Capacity Planning

When you complete this supplement, you should be able to :

Describe or Explain:

01. Capacity considerations

02. Net Present Value
03. Break Even Analysis
04. Financial Consideration
05. Strategies-Driven Investment
Capacity

● The Throughput, or the number of units a facility can hold, receive, store, or
produce in a period of time
● Determine fixed costs
● Determine bif demand will be satisfied
● Three time horizon
Planning Over a time Horizon
Design and Effective Capacity

Design capacity is the maximum theoretical output of a system

Normally expressed as a rate

Effective capacity is the capacity a firm expects to achieve given current operating
contrants

Often lower than design capacity

Utilization is the percent of design capacity achieved

Utilization = Actual Output / Design Capacity

Efficiency is the percent of effective capacity achieved

Efficiency = Actual Output / Effective capacity

Wallet Example
Actual production last week = 170,000 wallets
Effective capacity = 185,000 wallets
Design capacity = 1,250 wallets per hour
Wallet operates 7 day/ week, 4 shift, 8 hour

Design capacity = (7 x 4 x 8 ) x (1,250) = 350,000 wallets

Utilization = 170,000/350,000 = 50%
Efficiency = 170,000/185,00 = 91.8%
Wallet Example
Actual production last week = 170,000 wallets

Effective capacity = 185,000 wallets

Design capacity = 1,250 wallets per hour

Wallet operates 7 day/ week, 4 shift, 8 hour

Efficiency = 91.8%
Efficiency of new line = 80%

Expected Output = (effective capacity) (efficiency)

= (185,000)(.80) = 148,000 wallets

Capacity and Strategy

● Capacity decisions impact all 10 decisions of operations management as well

as other functional areas of the organization
● Capasity decisions must be integrated into the organization’s mission and
strategy
 Managing Demand

Demand Exceeds capacity

Curtail demand by raising prices,

Long term solution is to increase capacity
scheduling longer liad time

Capacity Exceeds Adjusting to seasonal demands

capacity
Stimulate market Product changes Produce product with
complimentary demand patterns
Economies and Diseconomies of scale
Capacity Considerations

1. Forecast demand accurately

2. Understanding the technology and capacity increments
3. Find the optimal operating level (volume)
4. Build for change
 Tactics for matching capacity to demand

Making staffing changes Improving methods to increase throughput

Adjusting equipment and process

● Purchasing additional machinery
Redesigning the product to
● Selling or leasing out existing equipment facilitate more throughput
Complementary Demand Patterns
Approaches to capacity Expansion
Approaches to capacity Expansion
Approaches to capacity Expansion
Approaches to capacity Expansion
Approaches to capacity Expansion
Break Even Analysis

● Technique for evaluating process and equipment alternatives

● Objective is to find the point in dollar and unit at wich cost equals revenue
● Requires estimation of fixed costs, variable costs, and revenue
Break Even Analysis
Fixed costs are costs that
continue even if no units are
produced
● Depreciation, taxes,
debt, mortgage
payments
Variable costs are costs that
vary with the volume of units
produced
● Labor, materials, portion
of utilities
● Contribuions is the
difference between selling
price and variabel cost
Break even Analysis

Costs and revenue are linear We actually know these costs

functions
● Very difficult to accomplish
● Generally niot the case in
the real world

There is no time value of money

Break Even Analysis
Break Even Example

The break-even point occurs :

Break Even Example

Fixed costs = $8,500 Material = $.90/unit

Direct labor = $2.00/unit Selling Price = $5.00 per unit

F $8,500
BEP $ = =
1- (V/P) 1- [(2.00/.90) / (5.00)]
$8,500
= = $20,238.09
.42

F $8,500
BEP x =
= = 4,047
1- (V/P) 5.00- (2.00 + .90)
Break Even Example
 Break Even Example

where

F = fixed cost
Vi = variable cost per unit for product i

Pi i Pi = price per unit for product i

Wi = percentage of total dollar sales for product i

Multiproduct Example
Multiproduct Example
Multiproduct Example
Decision tree and capacity Decision
Strategy-driven Investment

Operation may be responsible Analysing capacity alternatives

for return on investment (ROI) should included capital investment variable
costs, cash flows, and net present value
Net Present Value
Net Present Value Factor
Net Present Value of a anuity