From the software editor: A New Column for APICS -- The Performance Advantage This month, APICS -- The Performance Advantage introduces this new column, "Back to Basics," which will focus on the basics of production and inventory control practice. The style will be simple, direct and short (each article will run about 1,000 words), and each installment will be jam-packed with useful information. This series reflects a Vince Lombardi approach to production and inventory control -- that is, a recognition that success often comes not from the newest technology but rather from doing the basics well. In short, this series is based on the DTDTR concept -- Doing The Dumb Things Right. The need for this type of column was made clear at APICS '96 in New Orleans. Many of the best-attended sessions were those that dealt with basics. For example, Bill Wassweiler of the J.D. Edwards Company, noted that his session on Bill of Material Structure and Accuracy was packed to overflowing. To many, there seemed to be a real thirst for material on the basics. After we tested the concept for this column through an informal survey on the MFG-INFO mailing list on the Internet (where it received overwhelming support), the idea was accepted by publisher John Llewellyn and editor Greg Farley, and the column was born. The target for the column is the practitioner. Its intent is to identify and discuss the basics of production and inventory control. Among the topics to be covered will be capacity, inventory management, bottlenecks, rules of expediting, stockroom accuracy, lot sizing basics, and cycle counting. For some readers, this column will be a first introduction to the topics; for others, the column will be a review. This column will be managed by R.T. "Chris" Christensen of the University of Wisconsin at Madison. Chris is the director of the executive education program at Wisconsin. He brings to this column an extensive amount of real world and teaching experience. He has developed a national reputation for identifying and putting on informative and well structured seminars. Many of these seminars focus on basics. These and other traits make him the ideal candidate for this column. -- Steve Melnyk, Software Editor

By R.T. "Chris" Christensen

You would be amazed to learn how many companies have problems scheduling their manufacturing operations. They seem to be stuck in a mind-set that states "If we have idle equipment or labor, then we can accept more work." So more work is released to the shop. However, rather than increasing output, such a strategy usually results in output remaining constant or falling. Frustration increases. In these plants, the major problem is that management does not understand capacity or has an incomplete or inaccurate understanding of it.

If we are to address this problem, it is important that we understand the concept of capacity and why it is so important to production and inventory control (PIC) practice.

Let's begin with a simple observation. To build a part, we need information (routings, product structure, quantities, timings and the such), material and capacity. Of these various elements, capacity is often the most critical. In many instances, we reduce the various activities found in most PIC systems to being no more than variations on capacity planning, management and control. Scheduling, for example, can be regarded as being a capacity management issue. If we manage and measure capacity well, then we can enhance the ability of our shop to build orders in the quantity required, at the time demanded and to the levels of quality desired by our customers at acceptable levels of cost.


To understand capacity . . .
However, capacity is a manufacturing contradiction. Every PIC person has had contact with capacity, yet few are able to understand the various elements associated with capacity that make it so inherently complex and difficult. To understand capacity and resolve the problem identified at the start of this column, we must first begin by defining capacity and then looking at capacity at a micro (work center) level before exploring it at the shop level.

Capacity exists at two different levels: strategic and tactical. At the strategic level, capacity is what the shop or work center can and cannot do. At the tactical level (which is the focus of this column) capacity can be defined as the level of output per unit of time. This definition identifies several important traits of capacity. First, capacity is always measured in terms of time. For example, I tell you that there were two work centers that produced 5,000 units. This information is either meaningless or potentially confusing. Why? But, what if the first work center could produce 5,000 units in 24 hours while the second could produce this number in 120 hours. Then we could see that the work centers are different.

Time is also important when discussing capacity because capacity is finite with respect to time and it cannot be stored. This last fact is something that is very familiar to every restaurant, bank or similar service operation. If you have seats available and unused at 10:00 in the morning, you cannot take that unused capacity and store it until you need it for peak traffic. Capacity that is not used during a period of time is gone. In some senses, we can look at inventory as being a form of stored capacity. When we build inventory, we convert the capacity into product which can be then used to meet demand during these peak periods.


Two sides to every story
When dealing with capacity, we must also deal with two different sides of capacity. The first is capacity based on resources. A work center can consist of a machine that is available 24 hours a day, 7 days a week. It can also consist of a worker who operates the equipment. Finally, it can also consist of the various tooling that is needed to allow the equipment to process the various orders that pass through it. Each has different levels of availability. Each also defines a type of capacity. For the work center, the resource capacity is often defined by the limiting resource. For example, if the machine is available 24 hours a day but operated for one eight-hour shift, then the capacity of the work center is based on the operator resource capacity.

The second type of capacity is defined in terms of output -- the number of pieces produced by the work center. This definition is the one more frequently used in planning. The amount that is produced is often difficult to calculate because it reflects the impact of product mix (the greater the variety of products produced, the less output because of the need to setup when going from one product to another), the nature of the products being built (well-established products should consume less capacity than either prototypes or products that are relatively new), operator experience and capabilities, amount of work from preceding work centers (we could be idle because the preceding work centers have not produced enough material for us to process), maintenance of the equipment (creating opportunities for break-downs), and problems with material and/or tooling. These factors often contribute to situations in which a work center can produce more in one period than in another. They also contribute the volatility frequently associated with capacity.


Types of capacity
This discussion forces us to deal with the issues of how we measure capacity. Here, again, we have several different types of capacity that we must always recognize.

There are three measures of capacity.

1. Maximum capacity. This is the maximum amount that a work center can produce. It defines the upper limit on output. We previously noted that capacity is finite. That is, we have a set amount of capacity (the upper limit we now see is the maximum capacity). We use this capacity to satisfy various needs -- running orders, maintenance, setup or idle time. Because capacity is finite, to increase one component of capacity usage means decreasing the usage somewhere else. If we increase setups, then we can expect one or more of the other components to fall (for example, capacity used for processing, idle capacity or capacity set aside for maintenance).

2. Effective capacity. This is the amount of capacity that we plan for. Typically, effective capacity is expressed as a percentage of maximum capacity. For example, we might state effective capacity as being 75 percent of maximum. This leads to an interesting and important question -- why would we plan for less than 100 percent capacity utilization. The answer is that we might want to plan for this unused capacity so that we might improve the performance of our equipment (running equipment at 100 percent might create operating problems and unplanned breakdowns), have safety capacity available for unexpected orders, or to provide time for preventive maintenance.

3. Demonstrated capacity. This is the level of output that we actually get. While maximum and effective capacity are used for planning (that is, they are before the fact), demonstrated capacity is observed after the implementation of the plan (that is, after the fact).


What's the point?
Why collect these three measures of capacity? The answer is that they tell us a lot about what is happening and the types of problems that we are facing.

For example, if demonstrated capacity is less than effective capacity, then this state tells us that we are not producing as much as we planned for. We do not have a problem with the availability of capacity, but rather with how it is used.

Another example: The problem could be with the job mix or it could lie in the rate at which work is coming to us from the preceding work centers. However, if demonstrated capacity exceeds effective capacity planning and is beginning to approach maximum capacity, we can see that we are now approaching the problem of not having enough capacity. We must now try to find out why.

At this point, we are faced by an important consideration: How do we measure capacity?

We'll take up that question in the second part of this column. Look for it here in February.

Let's review To summarize the lessons of capacity as presented in this column: Capacity is one of three basic requirements for production (the others being information and material). Capacity exists at two levels: strategic (capabilities) and tactical (units of output per period of time). Capacity can be measured either in terms of resources or in terms of output, with the output perspective frequently being the desired form. Capacity is finite with respect to time; it cannot be stored. At any point in time, capacity can be used for production, setup or maintenance, or it can be idle. To increase one area of use demands that we increase one or more of the other areas. Capacity can be measured in terms of maximum, effective and demonstrated. Comparisons between these help us identify the nature and source of potential problems.

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