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Copyright © 2014 by McGraw-Hill Education (Asia). All rights reserved.
55
Capacity Planning
For Products and Services
5-2
Learning ObjectivesLearning Objectives
Explain the importance of capacity planning. Discuss ways of defining and measuring
capacity. Describe the determinants of effective
capacity. Discuss the major considerations related to
developing capacity alternatives. Briefly describe approaches that are useful
for evaluating capacity alternatives
5-3
Capacity PlanningCapacity Planning Capacity is the upper limit or ceiling on the
load that an operating unit can handle. Capacity also includes
Equipment Space Employee skills
Key questions in capacity planning: What kind of capacity is needed? How much is needed? When is it needed?
5-4
1. Impacts ability to meet future demands2. Affects operating costs3. Major determinant of initial costs4. Involves long-term commitment5. Affects competitiveness6. Affects ease of management7. Globalization adds complexity8. Impacts long range planning
Importance of Capacity DecisionsImportance of Capacity Decisions
5-5
CapacityCapacity
Design capacity maximum output rate or service capacity an
operation, process, or facility is designed for
Effective capacity Design capacity minus allowances such as
personal time, maintenance, and scrap
Actual output rate of output actually achieved—cannot
exceed effective capacity
5-6
Efficiency and UtilizationEfficiency and Utilization
Actual outputEfficiency =
Effective capacity
Actual outputUtilization =
Design capacity
Both measures expressed as percentages
5-7
Actual output = 36 units/day Efficiency = =
90% Effective capacity 40 units/ day
Utilization = Actual output = 36 units/day =
72% Design capacity 50 units/day
Example 1Example 1
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
5-8
Determinants of Determinants of Effective CapacityEffective Capacity
Facilities Product and service factors Process factors Human factors Policy factors Operational factors Supply chain factors External factors
5-9
Strategy FormulationStrategy Formulation
Capacity strategy for long-term demand Demand patterns Growth rate and variability Facilities
Cost of building and operating
Technological changes Rate and direction of technology changes
Behavior of competitors Availability of capital and other inputs
5-10
Key Decisions of Key Decisions of Capacity PlanningCapacity Planning
1. Amount of capacity needed Capacity cushion (100% - Utilization)
2. Timing of changes
3. Need to maintain balance
4. Extent of flexibility of facilities
Capacity cushion – extra demand intended to offset uncertainty
5-11
Steps for Capacity PlanningSteps for Capacity Planning
1. Estimate future capacity requirements
2. Evaluate existing capacity
3. Identify alternatives
4. Conduct financial analysis
5. Assess key qualitative issues
6. Select one alternative
7. Implement alternative chosen
8. Monitor results
5-12
Forecasting Capacity Forecasting Capacity RequirementsRequirements
Long-term vs. short-term capacity needs Long-term relates to overall level of capacity
such as facility size, trends, and cycles Short-term relates to variations from
seasonal, random, and irregular fluctuations in demand
5-13
Calculating Processing Requirements Calculating Processing Requirements (Example 2)(Example 2)
P r o d u c tA n n u a l
D e m a n d
S t a n d a r dp r o c e s s i n g t i m e
p e r u n i t ( h r . )P r o c e s s i n g t i m e
n e e d e d ( h r . )
# 1
# 2
# 3
4 0 0
3 0 0
7 0 0
5 . 0
8 . 0
2 . 0
2 , 0 0 0
2 , 4 0 0
1 , 4 0 0 5 , 8 0 0
P r o d u c tA n n u a l
D e m a n d
S t a n d a r dp r o c e s s i n g t i m e
p e r u n i t ( h r . )P r o c e s s i n g t i m e
n e e d e d ( h r . )
# 1
# 2
# 3
4 0 0
3 0 0
7 0 0
5 . 0
8 . 0
2 . 0
2 , 0 0 0
2 , 4 0 0
1 , 4 0 0 5 , 8 0 0
If annual capacity is 2000 hours, then we need three machines to handle the required volume: 5,800 hours/2,000 hours = 2.90 machines
5-14
Need to be near customers Capacity and location are closely tied
Inability to store services Capacity must be matched with timing of
demand
Degree of volatility of demand Peak demand periods
Planning Service CapacityPlanning Service Capacity
5-15
In-House or OutsourcingIn-House or Outsourcing
1. Available capacity
2. Expertise
3. Quality considerations
4. Nature of demand
5. Cost
6. Risk
Outsource: obtain a good or service from an external provider
5-16
Developing Capacity AlternativesDeveloping Capacity Alternatives 1. Design flexibility into systems
2. Take stage of life cycle into account
3. Take a “big picture” approach to capacity changes Bottleneck operations
4. Prepare to deal with capacity “chunks”
5. Attempt to smooth out capacity requirements
6. Identify the optimal operating level
7. Choose expansion strategy
Bottleneck OperationFigure 5.2
Machine #2Machine #2BottleneckOperation
BottleneckOperation
Machine #1Machine #1
Machine #3Machine #3
Machine #4Machine #4
10/hr
10/hr
10/hr
10/hr
30/hr
Bottleneck operation: An operationin a sequence of operations whosecapacity is lower than that of theother operations
5-18
Bottleneck OperationBottleneck Operation
Operation 120/hr.
Operation 210/hr.
Operation 315/hr.
10/hr.
Bottleneck
Maximum output ratelimited by bottleneck
5-19
Economies of ScaleEconomies of Scale
Economies of scale If the output rate is less than the optimal level,
increasing output rate results in decreasing average unit costs
Diseconomies of scale If the output rate is more than the optimal
level, increasing the output rate results in increasing average unit costs
5-20
Optimal Rate of Output
Minimumcost
Ave
rag
e co
st p
er u
nit
0 Rate of output
Production units have an optimal rate of output for minimal cost.
Figure 5.4
Minimum average cost per unit
5-21
Economies of ScaleEconomies of Scale
Minimum cost & optimal operating rate are functions of size of production unit.
Av
era
ge
co
st
per
un
it
0
Smallplant Medium
plant Largeplant
Output rate
Figure 5.5
5-22
Evaluating AlternativesEvaluating Alternatives
Cost-volume analysis Break-even point (BEP)
Financial analysis Cash flow Present value
Decision theory Waiting-line analysis Simulation
5-23
Cost–Volume RelationshipsCost–Volume Relationships
Am
ou
nt
($)
0Q (volume in units)
Total cost = VC + FC
Total variable cost (V
C)
Fixed cost (FC)
Figure 5.6A
5-24
Cost–Volume RelationshipsCost–Volume Relationships
Am
ou
nt
($)
Q (volume in units)0
Total r
evenue
Figure 5.6B
5-25
Cost–Volume RelationshipsCost–Volume Relationships
Am
ou
nt
($)
Q (volume in units)0 BEP units
Profit
Total r
even
ue
Total cost
Figure 5.6C
5-26
Break-Even Problem with Step Break-Even Problem with Step Fixed CostsFixed Costs
Quantity
FC + VC = TC
FC + VC = TC
FC + VC =
TC
Step fixed costs and variable costs
1 machine
2 machines
3 machines
Figure 5.7A
5-27
Break-Even Problem with Step Break-Even Problem with Step Fixed CostsFixed Costs
$
TC
TC
TCBEP2
BEP3
TR
Quantity
1
2
3
Multiple break-even points
Figure 5.7B
5-28
1. One product is involved2. Everything produced can be sold3. Variable cost per unit is the same
regardless of volume4. Fixed costs do not change with volume5. Revenue per unit is constant with
volume6. Revenue per unit exceeds variable
cost per unit
Assumptions of Assumptions of Cost–Volume AnalysisCost–Volume Analysis
5-29
Financial AnalysisFinancial Analysis
Cash Flow: the difference between cash received from sales and other sources, and cash outflow for labor, material, overhead, and taxes.
Present Value: the sum, in current value, of all future cash flows of an investment proposal.
5-30
Decision TheoryDecision Theory
Helpful tool for financial comparison of alternatives under conditions of risk or uncertainty
Suited to capacity decisions See Chapter 5 Supplement
3-31
Operations StrategyOperations Strategy
Capacity planning has strategic implications Could constrain subsequent operations
decisions Flexibility allows for agility Capacity expansion strategies:
Expand early Wait-and-see
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