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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
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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
The basic questions in capacity handling are: What kind of capacity is needed? How much is needed? When is it needed?
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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
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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.
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Efficiency and UtilizationEfficiency and Utilization
Actual outputEfficiency =
Effective capacity
Actual outputUtilization =
Design capacity
Both measures expressed as percentages
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Actual output = 36 units/day Efficiency = =
90% Effective capacity 40 units/ day
Utilization = Actual output = 36 units/day =
72% Design capacity 50 units/day
Efficiency/Utilization ExampleEfficiency/Utilization Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
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Determinants of Effective Determinants of Effective CapacityCapacity
Facilities Product and service factors Process factors Human factors Policy factors Operational factors Supply chain factors External factors
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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
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Key Decisions of Capacity Key Decisions of Capacity PlanningPlanning
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
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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
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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
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Calculating Processing Calculating Processing RequirementsRequirements
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
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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
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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
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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
4.Prepare to deal with capacity “chunks”
5.Attempt to smooth out capacity requirements
6.Identify the optimal operating level
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Bottleneck OperationBottleneck 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
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Bottleneck OperationBottleneck Operation
Operation 120/hr.
Operation 210/hr.
Operation 315/hr.
10/hr.
Bottleneck
Maximum output ratelimited by bottleneck
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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
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Optimal Rate of Output
Minimumcost
Av
era
ge
co
st
per
un
it
0 Rate of output
Production units have an optimal rate of output for minimal cost.
Figure 5.4
Minimum average cost per unit
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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
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Evaluating AlternativesEvaluating Alternatives
Cost-volume analysis Break-even point
Financial analysis Cash flow Present value
Decision theory Waiting-line analysis
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Cost-Volume RelationshipsCost-Volume Relationships
Am
ou
nt
($)
0Q (volume in units)
Total cost = VC + FC
Total variable cost (V
C)
Fixed cost (FC)
Figure 5.6a
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Cost-Volume RelationshipsCost-Volume Relationships
Am
ou
nt
($)
Q (volume in units)0
Total r
evenue
Figure 5.6b
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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
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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 constant with volume6.Revenue per unit exceeds variable cost
per unit
Assumptions of Cost-Volume Assumptions of Cost-Volume AnalysisAnalysis
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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.
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Decision TheoryDecision Theory
Helpful tool for financial comparison of alternatives under conditions of risk or uncertainty
Suited to capacity decisions
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Waiting-Line AnalysisWaiting-Line Analysis
Useful for designing or modifying service systems
Waiting-lines occur across a wide variety of service systems
Waiting-lines are caused by bottlenecks in the process
Helps managers plan capacity level that will be cost-effective by balancing the cost of having customers wait in line with the cost of additional capacity
Location Planning and Analysis
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Learning ObjectivesLearning Objectives
List some of the main reasons organizations need to make location decisions.
Explain why location decisions are important. Discuss the options that are available for location
decisions. Describe some of the major factors that affect
location decisions. Outline the decision process for making these
kinds of decisions. Use the techniques presented to solve typical
problems.
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Need for Location DecisionsNeed for Location Decisions
Marketing Strategy
Cost of Doing Business
Growth
Depletion of Resources
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Nature of Location DecisionsNature of Location Decisions
Strategic Importance of location decisions Long term commitment/costs Impact on investments, revenues, and operations Supply chains
Objectives of location decisions Profit potential No single location may be better than others Identify several locations from which to choose
Location Options Expand existing facilities Add new facilities Move
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Making Location DecisionsMaking Location Decisions
Decide on the criteria Identify the important factors Develop location alternatives Evaluate the alternatives
Identify general region Identify a small number of community
alternatives Identify site alternatives
Evaluate and make selection
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Location Decision FactorsLocation Decision Factors
Regional Factors
Site-related Factors
Multiple Plant Strategies
Community Considerations
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Location of raw materials Location of markets Labor factors Climate and taxes
Regional FactorsRegional Factors
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Quality of life Services Attitudes Taxes Environmental regulations Utilities Developer support
Community ConsiderationsCommunity Considerations
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Land Transportation Environmental Legal
Site Related FactorsSite Related Factors
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Product plant strategy Market area plant strategy Process plant strategy
Multiple Plant StrategiesMultiple Plant Strategies
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Service and Retail LocationsService and Retail Locations
Manufacturers – cost focused Service and retail – revenue focused
Traffic volume and convenience most important Demographics
Age Income Education
Location, location, location Good transportation Customer safety
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Comparison of Service and Comparison of Service and Manufacturing ConsiderationsManufacturing Considerations
Manufacturing/Distribution Service/Retail
Cost Focus Revenue focus
Transportation modes/costs Demographics: age,income,etc
Energy availability, costs Population/drawing area
Labor cost/availability/skills Competition
Building/leasing costs Traffic volume/patterns
Customer access/parking
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Trends in LocationsTrends in Locations
Foreign producers locating in U.S. “Made in USA” Currency fluctuations
Just-in-time manufacturing techniques Microfactories Information Technology
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Global LocationsGlobal Locations
Reasons for globalization Benefits Disadvantages Risks Global operations issues
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GlobalizationGlobalization
Facilitating Factors Trade agreements Technology
Benefits Markets Cost savings Legal and regulatory Financial
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GlobalizationGlobalization
Disadvantages Transportation costs Security Unskilled labor Import restrictions Criticisms
Risks Political Terrorism Legal Cultural
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Foreign Government
a. Policies on foreign ownership of production facilities Local Content Import restrictions Currency restrictions Environmental regulations Local product standards Liability laws
b. Stability issues
Cultural Differences
Living circumstances for foreign workers / dependents Religious holidays/traditions
Customer Preferences
Possible buy locally sentiment
Labor Level of training and education of workers Work ethic Possible regulations limiting number of foreign employees Language differences
Resources Availability and quality of raw materials, energy, transportation infrastructure
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Evaluating LocationsEvaluating Locations
Cost-Profit-Volume Analysis Determine fixed and variable costs
Plot total costs
Determine lowest total costs
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Location Cost-Volume AnalysisLocation Cost-Volume Analysis
Assumptions Fixed costs are constant Variable costs are linear Output can be closely estimated Only one product involved
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Example 1: Cost-Volume AnalysisExample 1: Cost-Volume Analysis
Fixed and variable costs for four potential locations
L o c a t i o n F i x e dC o s t
V a r i a b l eC o s t
ABCD
$ 2 5 0 , 0 0 01 0 0 , 0 0 01 5 0 , 0 0 02 0 0 , 0 0 0
$ 1 13 02 03 5
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Example 1: SolutionExample 1: Solution
F i x e dC o s t s
V a r i a b l eC o s t s
T o t a lC o s t s
ABCD
$ 2 5 0 , 0 0 01 0 0 , 0 0 01 5 0 , 0 0 02 0 0 , 0 0 0
$ 1 1 ( 1 0 , 0 0 0 )3 0 ( 1 0 , 0 0 0 )2 0 ( 1 0 , 0 0 0 )3 5 ( 1 0 , 0 0 0 )
$ 3 6 0 , 0 0 04 0 0 , 0 0 03 5 0 , 0 0 05 5 0 , 0 0 0
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Example 1: SolutionExample 1: Solution
800700600500400300200100
0
Annual Output (000)
$(000)
8 10 12 14 166420
A
BC
B SuperiorC Superior
A Superior
D
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Evaluating LocationsEvaluating Locations
Transportation Model Decision based on movement costs of raw
materials or finished goods
Factor Rating Decision based on quantitative and
qualitative inputs
Center of Gravity Method Decision based on minimum distribution
costs
