System Design and Capacity

SYSTEM DESIGN
AND CAPACITY
INTRODUCTION
■ Before products can flow into a market, someone must design and invest
in the facilities and organization to produce them.
■ Capacity Planning for manufacturing and service systems are different.
Both must be designed with capacity limitations in mind.
MANUFACTURING AND SERVICE
SYSTEMS
■ Manufacturing and service systems are arrangements of facilities,
equipment, and people to produce goods and services under controlled
conditions.
Manufacturing systems
■ Produce standardized products in large volumes. This plant and

machinery have a finite capacity and contribute fixed costs that must be
borne by the products produced.
■ Variable costs are added as labor is employed to combine or process the
raw materials and other components
■ Value addition will takes place during the production process for the
product. The cost of output relative to the cost of input can be measured,
as the actual cost is known i.e. productivity is measurable quantity
Service systems
■ present more uncertainty with respect to both capacity and costs.

■ Services are produced and consumed in the presence of the customer and
there is little or no opportunity to store value, as in a finished goods
inventory.
■ This makes more difficult to accumulate costs and measure the
productivity of the services.
DESIGN AND SYSTEMS CAPACITY
■ Production systems design involves planning for the inputs,

transformation activities, and outputs of a production operation.
■ Design plays a major role because they entail significant investment of
funds and establish cost and productivity patterns that continue in future.
■ The capacity of the manufacturing unit can be expressed in number of
units of output per period
DESIGN CAPACITY
■ Designed capacity of a facility is the planned or engineered rate of output

of goods or services under normal or full scale operating conditions.
■ For example, the designed capacity of the cement plant is 100 TPD (Tons
per day). Capacity of the sugar factory is 150 tons of sugarcane crushing
per day.
■ The uncertainty of future demand is one of the most perplexing problems
faced by new facility planners.
■ Design for a minimum demand would result in high utilization of
facilities but results in inferior service and dissatisfaction of customers
because of inadequate capacity. It reflect the management’s strategy for
meeting the demand.
System/effective capacity
■ System capacity is the maximum output of the specific product or product mix the
system of workers and machines is capable of producing as an integrated whole.
■ System capacity is less than design capacity or at the most equal it because of the
limitation of product mix, quality specification, and breakdowns.
■ The actual is even less because of many factors affecting the output such as actual
demand, downtime due to machine/equipment failure, unauthorized absenteeism.
■ The system capacity is less than design capacity because of long-range
uncontrollable factors.
■ The actual output is still reduced because of short-term effects such as breakdown
of equipment, inefficiency of labor.
■ These different measures of capacity are useful in defining two measures
of system effectiveness: efficiency and utilization.
– Efficiency is the ratio of actual output to effective capacity.
– Utilization is the ratio of actual output to design capacity.
CAPACITY PLANNING
■ Design of the production system involves planning for the inputs,

conversion process and outputs of production operation.
■ The objective of capacity management is to match the level of operations
to the level of demand.
■ Capacity planning is to be carried out keeping in mind future growth and
expansion plans, market trends, sales forecasting, etc
■ Capacity is the rate of productive capability of a facility. Capacity is
usually expressed as volume of output per period of time.
■ Capacity planning is the first step when an organization decides to produce
more or new products.
■ Production managers are more concerned about the capacity for the
following reasons:
– Sufficient capacity is required to meet the customers demand in time.
– Capacity affects the cost efficiency of operations.
– Capacity affects the scheduling system.
– Capacity creation requires an investment.
SYSTEM DESIGN AND
CAPACITY
(PROCESS OF CAPACITY PLANNING)
Jacob D. Dizon
■ Capacity planning is concerned with defining the long-term and the
short-term capacity needs of an organization and determining how those
needs will be satisfied.
■ Capacity planning decisions are taken based upon the consumer demand
and this is merged with the human, material and financial resources of
the organization.
1. Long-term capacity strategies
■ Long-term capacity requirements are more difficult to determine because

the future demand and technology are uncertain.
– today’s products may not be existing in the future
■ Long-range capacity requirements are dependent on
– marketing plans,
– product development and
– life-cycle of the product.
The product life cycle
Following parameters will affect long-range capacity decisions.
■ Multiple products: Company’s produce more than one product using
the same facilities in order to increase the profit. Having more than one
product helps the capacity planners to do a better job.
■ Phasing in capacity: In high technology industries, and in industries
where technology developments are very fast, the rate of obsolescence
is high.
■ Phasing out capacity: The outdated manufacturing
facilities cause excessive plant closures and down time.
■ The phasing out options makes alternative arrangements
for men like shifting them to other jobs or to other locations,
compensating the employees, etc.
2. Short-term capacity strategies:
■ Managers often use forecasts of product
demand to estimate the short-term workload
the facility must handle.
■ Managers then compare requirements with
existing capacity and then take decisions as
to when the capacity adjustments are needed.
■ For short-term periods of up to one year,
fundamental capacity is fixed so major
facilities will not be changed.
Short-term capacity strategies are:
■ 1. Inventories: Stock finished goods during slack periods to meet the

demand during peak period.
■ 2. Backlog: During peak periods, the willing customers are requested to
wait and their orders are fulfilled after a peak demand period.
■ 3. Employment level (hiring or firing): Hire additional employees
during peak demand period and layoff employees as demand decreases.
■ 4. Employee training: Develop multi skilled employees through training
so that they can be rotated among different jobs. The multi skilling helps
as an alternative to hiring employees.
■ 5. Subcontracting: During peak periods, hire the capacity of other firms
temporarily to make the component parts or products.
■ 6. Process design: Change job contents by redesigning the job.
IMPORTANCE OF CAPACITY
DECISIONS
■ 1. Capacity decisions have a real impact on the ability of the organization to
meet future demands for products and services; capacity essentially limits the
rate of output possible.
■ 2. Capacity decisions affect operating costs.
■ 3. Capacity is usually a major determinant of initial cost.
■ 4. Capacity decisions often involve long-term commitment of resources and the
fact that, once they are implemented, it may be difficult or impossible to modify
those decisions without incurring major costs.
■ 5. Capacity decisions can affect competitiveness
■ 6. Capacity affects the ease of management
■ Better utilization of existing capacity can be accomplished through improvements in
Overall Equipment Effectiveness (OEE).
■ OEE or Overall equipment effectiveness is a performance measure that reflects the
health of your process or machine, it is a composite measure that is calculated from
your machines availability, performance and the quality of output and expressed as a
percentage.
Measures of Capacity
DETERMINANTS OF EFFECTIVE
CAPACITY
■ The main factors relate to:
1. facilities,
2. products or services,
3. processes,
4. human considerations,
5. operational factors,
6. the supply chain, and
7. external forces.
Factors that determines effective capacity
DO IT IN-HOUSE OR OUTSOURCE
IT?
■ Once capacity requirements have been determined, the organization must decide
whether to produce a good or provide a service itself, or to outsource from another
organization. Many organizations buy parts or contract out services, for a variety of
reasons.
Some factors to consider:
■ Available capacity. If an organization has available the equipment,
necessary skills, and time, it often makes sense to produce an item or
perform a service in-house.
■ Expertise. If a firm lacks the expertise to do a job satisfactorily, buying
might be a reasonable alternative.
■ Quality considerations. Firms that specialize can usually offer higher
quality than an organization can attain itself.
■ The nature of demand. When demand for an item is high and steady, the
organization is often better off doing the work itself.
■ Cost. Any cost savings achieved from buying or making must be weighed
against the preceding factors
■ Risks. Buying goods or services may entail considerable risks.
Examples:
■ ILLUSTRATION 1: Given the information below, compute the

efficiency and the utilization of the vehicle repair
■ Department: Design capacity = 50 trucks per day
■ Effective capacity = 40 trucks per day
■ Actual output = 36 trucks per day
■ ILLUSTRATION 2: The design capacity for engine repair in our
company is 80 trucks per day. The effective capacity is 40 engines per
day and the actual output is 36 engines per day. Calculate the utilization
and efficiency of the operation. If the efficiency for next month is
expected to be 82%, what is the expected output?
■ ILLUSTRATION 3: Given: F = Fixed Cost = $ 1000, V = Variable cost
= $ 2 per unit and P = Selling price = $ 4 per unit, Find the break-even
point in $ and in units.
“Plan is nothing, but Planning is everything”
-Dwight Eisenhower

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SYSTEM DESIGN

■ Produce standardized products in large volumes. This plant and

■ present more uncertainty with respect to both capacity and costs.

■ Production systems design involves planning for the inputs,

■ Designed capacity of a facility is the planned or engineered rate of output

■ Design of the production system involves planning for the inputs,

■ Long-term capacity requirements are more difficult to determine because

■ 1. Inventories: Stock finished goods during slack periods to meet the

■ ILLUSTRATION 1: Given the information below, compute the

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