Capacity and Forecasting - Analysis of Capacity Utilization - Research Paper Example

Vice President of Operations A.N. Consultant Capa and Forecasting Report Introduction Capa planning and capa utilization goes hand in hand. According to Inman (n.d.) capacity planning is the process that is utilized in order to decide how much capacity is required, and when the capacity is required to manufacture more products or to begin producing a new product. Capacity utilization on the other hand is the extent to which an enterprise uses its installed production capacity. It is the efficiency with which the factors of production are being used (Wikipedia 2011b). EMC may experience capacity problems in future and so it is critical that a decision be made soon on how to resolve such problems, should they occur in future. Too much capacity is just as bad as too little. According to Wikipedia (2011a), excess capacity can drain a firm’s resources and prevent investments in projects that are more profitable. Insufficient capacity on the other hand could lead to unsatisfied customer demands. Analysis of capacity utilization The information presented indicates that capacity utilization at EMC is 92% with varying rates of utilization in different processes. The graph in Figure 1 below provides a visual illustration of the range of utilization rates for different processes. Figure 1 The graph indicates that plastic molding has the highest utilization rate and blanking machine the lowest. It is uncertain as to how the 92% was arrived at. However, it is a high utilization rate which suggests that an increase in demand by 10 to 15 percent may not be easily met on a 40 hour week shift. Only plastic molding and finishing processes are above 80% capacity utilization machine, assembly and packaging is below that level. Before deciding on whether additional capacity is required the capacity available should be determined. It does not appear as if the Bill Morton has worked out what levels of production can be achieved from the capacity available. According to Wikipedia (2011b.) in order to determine how much capacity is required to manufacture a quantity of goods the standard cycle time should first be multiplied by the number of parts and then divided by the process’ overall equipment effectiveness. When that information is received then it will be much easier to determine any additional capacity that is required. There seem to be a bottleneck situation in molding and finishing. According to Goldman (n.d.) your bottleneck operation should never stop, it should be kept running during coffee breaks and lunch breaks. The impact of forecasts on future capacity needs According to Walonick (1993) a forecast is designed to assist in planning and making decisions in the present. However, regardless of the methods used there is no way to predict the future with certainty. Forecast could either suggest that we have more or less capacity than is required. If the forecast suggest that we need a higher level of capacity then this may mean that additional investments may have to be made in terms of space and equipment. It may also mean additional staff would have to be employed. However, there are a number of things that can be done in the short term until there is convincing information that an increase in demand is long term. Overtime work could be introduced on a regular basis, temporary contract workers could be employed or another shift could be introduced. While the things that can be done to increase capacity in the short term are relatively inexpensive, increasing capacity by building additional space is very costly if it is not fully utilized. EMC should be careful not to rush to permanently increase its capacity as there is a level of uncertainty in forecasting. Implications of incorrect forecasts There are two ways in which a forecast could possibly be incorrect. A forecast may suggest that more space as well as machinery and labor are required or it could possibly state that less of these elements are required. Incorrect forecasts could lead to unnecessary investments. Making new investments in factory space and equipment is very costly and could affect EMC’s profit levels as the firm would have invested in space and equipment that it does not need. Whether or not they are being used, they still represent a cost to the company as these funds could have been invested in other projects. On the other hand if demand outstrips what the firm is able to supply even by increasing the number of shifts it means that there will be unsatisfied customers. Possible ways of increasing capacity According to Inman (n.d.), the easiest and most commonly used method of increasing capacity in the short term is by working overtime. Inman (n.d.) also indicates that other alternatives are available when overtime does not provide sufficient capacity. They include: adding shifts; employing temporary workers; floating workers; leasing workers; and subcontracting facilities. Additionally, buffer stocks could be put in place ahead of demand and certain processes could be redesigned to increase productivity at work stations (Inman n.d.). Furthermore, in the long term additional investments could be made in factory space and equipment and more labor could be employed to run these equipment. Short and long term implications for increasing capacity In the short term overtime working or shift working could be implemented at EMC. However, in the long term EMC could consider obtaining additional factory space and machinery. In the short term the machinery may be overworked and there could be frequent breakdowns. This would further affect EMC’s ability to fulfill its demand requirements. Any decision should take into consideration the contribution of each of EMC’s products to the firm’s gross margin. The short term forecast for the Plasti-brack product line indicates that the annual increase will be lower (between 7% and 10%) than the overall annual increase of 12.5%. If demand continuous at the same rate this would work out to between 40 and 61% annual compound growth over the next five years for the Plasti-brack products. This is between 20 and 41% less than the average growth rate of 80% of all of EMC’s products. This implies that the demand for some of the firm’s products may well be in excess of 100% and would further indicate that some additional machines and more factory space may be required in the long run if EMC is to continuing satisfying the demands of its customers. Plan to alleviate capacity situation in Plasti-brack product In order to alleviate the capacity situation with the Plasti-brack product the company should use overtime labor in the short term. When and if this proves to be insufficient shift working could be introduced. Bottlenecks in certain processes should be managed by working continuously. If it is later proved that there is sustained level of demand for the products that EMC manufactures and increasing the number of shifts to the maximum number possible will not be able to satisfy demand then increasing plant capacity and buying more machine will be considered as a reasonable alternative. However, based on the projections for the Plasti-brack products there is no need for an increase in factory space or additional machinery. Any bottlenecks in molding and finished goods should be managed by staggering lunch time and breaks for workers in molding and finished goods so that the process keeps going. This will prevent build up in the other process areas. EMC should ensure that the machines are adequately maintained to prevent break down. It should also be noted that, if it is important to EMC to be able accommodate emergency orders then excess capacity would be appropriate (Inman n.d.). Justification based on concepts of capacity management In the short term increasing economies of scale can be gained at EMC by allowing overtime work. This method is very flexible and inexpensive as it foregoes the expense of hiring, training and paying additional benefits (Inman n.d.). EMC should be able to use its current capacity to accommodate the 7 to 10% projected increase in demand for Plasti-brack products this year. This increase may not need any excess overtime working except when there are a few spurts in demand. However, in the long term it may be more economical to invest in new factory space and more efficient machines to produce goods. This is so as machines should not be allowed to run continuously for long hours as they may be subject to increased breakdowns. Additionally, Inman (n.d.) suggests that insufficient capacity can lead to deterioration in delivery performance, unnecessary increases in work-in-progress, and frustration among the persons in manufacturing while excess capacity can be quite costly and unnecessary. References Goldman, A. (n.d.). Eliminating Bottlenecks. Retrieved on 23rd Sept 2011 from: http://www.gaebler.com/Eliminating-Bottlenecks.htm Inman, R.A. (n.d.). Capacity Planning. Retrieved on 22nd Sept 2011 from: http://www.enotes.com/management-encyclopedia/capacity-planning Walonick, D.S. (1993). An Overview of Forecasting Methodology. Retrieved on 22nd Sept 2011 form: http://www.statpac.org/research-library/forecasting.htm Wikipedia. (2011a). Capacity Planning. Retrieved on 23rd Sept 2011 from: Wikipedia. (2011b). Capacity Utilization. Retrieved on 23rd Sept 2011 from: http://en.wikipedia.org/wiki/Capacity_utilization Read More