5-1 Capacity Planning

Operations Management

William J. Stevenson

8th edition

5-2 Capacity Planning

CHAPTER

Capacity Planning For Products and Services

McGraw-Hill/Irwin

Operations Management, Eighth Edition, by William J. Stevenson Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

5-3 Capacity Planning

Capacity Planning

Capacity is the upper limit or ceiling on the load that an operating unit can handle. The basic questions in capacity handling are:

What kind of capacity is needed? How much is needed? When is it needed?

5-4 Capacity Planning

Importance of Capacity Decisions

1. 2. 3. 4. 5.

6.
7. 8.

Impacts ability to meet future demands Affects operating costs Major determinant of initial costs Involves long-term commitment Affects competitiveness Affects ease of management Globalization adds complexity Impacts long range planning

5-5 Capacity Planning

Capacity

Design capacity

maximum output rate or service capacity an operation, process, or facility is designed for Design capacity minus allowances such as personal time, maintenance, and scrap

Effective capacity

Actual output

rate of output actually achieved--cannot exceed effective capacity.

5-6 Capacity Planning

Efficiency and Utilization

Actual output

Efficiency =

Effective capacity
Actual output

Utilization =
Design capacity
Both measures expressed as percentages

5-7 Capacity Planning

Efficiency/Utilization Example

Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 units/day

Actual output

36 units/day = 90% 40 units/ day = 36 units/day 50 units/day = 72%

Efficiency =
Effective capacity

Utilization =

Actual output Design capacity

5-8 Capacity Planning

Determinants of Effective Capacity

Facilities Product and service factors Process factors ( output quality ) Human factors Operational factors ( late delivery for the raw materials ) Supply chain factors External factors

5-9 Capacity Planning

Key Decisions of Capacity Planning

1. 2. 3. 4.

Amount of capacity needed Timing of changes Need to maintain balance Extent of flexibility of facilities

Capacity cushion extra demand intended to offset uncertainty

5-10 Capacity Planning

Steps for Capacity Planning

1.
2. 3. 4. 5.

6.
7. 8.

Estimate future capacity requirements Evaluate existing capacity Identify alternatives Conduct financial analysis Assess key qualitative issues Select one alternative Implement alternative chosen Monitor results

5-11 Capacity Planning

Make or Buy

1. 2. 3. 4.

5.
6.

Available capacity Expertise Quality considerations Nature of demand Cost Risk

5-12 Capacity Planning

5-13 Capacity Planning

5-14 Capacity Planning

5-15 Capacity Planning

5-16 Capacity Planning

A manager must decide which type of equipment to buy , type A or type B. type A equipment costs $15000 each and type B costs $ 11000. the equipment can be operated 8 hours a day ,250 days a year. Either machine can be used to perform two types of chemical analysis C1 and C2 annual service requirement and processing times are shown in the following table .which type of equipment should be purchased and how many of that type will be need ? The goal is to minimize total purchase cost.

5-17 Capacity Planning

Processing time per Processing time per analysis ( HR) analysis ( HR) Analysis type C1 C2 Annual volume 1200 900 A 1 3 B 2 2

Total processing time ( annual volume processing time per analysis ) needed by type of equipment.

Analysis type C1 C2

A 1200 2700 3900

B 2400 1800 4200

5-18 Capacity Planning

Total processing time available per price of equipment is 8 hours/day 250 days/year =2000 Hence , one piece can handle 2000 hours of analysis ,two pieces of equipment can handle 4000 hours and so on. Given the total processing requirement two of type A would be needed for a total cost of 2 15000=30000 or three of type B for a total cost of 3 11000=33000 thus two pieces of type A would have sufficient capacity to Handle the load at lower cost than three of type B

5-19 Capacity Planning

Developing Capacity Alternatives

1. 2. 3.

Design flexibility into systems Take stage of life cycle into account Take a big picture approach to capacity changes Prepare to deal with capacity chunks Attempt to smooth out capacity requirements Identify the optimal operating level

4. 5. 6.

5-20 Capacity Planning

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 If the output rate is more than the optimal level, increasing the output rate results in increasing average unit costs

Diseconomies of scale

5-21 Capacity Planning

Planning Service Capacity

Need to be near customers

Capacity and location are closely tied Capacity must be matched with timing of demand Peak demand periods

Inability to store services

Degree of volatility of demand

5-22 Capacity Planning

Assumptions of Cost-Volume Analysis

1.
2. 3.

4. 5. 6.

One product is involved Everything produced can be sold Variable cost per unit is the same regardless of volume Fixed costs do not change with volume Revenue per unit constant with volume Revenue per unit exceeds variable cost per unit

5-23 Capacity Planning

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.

5-24 Capacity Planning

A department works one eight hour shift ,250 days a year, and has these figures for usage of a machine that is being considered :
Annual Demand Standard processing time per unit (hr.)

Product

#1 #2 #3

400 300 700

5.0 8.0 2.0

5-25 Capacity Planning

Calculating Processing Requirements

Annual Demand Standard processing time per unit (hr.) Processing time needed (hr.)

Product

#1 #2 #3

400 300 700

5.0 8.0 2.0

2,000 2,400 1,400 5,800

5-26 Capacity Planning

Annual capacity =8 250=2000 Number of machines required =5800 2000=2.9