copyright © 2010 by the mcgraw-hill companies, inc. all rights reserved. chapter strategic capacity...
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Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
ChaptChapterer
Strategic Capacity Planning
55
Slides prepared byLaurel DonaldsonDouglas College
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
2
Define capacity, explain the importance of long-term capacity, know how to measure capacity and understand two related performance measures, and describe factors influencing effective capacity.
Describe the strategic capacity planning process in organizations, know how to forecast demand and calculate capacity requirements, and discuss major considerations for developing capacity alternatives,
Describe the break-even analysis approach for evaluating capacity alternatives, and use it to solve problems.
Define capacity, explain the importance of long-term capacity, know how to measure capacity and understand two related performance measures, and describe factors influencing effective capacity.
Describe the strategic capacity planning process in organizations, know how to forecast demand and calculate capacity requirements, and discuss major considerations for developing capacity alternatives,
Describe the break-even analysis approach for evaluating capacity alternatives, and use it to solve problems.
LO 1
LO 3
LO 2
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Outline
What is capacity?Measuring capacityFactors influencing capacityDeveloping capacity
alternativesEvaluating alternatives
3
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
LO 1
What is capacity?
The basic questions in capacity handling are:What kind of capacity is needed?How much is needed?When is it needed?
4
Capacity is the upper limit on the load that an operating unit can
handle.
Capacity is the upper limit on the load that an operating unit can
handle.
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LO 1
Importance of Long-Term Capacity
5
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LO 1
Measuring capacity
Design capacitymaximum obtainable output under ideal
conditionsEffective capacity
Maximum capacity given delays, product mix, scheduling difficulties, and other realities.
Actual outputrate of output actually achieved—cannot
exceed effective capacity.
Design capacitymaximum obtainable output under ideal
conditionsEffective capacity
Maximum capacity given delays, product mix, scheduling difficulties, and other realities.
Actual outputrate of output actually achieved—cannot
exceed effective capacity.
6
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LO 1
Common Measures of Capacity
7
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LO 1
CapacityDesign
Output ActualnUtilizatio
Capacity Effective
Output ActualEfficiency
Efficiency and Utilization
8
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LO 1
Efficiency/Utilization Example
Design capacity = 50 trucks/dayEffective capacity = 40 trucks/dayActual output = 36 units/day
9
%72units/day50
dayunits36
CapacityDesign
Output ActualnUtilizatio
%90units/day40
dayunits36
Capacity Effective
Output ActualEfficiency
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LO 1
Example: Capacity
Actual production last week = 32,000 unitsEffective capacity = 35,000 unitsDesign capacity = 250 units per hourFactory operates 7 days/week, 3 - 8 hour shifts
10
What is the design capacity for one week? Calculate the efficiency and utilization rates.
Design capacity = (7 x 3 x 8) x (250) = 42,000 units
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LO 1
Actual production last week = 32,000 unitsEffective capacity = 35,000 unitsDesign capacity = 250 units per hourFactory operates 7 days/week, 3 - 8 hour shifts
Design capacity = (7 x 3 x 8) x (250) = 42,000 units
Example: Capacity
11
Utilization = 32,000/42,000 = 76.2%
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LO 1
Actual production last week = 32,000 unitsEffective capacity = 35,000 unitsDesign capacity = 250 units per hourFactory operates 7 days/week, 3 - 8 hour shifts
Design capacity = (7 x 3 x 8) x (250) = 42,000 units
Example: Capacity
12
Utilization = 32,000/42,000 = 76.2%
Efficiency = 32,000/35,000 = 91.4%
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LO 1
Factors Influencing Capacity Facilities
Floor space, layout Products or services
Limited menu in a restaurant Human
Training, skills and experience Planning and Operational
No of shifts per day, inventory, quality control External
Pollution standards, paper work
FacilitiesFloor space, layout
Products or servicesLimited menu in a restaurant
HumanTraining, skills and experience
Planning and OperationalNo of shifts per day, inventory, quality control
ExternalPollution standards, paper work
13
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LO 1
Factors Influencing Capacity
14
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LO 2
Capacity planning process
15
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LO 2
Some Possible Growth Patterns
16
Vo
lum
eV
olu
me
Vo
lum
eV
olu
me
Vo
lum
eV
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me
Vo
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eV
olu
me
00 00
00 00
TimeTime TimeTime
TimeTime TimeTime
GrowthGrowth DeclineDecline
CyclicalCyclical StableStable
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LO 2
Product Annual Demand
Standard Processing time per unit (hr.)
Processing time needed (hr.)
#1 400 5.0 2,000
#2 300 8.0 2,400
#3 700 2.0 1,400
A department works one eight hour shift, 250 days a year, and has these figures for products, their demand, and usage of a type of machine that is currently being considered. How many machines would be needed to handle the required volume?
machines 9.22,000
1,4002,4002,000
yearper hours machine 000,22508
Calculating Capacity Requirements
17
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LO 2
Developing Capacity Alternatives
18
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LO 2
Minimum cost & optimal operating rate are functions of size of production unit.A
ve
rag
e c
os
t p
er
un
it
0
Smallplant Medium
plant Largeplant
Output rate
Optimal operating level
19
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LO 2
Economies and Diseconomies of Scale
20
Economies of scale
Diseconomies of scale
Small FacilityMedium Facility
Large Facility
Best operating
level
Output rate
Avera
ge c
ost
per
un
it
Best operating
level
Best operating
level
What makes the unit cost increase?
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LO 2
Economies and Diseconomies of ScaleEconomies of scale
Fixed costs (facilities, equipment, management) spread out over more units
Volume purchase discountsDiseconomies of scale
Worker fatigue, equipment breakdown, less room for error, difficulties in coordination
Economies of scaleFixed costs (facilities, equipment,
management) spread out over more unitsVolume purchase discounts
Diseconomies of scaleWorker fatigue, equipment breakdown,
less room for error, difficulties in coordination
21
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LO 2
Evaluating alternatives Economic considerations
Cost, useful life, compatibility, revenue Non economic considerations
Public opinion, reactions from employees, community pressure
Economic considerations Cost, useful life, compatibility, revenue
Non economic considerations Public opinion, reactions from
employees, community pressure
22
Techniques used for evaluation:a) Break Even Analysisb) Payback Periodc) Net Present Value
Techniques used for evaluation:a) Break Even Analysisb) Payback Periodc) Net Present Value
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LO 3
Break Even Analysis
23
vr
FCQ
vQFCrQTCTRP
rQTR
vQVC
VCFCTC
BEP
profit
eeven volumbreak
output of volume
unitper revenue
unitper cost variable
Revenue Total
Cost Variable Total
Cost Fixed Total
Cost Total
P
Q
Q
r
v
TR
VC
FC
TC
BEP
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LO 3
Profit
Loss
Break-Even Analysis
24
Total revenue
Total cost
Variable cost
Fixed cost
Break-even pointTotal revenue = Total cost
Am
ou
nt
($)
Q (quantity in units)
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LO 3
Example: Break-Even
25
Fixed costs = $40,000 Material = $1.50/unitLabour costs = $3/unit Selling price = $10.00 per unit
QBEP = = = 7273FC
R - VC$40,000
10.00 - (3 +1.50)
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LO 3
Example: Break-even AnalysisThe school cafeteria can make pizza for
about $.30 per slice.Cost for kitchen and labour is $200 per day
The nearby Pizza Den delivers for $9.00 per pizza (8 slices)Cost for labour reduced to $75 per day
Make or Buy?
The school cafeteria can make pizza for about $.30 per slice.Cost for kitchen and labour is $200 per day
The nearby Pizza Den delivers for $9.00 per pizza (8 slices)Cost for labour reduced to $75 per day
Make or Buy?
26
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LO 3
Break-Even Problem with Step Fixed Costs
27
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LO 3
Multiple break-even points
Multiple Break-Even Points
28
$
TC
TC
TC
TR
Quantity
1
2
3
2BEP
3BEP
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LO 3
Assumptions of Break Even Analysis
29
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LO 3
Further Financial AnalysisCash Flow
(cash received from sales and other sources) -- (cash outflow for labour, material, overhead, taxes)
Present Valuethe sum, in current value, of all future cash flows
of an investment proposal.
Cash Flow (cash received from sales and other sources)
-- (cash outflow for labour, material, overhead, taxes)
Present Valuethe sum, in current value, of all future cash flows
of an investment proposal.
30
most used methods of financial analysis:Payback periodNet present value (NPV)Internal rate of return (IRR)
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LO 1
What is Capacity?Capacity usually refers to the upper limit of:
A) inventories B) demand C) supplies D) rate of output E) finances
Ans: D Page: 141
31
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
LO 1
What is capacity?Capacity decisions are mostly long term decisions.
Ans: False Page: 141
Stating capacity in dollar amounts generally results in a consistent measure of capacity.
Ans: False Page: 142
32
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LO 1
Capacity performanceThe maximum possible output given a
product mix, scheduling difficulties, quality factors, and so on, is: A) utilization B) design capacity C) efficiency D) effective capacity E) available capacity
Ans: D Page: 142
33
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
LO 1
Capacity PerformanceEfficiency is defined as the ratio of:
A) actual output to effective capacity B) actual output to design capacity C) design capacity to effective capacity D) effective capacity to actual output E) design capacity to actual output
Ans: A Page: 143
34
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
LO 1
Capacity PerformanceUtilization is defined as the ratio of:
A) actual output to effective capacity B) actual output to design capacity C) design capacity to effective capacity D) effective capacity to actual output E) design capacity to actual output
Ans: B Page: 143
35
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Learning Checklist
Define capacity and identify some common ways it is measured.
Distinguish between efficiency and utilization and be able to calculate them.
Describe factors that influence effective capacity.
Describe the steps of the strategic capacity planning process.
Discuss major considerations for developing capacity alternatives.
Use break-even analysis to solve problems.36