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McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
5
Capacity Planning
For Products and Services
5-2
Learning 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 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?
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 Decisions
5-5
Capacity
Design capacity …
Effective capacity …
Actual output …
5-6
Efficiency and Utilization
Actual outputEfficiency =
Effective capacity
Actual outputUtilization =
Design capacity
Both measures expressed as percentages
5-7
Actual output = units/day Efficiency = =
Effective capacity units/ day
Utilization = Actual output = units/day =
Design capacity units/day
Efficiency/Utilization Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 trucks/day
5-8
Determinants of Effective Capacity
Facilities Product and service factors Process factors Human factors Policy factors Operational factors Supply chain factors External factors
5-9
Strategy 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 Capacity 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
Forecasting Capacity Requirements
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
5-12
Calculating Processing Requirements
Product
Annual
Demand
Standard processing time
per unit (hr.)
Processing time
needed (hr.)
#1
#2
#3
Total
400
300
700
5.0 8.0 2.0
Tot
If annual capacity is 2000 hours, then how many machines do we need to handle the required volume of …. ?
5-13
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 Capacity
5-14
In-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
5-15
Developing 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
5-16
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
5-17
Bottleneck Operation
Operation 120/hr.
Operation 210/hr.
Operation 315/hr.
?
Which operation is the Bottleneck operation?
Maximum output ratelimited by bottleneck
5-18
Economies 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
5-19
Optimal Rate of Output
Minimumcost
Ave
rag
e c
ost
pe
r 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
5-20
Economies of Scale
Minimum cost & optimal operating rate are functions of size of production unit.
Ave
rag
e c
ost
pe
r u
nit
0
Smallplant Medium
plant Largeplant
Output rate
Figure 5.5
5-21
Evaluating Alternatives
Cost-volume analysis Break-even point
Financial analysis Cash flow Present value
Decision theory Waiting-line analysis
5-22
Cost-Volume Relationships
Am
ou
nt
($)
0Q (volume in units)
Total cost = VC + FC
Total variable cost (V
C)
Fixed cost (FC)
Figure 5.6a
5-23
Cost-Volume Relationships
Am
ou
nt
($)
Q (volume in units)0
Tota
l revenue
Figure 5.6b
5-24
Cost-Volume Relationships
Am
ou
nt
($)
Q (volume in units)0 BEP units
Profit
Tota
l rev
enue
Total cost
Figure 5.6c
5-25
Break-Even Problem with Step Fixed 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
5-26
Break-Even Problem with Step Fixed Costs
$
FC1
FC2
FC3BEP2
BEP3
TP
Quantity
1
2
3
Multiple break-even points
Figure 5.7b
TP = (P – VC) Q
5-27
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 Analysis
5-28
Financial 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.
5-29
Waiting-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
