UNIT – 2 - PRODUCTION CAPACITY, MEASUREMENTS,

FACILITY AND LOCATION DECISIONS

1. PRODUCTION CAPACITY:

Definition

Production capacity is defined as maximum production or output, which can be produced in business with
the help of available resources. The capacity is calculated over days or weeks or months. The
measurement is done in a way that we can adjust our production capacity according to the demand from
the market.

There is no concept of maximum production since the ‘maximum’ that company produce could be infinite
– with the right tools, that is if all other variables involved in production are considered maximum and
constant. However, for the sake of discussion, the maximum is the best that can be produced at a given
time.

It can also be understood as to how you manage the available employees, time, and resources in the most
efficient way possible to fulfil the demand. Such decisions take time and are dependent on multiple factors
like:

1. Raw materials should be readily available – somewhat ready whenever required so that they can
be used whenever needed. This is true, especially during seasonal demands. For example,
requirements of candies go up during Halloween, or decorative items sale would increase around
Christmas. In such cases, the company has to have ample stock to fulfil market demand.
2. Human resources and labor should be present as and when necessary, preferably at all times. If
there are shifts of people working on the same machine, then the production capacity increases.
For example, if workers of day shift run and utilize the devices for 12 hours – from 8 am to 8 pm
and then the output would be – say A unit. If the machines are being used for 12 more hours –
from 8 pm to 8 am by night shift workers, then the output would be 2A.
3. Equipment are expected to work optimally and reduce time and cost. As the utilization of the
equipment increases, its life reduces. The machine initially operates at full capacity, but as the
times go and the work on it increases, the ability goes down. To avoid this, the machines need to
be serviced periodically and, if defunct, then needs to be replaced.
4. Adequate warehousing and storage facilities should be present, considering the demand as well
as the shelf life of the product.

Average Annual Production Capacity

It is defined as the sum of average capacity at the start of the year and average annual capacity of
equipment during the year of purchase of equipment after reducing the average annual capacity of
equipment during the year.
Calculation of Machine Hour Capacity

The first step is to understand and calculate the capacity of the machine hour in the factory. What example
of the factory has 100 machines, and the workers in the factory utilize the machine from 8 am to 8 pm for
12 hours a day, then the capacity would be 12 multiplied by hundred, which comes to 1200 machine
hours.

Production capacity with a single product

The production capacity is pretty straightforward for a single product. The time to produce a single
product is determined, and it is divided by the plant capacity in hours.

For example, if one worker takes 30 minutes (0.5hrs) on a machine to make one product and the capacity
of the machine has 1200 hours, then the production capacity would be

1200 / 0.5, which would be 2400 units per day.

Production Capacity Calculation

When there is a mix of products present to calculate the production capacity, then it can get more
complicated.

For example, apart from producing a unit of product which takes 30 minutes a day, the manufacturing
facility also makes a product B, which takes 15 minutes or 0.25 hours on one machine for one unit. In this
case, the number of units multiplied by 0.5, plus the number of units of Product B increased by 0.25.

Therefore, at 1200 machine-hours, one combination of production would be either 2400 units per day or
4800 of Product B per day.

Understanding the Production capacity utilization rate

If the production capacity is known, then you can measure the capacity. The measurement of what
percentage of capacity the business is running at is called a capacity utilization rate.

The capacity utilization rate is calculated by dividing actual output with potential output. For example, if
the business is producing 2400 units of a product birthday, continuing the above example, but now it only
produces 2000 units per day, then the capacity is 83.3%.

The higher the percentage, the better is the capability of the business to perform at full capacity.

Another example of Production Capacity

A company is in the manufacturing of Shirts. Now, let us consider that it has 100 machines and takes 1 hr.
to produce one shirt. The same machines are also able to manufacture buttons that require 10 minutes
or (0.16 hrs.) to produce one button. The machines work from 8 am to 6 pm (10 hours per day).

Therefore, the machine hour capacity is:

Total number of machine utilization hours’ x number of machines

100 x 10
Machine hour capacity = 1000 hours

Production capacity with a single product: = Total machine hours/time required to produce 1 unit of
product = 1000/1 (1 shirt takes 1 hour) = 1000 shirts.

for multiple products: Total machine hours/time required to produce 1 unit of product = 1000/0.16

= 5,998 buttons

So the machine can either produce 1000 shirts or 5998 buttons

Production capacity utilization rate

When the machines were new, they used to operate for 10 hrs. at 100% capacity.

Therefore, the output was 1000 shirts a day. But after about a year, the machines were able to produce
only 900 shirts at a day, rest all variables kept constant.

Therefore, the production capacity utilization rate = new capacity / earlier capacity = ( 900 / 1000 ) x 100

Thus the production capacity utilization rate is now only 90% of original capacity.

2. PRODUCTION CAPACITY PLANNING

Production capacity is the maximum product output a company can produce using its available resources
over a specified amount of time. This metric is important because it informs a manufacturer’s critical
business decisions in both the near and long-term.

For instance, if a manufacturing business wants to fulfill a higher quantity of larger orders, the decision-
makers need to know if the operation can sufficiently meet the increase in demand. Additionally,
manufacturers use production capacity to inform labor utilization as well as capex decisions including their
machines, equipment, and facilities.

Therefore, it’s important for manufacturers to know their operation’s production capacity because it
informs both administrative and in-facility decisions, enabling businesses to maximize their production
efficiency.

Facilities are buildings, pieces of equipment, or services that are provided for a particular purpose.

Production is the process of manufacturing or growing something in large quantities.

Production Facility. Definition.

One or more installations on the same site operated by the same natural or legal person, designed, built
or installed to serve specific production or industrial purposes, comprehending all infrastructure,
equipment and materials.

Capacity forecasting is the process of predicting how many resources you're going to need and how much
time you're going to need them for. It's also sometimes called demand forecasting or resource forecasting.

Capacity forecasting is the process of predicting how many resources you're going to need and how much
time you're going to need them for. It's also sometimes called demand forecasting or resource forecasting.
Capacity is increased either to meet an actual (immediate) increase in customer demand or an anticipated
(future) increase in customer demand. Immediate capacity increases are usually achieved by: Using
existing equipment for more time (Adding shifts or overtime) Using someone else's equipment
(Outsourcing).

How to increase production capacity?

For businesses looking to scale up their operations, there are a couple of different options they can
explore to increase production capacity. A few examples include:

Add more work shifts: A manufacturing business can increase production capacity by lengthening the
amount of time available for production. Manufacturers can do this by instituting overtime pay to
encourage employees to work extra hours. Alternatively, manufacturers can adopt a shift-based
operation. Different groups of employees ensure that the machines run longer, increasing production
capacity significantly.

Outsource production: Sometimes, your machinery might be working at its peak, but not enough to meet
consumer demand. Manufacturing businesses can increase production capacity by outsourcing the work
to a contract manufacturer to help meet demand in the short-term.

Adopt lean manufacturing practices: Lean manufacturing practices ensure that production operations
run as efficiently as possible, eliminating different forms of waste that can take place in a manufacturing
facility. As a result, all inputs go towards ensuring that machines and employees are working towards
delivering more products.

Improve equipment effectiveness: Adopting proactive machine maintenance ensures that the equipment
is always in good working condition. Consequently, there’s less machine downtime to interrupt the
production operation. By maximizing overall equipment effectiveness (OEE), businesses are able to
marginally increase production capacity.

Invest in new machinery: If your budget allows, you can obtain new machinery to increase output. This is
more feasible when the existing equipment is already working at full capacity but still doesn’t meet your
capacity requirements. These types of capex purchases are important to consider for businesses looking
to grow over longer time horizons, whereas outsourcing may be a better option for businesses looking for
a short-term fix to supply constraints as a result of seasonality, for example.

3. FACILITY LOCATION

Facility Location is the right location for the manufacturing facility, it will have sufficient access to the
customers, workers, transportation, etc.

A facility location may be defined as the place where a facility will be set up for. producing goods or
services.

There are three main types of facility layouts: process, product, and fixed-position.

Facility Location is an important factor in the supply chain that significantly impacts on the efficiency and
effectiveness of many supply networks and the organization at large. Location decisions are strategic in
character, long-term in nature, and non-repetitive in nature.
Types of Facilities

 Commercial and Institutional Sector.

The seven factors affecting a location decision in operations management are facilities, competition,
logistics, labor, community and site, political risk and incentives, according to Reference for Business.

The main objective of Facility location is to provide optimum space to organize equipment and facilitate
movement of goods and to create safe and comfortable work environment. To promote order in
production towards a single objective. To reduce movement of workers, raw material and equipment. To
promote safety of plant as well as its workers.

Key Factors in Facility Location Decision-Making

Proximity to sources of supply: Firms that process bulk raw materials usually locate close to the source
of supply to reduce transportation costs. Paper mills locate close to forests, canneries are built close to
farming areas, and fish processing plants are located close to the harbors where the fishing vessels dock.

Proximity to customers: There are several reasons why an organization would locate close to end
customers. Service firms need to be close to customers to be convenient, as is the case for grocery stores,
gas stations, fast food restaurants, and hospitals. Transportation costs can also require proximity to
customers, as in the case of concrete manufacturing. Perishable products often require that they be
produced close to the final market, as is the case for bakeries and fresh flowers.

Community factors: Communities may offer a number of incentives to entice companies, including
waiving or reducing taxes, and providing access roads, water and sewer connections, and utilities.
Community attitudes can also play a role in an organization’s location decision. Some communities may
actively discourage companies that might bring more pollution, noise, and traffic to the area. Some
communities may not want a prison to be located in their community. Other communities may welcome
such firms because of the jobs, tax revenues, and economic diversity they promise.

Labor factors: Research shows that the majority of location decisions are largely based on labor factors,
since labor is a critical variable for many firms. Labor factors include the prevailing wage rate in a
community for similar jobs, the supply of qualified workers, and the average education level of the local
population (percentage of high school graduates, etc.). Other labor factors can include the degree of union
organizing and the general work ethic of a community, as well as other measures of absenteeism, and
worker longevity in a job can play a strong role when a firm makes a location decision.

Other factors: Many other factors can play a role in the location decision, including quality of life (crime
rates, good schools, climate, and recreation options), access to major transportation arteries, construction
costs, proximity of the competition, and opportunities for future expansion.