output capacity determination
2. Input capacity determination
3. Capacity-demand match (input or output)
The categories listed above can involve either manufacturing or service problems. The solution to the
following realistic examples will provide an easy and an intuitive way to comprehend and solve
capacity planning problems.
Problem 1 Manufacturing example

(Output capacity determination and capacity-demand match)
A battery manufacturing plant normally operates two eight-hour shifts per day and 6 days per week.
The manufacturer can produce 375 units per hour. Over the next four weeks, the aggregate demand for
the batteries are given in the following table.
Week 1 2 3 4
Demand 30,000 32,000 36,000 40,000
a. Calculate the weekly capacity of the plant.
b. If the firm attempts to produce the demanded quantity, at what percentage of the capacity
would it be operating each week?
c. Determine the “Level” production schedule and the resulting average inventory for the 4-week
period. Assume that no shortages are allowed and the current inventory is zero and desired
ending inventory in week 4 is also zero.
d. Determine the “Chase” production schedule and the resulting average inventory for the 4-
week period. Assume that no shortages are allowed and the current and desired ending
inventory in week 4 is zero.
e. Based on your answers to part c and d, discuss the trade-off between “Level” and the “Chase”
production plans.
Note: Part a of this problem can be classified as output capacity determination while parts b
through e deal with capacity-demand match.
5-14
Problem 2 Service example

(Output capacity determination)
A small grocery store has a total of four regular checkout lines and one express checkout line.
Recently on Sundays the store has been experiencing either excessive idle time for cashiers or
excessively long customer waiting lines. The results of a recent time study performed by a
management consulting company showed that the average service time for express and regular
checkout lines are 3 and 10 minutes respectively. As the next step in analyzing the problem, the
manager of the grocery store wants to determine the estimated capacity of the store on Sundays in
terms of total number of customers. Currently the store is open from 6 a.m. to midnight on Sundays.
The express checkout line is always open while there is only one regular line open from 6 a.m. to 9
a.m. and also one regular line open from 9 p.m. to midnight. There are two regular checkout lines open
from 9 a.m. to noon and also from 6 p.m. to 9 p.m. All four regular lines are open between noon and 6
p.m.
a. Determine the current capacity of the store in total number of customers for Sundays.
b. Assume that the store manager decides to reduce the number of regular lines from 2 to 1
between 7 p.m. and 9 p.m. and closes the express line between 6 a.m. and 8 a.m. and 10 p.m.
and midnight. What is the revised capacity for Sundays?
Problem 3 Manufacturing example

(Input capacity determination – number of resources needed)
A video equipment manufacturer produces videotapes and DVDs. The manufacturing facility operates
two eight-hour shifts per day for 6 days a week. The unit manufacturing time is 6 minutes for each
videotape and 8 minutes for each DVD.
a. Given that machine operators work at 80% efficiency, determine the number of workers
needed to produce 5000 videotapes and 2500 DVDs per week.
b. Given that machines have 95% efficiency, determine the number of machines needed to
produce 5000 videotapes and 2500 DVDs per week.
c. Assume that the number of workers is sufficient, what is the maximum number of videotapes
and the maximum number of DVDs that can be manufactured with 15 machines.
d. Assume that the number of machines is sufficient, what is the maximum number of videotapes
and the maximum number of DVDs that can be manufactured with 20 workers.
5-15
Problem 4 Manufacturing example with multiple products and multiple machines

(Input capacity determination – and number of resources needed)
Among many other products, a firm manufactures three different electronic components (A, B, C) on
any of the three different machines (1, 2, 3). The quarterly forecasted demand for the three
components are given in Table 1.
Table 1
Quarterly Forecasted Demand by Product Type
Season
Component Winter Spring Summer Fall
A 8,000 20,000 12,000 6,400
B 4,000 12,000 8,000 5,600
C 9,600 19,200 14,400 7,200
Table 2 displays the unit production time for each product on each machine
Table 2
Unit Production Time in hours
Component
Machine A B C
1 .25 .50 .40
2 .10 .30 .15
3 .45 .20 .35
Interpreting Table 2, we can state that each unit of product A takes 15 minutes (.25 x 60 min.) to
process on machine 1, while it takes 12 minutes (.20 x 60 minutes) to process one unit of product B on
machine 3.
a. Determine the maximum number of machine hours demanded for each quarter machine
combination.
b. The production manager has determined that the amount of productive time available for each
machine per quarter is 600 hours. Determine the maximum number of each machine type
needed to be dedicated to produce all components in each quarter.
c. Does there appear to be seasonal variation in demand? Explain.
5-16
Solution to Problem 1 Manufacturing example

(Output capacity determination and capacity-demand match)
a. The number of units/week = (375 units/hr.) (8 hrs/shift) (2 shifts/day) (6 days/week)
The number of units/week = 36,000 batteries
b.
Week 1 2 3 4
Forecasted
30,000 32,000 38,000 40,000
demand
Capacity 36,000 36,000 36,000 36,000
% of capacity
83.33% 88.89% 105.6% 111.1%
utilized
c. In determining the “Level” production plan, if the demand is less than or equal to the
production capacity, we simply determine the average demand for the four-week period and
use the average demand as our production quantity. However, if the average demand is above
capacity, then we can either try to expand capacity, delay the order or reduce the quantity.
Since in this instance the average demand is less than capacity in each week, we can use the
average demand as our production quantity.
30,000  32,000  38,000  40,000
Average demand   35,000
4
The “Level” production plan and the resulting ending inventory for each week is given in the
following table.
Week 0 1 2 3 4
Forecasted demand 30,000 32,000 38,000 40,000
Capacity 36,000 36,000 36,000 36,000
Production 35,000 35,000 35,000 35,000
Ending Inventory 0 5,000 8,000 5,000 0
Average inventory = 18,000 / 4 = 4,500 units.

d. In determining the “Chase” production plan, we attempt to match production with demand
unless there is insufficient capacity. The amount of shortage from the latest period with
insufficient capacity is scheduled for production in the latest period with excess supply. In our
problem, week 4 has a potential shortage of 4,000 units and week 2 is the latest period with
excess capacity of 4,000 units. Therefore, week 4’s shortage is scheduled for production in
week 2. Likewise, week 3 has a potential shortage of 2,000 units, which is scheduled for
production in week 1.
5-17
The “Chase” production plan and the resulting ending inventory for each week is given in the
following table.
Week 0 1 2 3 4
Forecasted demand 30,000 32,000 38,000 40,000
Capacity 36,000 36,000 36,000 36,000
Production 32,000 36,000 36,000 36,000
Ending Inventory 0 2,000 6,000 4,000 0
Average inventory = 12,000/4 = 3,000 units.

e. The “Chase” production plan results in fewer units in inventory, while the “Level” production
plan results in more uniform production, thus less hiring and layoff costs.
Solution to Problem 2 Service example

(Output capacity determination)
a. Hourly capacity of the express line = (60 minutes) / (3 minutes per cust.) = 20 customers
Hourly capacity of the regular line = (60 minutes) / (10 minutes per cust.) = 6 customers
Capacity of the express line for Sundays = (20 customers) x (18 hours) = 360 customers
Capacity of the regular line:
From 6 a.m. to 9 a.m. = (6 customers/hr) (3 hours) (1 line) = 18 customers
From 9 a.m. to noon = (6 customers/hr) (3 hours) (2 lines) = 36 customers
From noon to 6.p.m. = (6 customers/hr) (6 hours) (4 lines) = 144 customers
From 6 p.m. to 9 p.m. = (6 customers/hr) (3 hours) (2 lines) = 36 customers
From 9 p.m. to midnight = (6 customers/hr) (3 hours) (1 line) = 18 customers
Sunday total regular line capacity = 18+ 36 + 144 + 36 + 18 = 252 customers
Overall Sunday capacity = Total regular line capacity + Express line capacity
Therefore overall capacity for Sundays = 360 + 252 = 612 customers
b. Reduction in express line capacity = (4 hours) (20 customers / hour) = 80 customers
Reduction in regular line capacity = (2 hours) (6 customers per hour) = 12 customers
Revised Sunday capacity = 612 – (80 + 12) = 520 customers
5-18
Solution to Problem 3 Manufacturing example

(Input capacity determination – number of resources needed)
In general, we can express the equation for number of resources using the following notation:
k
pD i i
NR  i 1
(T )( E )
where:
NR = Number of resources (machines or workers) required
k = number of products produced
T = Total time available per resource per scheduled time period i
pi= Unit production time for product i
DI= Demand for product i for the scheduled time period
E = Efficiency of the resource measured as a percentage
Therefore, if we know the number of workers and want to determine the maximum demand that can be
satisfied for a given product, we can manipulate the formula given above and obtain the following
equation:
( N R )(T )( E )
Di 
pi
Given the above information, we can now solve problem 3.
T  (2 shifts )(6 days )(8 hrs. / shift )(60 min. / hr.)  5,760 min . / week
k
a. pD i i
(6 min.)(5,000)  (8 min.)( 2,500)
NW  i 1
  10.88  11 workers
(T )( E ) (5,760)(.80)
k
b.
pD
i 1
i i
(6 min.)(5,000)  (8 min.)(2,500)
NM    9.14  10 machines
(T )( E ) (5,760)(.95)
( N M )(T )( E ) (15)(5,760)(.95)
Dvideotape    13,680 videotapes
pvideotape 6
c.
( N M )(T )( E ) (15)(5,760)(.95)
DDVD    10,260 DVDs
p DVD 8
5-19
( N M )(T )( E ) ( 20)(5,760)(.80)
Dvideotape    15,360 videotapes
pvideotape 6
d.
( N M )(T )( E ) ( 20)(5,760)(.80)
DDVD    11,520 DVDs
p DVD 8
Solution to Problem 4 Manufacturing example with multiple products and multiple machines
(Input capacity determination – and number of resources needed)
a. First, we need to convert the demand to machine hours for each machine in each season.
The demand in the winter is 100, 50, and 120 for components A, B and C respectively and it
takes .25 hours, 1/2 hour and .4 hours to process components A, B and C respectively on
machine 1. Therefore with this information, we can compute the maximum machine hours
demanded for machine 1 (M1) in the winter quarter.
Max. hrs. for M1 in Winter = (.25)(8000)+(.5)(4,000)+(.4)(9600) = 7840 hrs.
Similarly the quarterly machine hours demanded can be calculated for the rest of the machine-
season combinations:
Max. hrs. for M1 in Spring = (.25)(20,000)+(.5)(12,000)+(.4)(19,200) =18,680 hrs.

Max. hrs. for M1 in Summer = (.25)(12,000)+(.5)(8,000)+(.4)(14,400) = 12,760 hrs.
Max. hrs. for M1 in Fall = (.25)(6,400)+(.5)(5,600)+(.4)(7,200) = 7,280 hrs.
Max. hrs. for M2 in Winter = (.10)(8,000)+(.30)(4,000)+(.15)(9,600) = 3,440 hrs.

Max. hrs. for M2 in Spring = (.10)(20,000)+(.30)(12,000)+(.15)(19,200) = 8,480 hrs.
Max. hrs. for M3 in Winter = (.45)(8,000)+(.2)(4,000)+(.35)(9,600) = 7,760 hrs.

Max. hrs. for M3 in Spring = (.45)(20,000)+(.2)(12,000)+(.35)(19,200) = 18,120 hrs.
5-20
b. Since (T) (E) = 600 productive hours per quarter,

7,840 hrs. demanded
N M 1(Winter )   13.06 ~ 14 machine 1s
600 hrs.
Therefore we can conclude that at most we need to allocate 14 machine 1s to produce
components A, B and C in the winter quarter.
Similarly the maximum number of machine 3s needed in the spring quarter to make all three
components can be determined as follows:
18,120 hrs. demanded
N M 3( Spring )   30.02 ~ 31 machine 3s
600 hrs.
The following table summarizes the maximum number of each machine type needed by
quarter.
Quarterly Maximum number of machine types needed

Season
Machine Winter Spring Summer Fall
1 14* 32 22 13
2 6 15 10 6
3 13 31 28 11
*All values in the table are rounded up.

c. Yes, there appears to be a significant seasonal variation in demand. It appears that the highest
demand is experienced in the spring followed by summer. Therefore, most likely the
components are used in summer products and because of lead times the demand peaks in the
spring.
5-21

Capacity Planning

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Capacity Planning

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Chapter 05 - Strategic Capacity Planning for Products and Services

Answers to Discussion and Review Questions

Critical Thinking Exercises

2. Answers will vary.

Memo Writing Exercises

Actual output = .8 (Effective capacity)

e. $100,000 TR = $90,000 @ Q = 100,000 units

b. Profit = Q(Rev – VC) – FC

6. a. Cost for Plan A: $20 + $.45(120) + $.20(40) = $82

a. TC for 10,000 units TC for 20,000 units

9. Actual output will be 225 per day per cell;

10. a. Given: 10 hrs. or 600 min. of operating time per day.

Total processing time by machine

b. Total cost for each type of machine:

Buy 2 Bs—these have the lowest total cost.

11. R = $45 per customer, VC = $20 per customer

Case: Outsourcing of Hospital Services

Enrichment Module: Solving Capacity Planning Problems

Problem 1 Manufacturing example

Problem 2 Service example

Problem 3 Manufacturing example

Problem 4 Manufacturing example with multiple products and multiple machines

Solution to Problem 1 Manufacturing example

Average inventory = 18,000 / 4 = 4,500 units.

Average inventory = 12,000/4 = 3,000 units.

Solution to Problem 2 Service example

Solution to Problem 3 Manufacturing example

Max. hrs. for M1 in Spring = (.25)(20,000)+(.5)(12,000)+(.4)(19,200) =18,680 hrs.

Max. hrs. for M2 in Winter = (.10)(8,000)+(.30)(4,000)+(.15)(9,600) = 3,440 hrs.

Max. hrs. for M3 in Winter = (.45)(8,000)+(.2)(4,000)+(.35)(9,600) = 7,760 hrs.

b. Since (T) (E) = 600 productive hours per quarter,

Quarterly Maximum number of machine types needed

*All values in the table are rounded up.

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