What Is Capacity Planning?

What Is Capacity Planning? Planning is concerned with thinking ahead, making provision. Capacity can be referred to as the upper limit on the rate of output. Another meaning of capacity can also be to maximum rate at which a transformation system produces or processes inputs. Therefore capacity planning can be defined as the process used to determine how much capacity is needed and when it is needed, in order to manufacture greater product or being production of a new product. According to TeamQuest (www.teamquest.ocm/capacityplanning Date access 12 Feb 2010) the goal of capacity plannings would be to provide satisfactory service levels to users in a cost-effective manner. Capacity planning has become a major issue in a global environment due to the financial benefits of the efficient use of capacity plans within material requirements planning systems and other information systems. Insufficient capacity will lead to insufficient delivery performance, stress on current work-in-process, and frustrate sales personnel and those in manufacturing. However, excess capacity can be costly and unnecessary. The lack of proper capacity planning will become a barrier to the achievement of maximising performance. With regard to Natref refinery they have a constant plan ahead for the next six months where the last three months are fixed. A shortage of supply would definitely influence its ability to provide according to its estimates. The supplies need to be monitored closely due to the fact that capacity is a possible restraint, especially when there is a need for stock building. These problems are closely planned and scheduled to reduce unforeseen capacity problems. The planning is done by the shareholders of Natref namely Sasol, that holds 63.64% of the shares and Total that holds 36.36% shares. The shareholders are very closely involved with Natrefs daily operations. The levels of capacity and production rate is constantly monitored to ensure that the plant is run in an optimized way and to ensure that there are no shortage of raw materials. When doing capacity planning it is important to consider the following three steps as set out by TeamQuest (www.teamquest.ocm/capacityplanning Date access 12 Feb 2010): To follow the above mentioned steps, you can ensure that your organisation will be prepared for the future. You will have the information necessary to purchase only what you need, avoiding over-provisioning while at the same time assuring adequate service. To be able to do capacity planning it is important to understand and determine the market requirements. To be able to determine the requirements you need to understand the workloads. Before setting service/product levels, you need to determine what unit you will use to measure the incoming work. According to TeamQuest (www.teamquest.ocm/capacityplanning Date access 12 Feb 2010) the workload can be explained as a logical classification of work performed. It is useful to analyze the work done on systems in terms that make sense BOTTLENECKS What is a bottleneck? A Bottleneck is the action that occurs and causes the capacity in a certain procedure that is not fully utilized for (Operations Supply Management, Jacobs, Chase, Aquilano, 2009:165) this action, it may be time, how long it takes to complete the task or the facilities that are in process for instance dispatch places of the final product. Business Definition: Bottleneck (http://dictionary.bnet.com/definition/bottleneck.html Date of access 10 Feb 2010) An activity within an organization which has a lower capacity than preceding or subsequent activities, thereby limiting throughput. Bottlenecks are often the cause of a build-up of work in progress and of idle time, A limiting factor on the rate of an operation. A workstation operating at its maximum capacity becomes a bottleneck if the rate of production elsewhere in the plant increases throughput but at that workstation can not be increased to meet demand. An understanding of bottlenecks is important if the efficiency and capacity of an assembly line are to be increased. The techniques of fishbone charts, Pareto charts, and flow charts can be used to identify where and why bottlenecks occur. Identification of bottlenecks (Production and Operations Management, Ray Wild, 1979) There are two ways to identify bottlenecks in a system, first check whether the resource profile is correct for the given capacity and secondly make use of the knowledge of personnel in the specific layout by discussing this and finding out where they see the bottlenecks. In the process to avert and manage bottlenecks, there need to be looked at the following factors: The work that must be done and the work ethics The goal is to establish what the most economic way is, to get the work done. To standardize the method, equipment and material that is used to get the work done. Furthermore there should be established how much time a qualified worker needs to do a job of a given quality standard. It is important that this process be applied for maximum benefit to the organization. The interpretation of the layout Points that need to be looked at are the following: Cost of the handling and moving of crude oil. Utilization of labour, facilities and the space of the plant. Are there initial plans for the maximization or minimization of the layout? If equipment needs to be changed or replaced, does the plant compensate for it? Capacity planning and management thereof Effective capacity management is of utmost importance to Natref. The main goal for capacity planning is to balance the level of manufacturing to the demand of the product being manufactured. Capacity planning comes down to the following two factors: Determining the capacity needed for the manufacturing system. By developing and implementing a strategy that can be used in the existing process by applying resources in such a manner those fluctuations can supply in demand. Scheduling Because Natref is operating on a LEAN process, scheduling is of utmost importance, for example when a shutdown is planned. This means that certain activities will have to be rescheduled, for example, more completed products will have to be stored for the demand thereof during the shutdown. The ships with crude oil that have been ordered, will have to be rescheduled, because there might not be storage available at Natcos. The design and scheduling of the process flow See if the refinery process used by Natref is entailing optimal flow, in other words, is the manufacturing line in balance. All these processes are being used and implemented by Natref. What makes the situation at Natref a slightly different is that bottlenecks can not only arise in the layout, but also in the process of crude oil being provided from Durban by pipe line. Bottlenecks can also arise at the storage facility (Natcos). Refer to Annexure A for the schematic presentation on the potential bottlenecks. All the points marked A, B, C, D and E can be identified as probable bottlenecks. Because Natref itself does not have a lot of storage capacity (LEAN) for crude oil, they should act more pro-active to avoid bottlenecks in the refining and procurement stages. If bottlenecks occur during the refining process, then it should be dealt with the utmost urgency. Note to Natref At present Natrefs biggest points for bottlenecks are the procuring and shipping of ready products, because in both cases they do not have enough storage capacity. The existing shipping facility is too small and therefore a bigger shipping facility is being built to increase the tempo for road- and rail transport. This is a much cheaper option to building a storage facility at Natref, because there would be less risk due to fire hazards when product is kept in storage. Natrefs main goal is procurement of energy resources. Natref should in fact make use of its clients storage facilities and so shipping its ready-made products quicker. Relating to the procurement of crude oil, Natref should manage bottlenecks as follows for minimum risks: Advanced buying of crude oil should be scheduled that there would always be enough ships on its way, so that Natcos (storage farm at Durban) would not run out and that there would always be enough storage space. Maintenance plans for the pipe line from Natcos to Natref should be thoroughly seen through, so that continual flow of crude oil can be maintained. Maintenance should be synchronized during shutdown dates. CAPACITY PLANNING: CHANGES IN DEMAND AND SUPPLY The business environment has never been more challenging than it is right now. The speed of change in the marketplace is creating a stress on corporations to respond quickly and effectively. The foundation that is required to react to dynamic changes in supply and demand is based on understanding your supply chains capacities. Understanding and then building the infrastructure that provides the needed flexibility and speed requires an in-depth understanding of how capacity impacts your business. The impact of capacity management is felt throughout the organization, within every element of the supply chain. Supplier capacity can bring production to a standstill. Production capacity is equally important; if the capacity is not great enough to meet peak demand periods and inventory building is not properly planned, customer demand will go unfilled. Distribution capacity, both storage and throughput, ensures delivery of the right product at the right time. Transportation connects all elements of the supply chain; as such, its capacity issues are key, influencing service levels and on-time delivery performance. Change has become the rule, not the exception. The need for capacity management is measured not in years or quarters but rather in weeks and months. Changes can be brutally fast and without warning. Industry over the past two years has been hit hard with a steep slowdown of their business. Some were managing their capacity to great detail during the late 90s, with state of the art systems in place; however, these systems failed when business conditions began impacting their extended supply chains, including contract manufacturers and suppliers. With these current levels of change, dynamic measurement and planning tools have become a necessity. External as well as internal dynamics create the need for constant monitoring and adjustment of capacity levels and policies. Global economic conditions and competitors cause external pressures that challenge current business practices. From price pressures to raw material availability, organizations must be flexible enough to react quickly to these changes. Internal dynamics can be equally as disruptive. Acquisitions and partnerships as well as moves into new markets create opportunities to leverage current assets and spend capital wisely. However, without proper planning, these opportunities can become large challenges and liabilities if synergies are not exploited. No matter how well capacity planning is conducted, these decisions must periodically be revisited to make sure they are still aligned with the organizations goals. If so, they will provide the foundation to support new initiatives including collaboration throughout the extended supply chain. Management Reality: A subjective issue As every manager knows, capacity is a difficult concept to quantify. Whether its a workstations ability to process jobs or a manufacturing plants capability for a year, the answer is frequently it depends. Because of the dynamic nature of capacity and the interrelationships among different supply chain elements, capacity is forever changing. Product-mix changes, process or equipment engineering improvements, labor availability and new data management systems are only a few reasons capacity can suddenly change. The most available and, therefore, most popular measure of capacity is the past-but the past is not necessarily a good indication of the future. There is an answer. Many tools have been developed to address the dynamic nature of supply chains today. In an effort to empower managers, to allow them to plan rather than react, planning tools evaluate a variety of variables and are superior to educated guessing about where, how much and when capacity should be modified. With a scope ranging from a full view of the supply chain to a subset of the organization to a micro within the box view of a facility, there is a tool to meet any capacity management need. These tools help quantify the differences among alternatives and lead to a greater understanding of the interrelationships within a supply chain. From identifying bottlenecks, to backup suppliers, to available alternate routings, to contingency planning, the true cost and impact of decisions can be evaluated. Because all elements of the system being studied can be represented at once, sub-optimization can be avoided. Alternatives can be objectively evaluated to determine their t rue impact on a variety of performance measures, including throughput capacity, inventory levels, and cycle times, before expensive and disruptive changes are made. According to Baltzan et al. (2009:184) demand planning SCM (Supply Chain Management) software can help an organization determine capacity. An organization must determine the performance capacity level for each of its facilities. If it decides a facility will have a large amount of excess capacity, which provides the flexibility to respond to wide swings in demand, then it is choosing an effectiveness strategy. Excess capacity, however, cost money and can therefore decrease efficiency. Natref does just this, by utilising its software, swinging the throughput of its product albeit Diesel or Petrol, whenever the demand for the one product exceeds that of the other the system can rapidly change the throughput of the product needed. Competitive Advantage: Knowledge is Power Capacitys pervasive influence and the pace of change make the need for accurate knowledge and flexibility a necessity. The ability to quickly react, while making educated and informed decisions, will directly impact the health and success of your organization. It will enable you to rise above your competition, to compete based on your supply chain and the service and flexibility you can provide. In todays dynamic business environment, speed and flexibility are a necessity. From being able to quickly respond to business conditions to reacting to dramatic changes in customer demand, a disproportion of capacity can have devastating results. Too much capacity can result in low return on assets, morale damaging layoffs and expensive facility closures while too little can result in lost sales and eroding customer loyalty. Utilizing a strategic network design tool allows an organization to objectively evaluate its extended supply chain and simultaneously consider all costs and business policies. This understanding can then drive an organizations capital expenditures and strategies as they build a world-class supply chain, built to compete against any organization in the world. It can be said that from the information provided by Natref it is utilising its capacity very successful. In total Natref produces 170 000 m3 of Petrol 170 000m3 of Diesel fuel + 30 000 m3 of Diesel fuel for export markets, 110 000 m3 of Jet-Fuel (kerosene) and 25 000 t Heavy Fuel Oil for industrial use 13 000 t of Bitumen. Thus a total of 480 000m3 and 38 000t of product. The demand fluctuates constantly and Natref has to constantly stay abreast with changes. Natref are fortunate to have shareholders that have a direct input into the market that helps with its planning. TECHNIQUES TO DETERMINE LONG-TERM CAPACITY REQUIREMENTS To achieve real (effective) capacity, you must understand what is produce, need to look at both resource input and product output. As operation manager you have to ensure to view also the dimension of capacity, and that capacity must be stated relative to some period of time. This is evidence in the common distinction draw between long-range, intermediate-range, and short-range capacity planning.(Jacobs, Chase and Aquilano (2009:121-122)) According to Jacobs et al (2009:123-124) the objective of strategic capacity planning is to provide an approach for determining the overall capacity level of capital-intensive resources facilities, equipment, and overall labour force size that best support the companys long-range competitive strategy. To ensure overall capacity level the concept of best operating level must be used and at all time ensure a 100% capacity utilization rate is acquired. Capacity utilization rate is determined by the actual capacity used divided by the actual capacity it has been developing for. The % out of 100 will determined the utilization rate. When determining capacity requirements, you have to require demand for each product line, individual plant capabilities, and allocation from production: Use forecasting techniques to predict sales for individual products within each product line. Calculate equipment and labour requirements to meet product line forecasting. Project labour and equipment available over the planning horizon. (Jacobs et al (2009:121-122)) To evaluate capacity alternatives Jacobs et al (2009:131) suggests the use of a decision tree. A decision tree is a convenient way to evaluate a capacity investment decision; this does not only help to understand the problem but also finds a solution. A decision tree is a schematic model of the sequence of steps in a problem and the conditions and consequences of each step. The way forward is that a square indicates a decision point and the circles represent change events. Branches from decision point show choices available for decision maker, branches from chance events show the probabilities for occurrence. To solve the tree you work back from the end to the start of the tree, you calculate the expected values of each step, by calculating the value of each step the time and money value is important if the planning horizon is long. Example diagram of a decision tree Once the calculation is made you prune the tree by eliminating from each decision point all the branches except the one with the highest pay off. This continues until the first decision point and problems are solved. If no changes are made competitors will move in and would make expansion no longer feasible. According to an International Journal of Production Economics (2001:p215-22) in a manufacturing strategy, capacity is a structural decision category, dealing with dynamic capacity expansion and reduction relative to the long-term changes in demand levels. Sales and operation planning (SOP) is the long-term planning of production levels relative to sales within the frame work of a manufacturing planning and control system. Within the SOP, resources planning are used for determining the appropriate capacity levels in order to support the production plan. Manufacturing strategy and sales operation planning provides two perspectives on long-term capacity management, raising and treating different issues. Note to Natref: regarding best practice techniques to determine long-term capacity requirements Natref needs to: Estimate the capacity of the present facilities 115 000 barrels/day All petrol grades @ 3500 liter/minute 80% of JIA jet fuel requirements @ 2000 l/minute, and Diesel @ 4500 liters/minute With above information Natref need to establish their capacity utilization percentage and relates the actual output to output capacity and actual input use to input capacity. This will determine the efficiency of the current input and output capacity. With this a capacity cushion need to be added on to the capacity demand to allow for: greater than expected demand, demand during peak demand seasons, lower production cost, product and volume flexibility and improve quality of products and services. Forecast the long-range future capacity needs Natref need to consider the life input for the next 5 years and understand the product life cycle as it impacts capacity. Anticipate technology development and competitors action. Forecast the strategy and demand of shareholders. Ask the question what will change to the current month productions in 5 years: 170 000 m3 of Petrol 30 000 m3 of Diesel fuel for export markets 110 000 m3 Jet-fuel 25 000 t heavy fuel oil for industrial use Natref could also expand long-term capacity by: Subcontract with other companies, acquire other companies facilities and resources Expand , update or modify excising facilities When all above is done and the forecast and capacity requirements has been establish. Two approaches could be followed namely expand all at once or expand incrementally. Expand all at once build the ultimate facility now and grow into it Little risk of having to turn down business due to inadequate capacity and less interruption of production One large project cost less than few smaller projects and due to inflation, will construction cost be higher in the future Incrementally build as capacity demand grow Less risky if forecast needs to materialize and funds are not teid up in capacity for other investment possibilities Appropriate for new products May suggestion would be that after Natref has decides what strategy they want to take for the next 5 years regarding long-term capacity requirements they need to analyze more than one suggestion in a decision tree the expected value approach. The decision point would be the 5 year strategy, regarding this Natref need to determine more than one change event that will have an expected value. This will allow Natref to see all choices available for decision making and the probabilities for occurrence. When all the choices available value are calculated, Natref need to work back from the end of the tree to the start of the tree, this will allow Natref to calculated the expected value of each step and the time and money to determine the actual long-term requirements for the next 5 years. WAYS TO COUNTER LACK OF CAPACITY DURING PEAK DEMANDS/SHUTDOWNS If the goal of capacity planning is to provide satisfactory service levels to users in a cost effective manner, then the lack of capacity would be not succeeding in providing satisfactory service levels. And if capacity planning is defined as the process that is used to determine how much capacity is needed and when it is needed, in order to manufacture greater products or production of a new product, then lack of capacity is the situation where a goal is not achieved, due to some or other constraint in the process. According to a study conducted by Sylvester, Lendon and Bevan (2004:1) they prove that to continually add capacity is not a viable solution to counter the lack of capacity. In their study they needed to properly understand and manage patient flow in a hospital. This is removed from the capacity at a refinery, but the basics would still be the same. If one compare this directly to the Natref state of affairs, the assumption would be that to add capacity would not necessarily counter the lack of capacity. Natref is currently in the process of establishing another storage facility. The cost of adding this facility is very high, approximately R300 million. It is therefore not possible to constantly add capacity or storage facilities every time it seems that a lack of capacity will occur. Natref counter a lack of capacity by erecting a new storage facility, by ensuring that their estimates and planning for the given shutdown/peak period is precise. Although the product is stored periodically, to ensure that on the date of the shutdown or when the peak demand starts, it has sufficient stock to continue with the demand or supply in the additional situation, Natref should investigate the possibilities of utilising external sources of capacity. These storage facilities could include the underground tanks of the individual filling stations, and/or determining the product that will most likely be short or that needs to be stored for future use and to expand the storage of that product and less ening the storage of the product that would not be used as frequently. According to TeamQuest (www.teamquest.ocm/capacityplanning Date access 12 Feb 2010): there are five noteworthy reasons why capacity planning fails. It would also be possible to trace these reasons back and make a connection with the lack of capacity. If the planning fails the capacity would most probably fail as well. These five reasons are: 1. Imperfect data; 2. Lack of common goals; 3. Trendy versus modelling; 4. Too narrow view; 5. Flaws in the prediction method. If these five facts are taken into consideration when the capacity planning is done, it would increase the possibility of success for a project. Further there are three important considerations taken into account when adding capacity. They are: 1. Maintaining system balance; 2. Frequency of capacity; and 3. Use of external capacity. When analysing current capacity there are four basic steps that could be used to assist you: TeamQuest (www.teamquest.ocm/capacityplanning Date access 12 Feb 2010) identifies the following four steps: The first step would include comparing the measurements of any items referenced in the service level agreements with their objectives. This will indicate whether the system has adequate capacity. The second step would include checking the usage of resources. This analysis identifies highly used resources that may prove problematic at present or in the future. The third step would include looking at the resource utilisation for each workload. Determine which workloads are the major users of each resource. This will indicate the workloads that are making the greatest demands on the system resources. The fourth step is to determine where each workload is spending its time by analysing the components of response time. Allowing you to determine which system resources are responsible for the greatest portion of the response time for each workload. When measuring capacity you need to consider the following: Design capacity: the maximum output that can possibly be attained. Effective capacity: The maximum possible output given a product mix, scheduling difficulties, machine maintenance, quality factors, and so on. Actual output: the rate of output actually achieved. Measuring of System Effectiveness: Efficiency: the ratio of actual output to effective capacity Utilization the ratio of actual output to design capacity. PLAN FOR THE FUTURE: To ensure that you will be able to meet the requirements of the market in a years time, you need to do capacity planning based on the forecasted processing requirements. You need to know the expected amount of incoming work, by workload. That will allow you to calculate the optimal system configuration for satisfying service levels. Future processing requirements can come from a variety of sources. Input form management may include: Expected growth in the business Requirements for implementing new applications Planned acquisitions or divestitures to name but a few. Additional, future processing requirements may be identified from trends in historical measurements of incoming work such as orders or transactions. After system capacity requirements for the future are identified, a capacity plan should be developed to prepare for it. The first step in doing this is to create a model of the current configuration. From this starting point, the model can be modified to reflect the future capacity requirements. If the results of the model indicate that the current configuration does not provide sufficient capacity for the future requirements, then the model can be used to evaluate configuration alternatives to find the optimal way to provide sufficient capacity. When considering capacity planning there are even more issues to consider. Best practices. Since the late nineties refineries have expanded capacity significantly, production capacity has increased tremendously. As refineries got larger, it was expected that emissions would increase as well. Environmental problems have become a huge issue due to the large expansion in demand for product. Goals to achieve the environmental standards and best practices are a large part of capacity planning and production. Finding newer and better ways of producing more product and faster and cheaper. New modern techniques have challenged organisations to rethink the way they conduct business both internally and externally. To determine how efficiently and effectively their entire supply chain is managed. The petroleum refining industry has effectively embraced the software solutions to optimise the business supply chain to maximise the profit margins and create order in the chaos of numerous opportunities and challenges. The supply chain of a typical petroleum refining company involves a wide spectrum of activities, starting form crude purchase and crude transportation to refineries, refining operations, product transportation and finally delivering the product to the end user. The nature of the value chain is such that its economics are extremely complex and heavily linked. For example the process of selecting the right crude is liked not only to the transportation costs involved in delivering to the refinery, but it must take into consideration the refinery configuration, capabilities and constraints in converting the crude into products, as well as the product volume and price fluctuations. Software solutions based on Linear programming (LP) technique have emerged as leaders among various mathematical optimization techniques available to optimize the entire supply chain form crude evaluation and selection, production planning and product logistic planning Refinery planning form the foundation for the business decisions that have the biggest impact on refinery profitability. The following are plans that should be considered: Annual plans Monthly rolling plans Weekly Plans Strategic Plans Profitability improvement plans LONG TERM CAPACITY PLANNING According to the Encyclopaedia of Business, 2nd ed. The following is explained under long term capacity planning: Over the long term, capacity planning relates primarily to strategic issues. This involves the firms major production facilities. This type of planning also involves location decisions, technology and transferability of the process to other products. Long term capacity planning may evolve when short term changes in capacity are insufficient. Long term considerations relates to overall level of capacity Det