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Learning Objectives
1. Understand the concept of capacity and how
important it is to “manage” capacity.
2. Explain the impact of economies of scale of a firm.
3. Determine capacity requirements.
4. Understand how to use decision trees to analyze
alternatives when faced with the problem of adding
capacity.
5. Describe the differences in planning capacity
between manufacturing firms and service firms.
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Capacity Management in Operations
Capacity: the ability to hold, receive, store, or
accommodate
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Capacity Planning Time Durations
Long range
• Greater than one year (acquiring buildings, equipment, Strategic
facilities)
Intermediate range
Short range
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Strategic Capacity Planning
Determining the overall level of capital-intensive
resources that best supports the company’s long- Strategic
range competitive strategy.
Facilities/Buildings
Equipment/Machinery
Capacity level has high impact on the firm’s response rate, its
cost structure, inventory policies
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Capacity Utilization
Capacity utilization rate
Reveals how well a firm is using its potential capacity
Ratio of capacity used to Best operating level
Best operating level: capacity level for which the
process was designed (the output level at which average
unit cost is minimized)
Capacity used
Capacity utilization rate=
Best Operating Level
If the capacity utilization rate is high (close to 100%), the firm is
operating at “full capacity”
If this rate is low, a situation of "excess capacity" exists
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Example
http://www.youtube.com/watch?v=9SiNowSrUPs
Question 1:
Luxury cakes produces 750 cakes per week, their capacity
being 1200 cakes per week. What is their capacity
utilization?
Question 2:
Using the following information, comment on the effect
on increasing output to 900 cakes per week.
Price: 10 £
Fixed cost: 4000£
Variable cost: 5 £
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Economies of Scale
Economies of scale: the cost advantages that
businesses obtain as they increase their size
As a plant gets larger, and volume increases,
the average cost per unit drops, because:
1. Fixed cost per unit drops
www.masonmyers.com
2. Lower Operating and capital costs*
3. Labor becomes more specialized
Specialization economies of scale: division of labor is possible (workers need
to focus on less tasks so they become efficient)
4. Technical economies of scale: Larger companies can make savings by investing
in more efficient operations (ex: IT systems, better distribution system by
delivering in bulk)
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Diseconomies of Scale
Diseconomies of scale is the opposite of economies of scale and happen
when the plant becomes too large and exceeds the needs of the company,
which results in production of goods and services at higher cost per unit.
The reasons are:
The company needs high demand volume to keep the
large facility busy (to maintain a high demand the firm
may be forced to do many discounts so profit decreases)
Larger costs to maintain equipment (Ex: M&M Mars)
Control: It is more difficult to control and monitor
workers in a larger company
Communication is slower in large companies (messages www.investopedia.com
get lost), & coordination is week between functions
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Capacity Planning Concepts
Capacity Focus
The idea that a production facility works best when it is
concentrated on a limited set of production objectives
Focused factory or plant within a plant (PWP) concept.
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Considerations in Changing Capacity
Maintaining System Balance
• Outsourcing
• Sharing capacity (e.g. airlines companies sharing same planes)
Decreasing Capacity
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Planning Service Capacity
Manufacturing Service
Capacity Capacity
Capacity must be available
Goods can be stored for later
when service is needed –
use
cannot be stored
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Determining Capacity
Requirements
Project labor and
Use forecasting to Calculate labor
equipment
predict sales for and equipment
availability over
individual requirements to
the planning
products meet forecasts
horizon
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Example 4.1: Determining Capacity Requirements
Stewart Company produces two flavors of salad
dressing: Paul’s and Newman’s
Each is available in bottles and single-serving bags
Forecast for the next 5 years is given in the next
slide
The company has:
3 machines that can package 150 000 bottles each
year (2 operators / machine)
5 machines that can package 250 000 bags per year
(3 operators/machine)
What are the capacity and labor requirements for the 17
Determining Capacity
Requirements
Step 1:Use forecasting to predict Year
sales for individual products
1 2 3 4 5
Year
Step 1.1: Calculate Total
product line forecasts 1 2 3 4 5
60+75 100+200 18
Determining Capacity Requirements
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Determining Capacity Requirements
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Conclusions – present situation
Plastic bags operations
Max. capacity utilization is 94% (year 5), which might be
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Homework Exercises
Capacity requirement: 4,5,6,7 pg. 111
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Thank you.
Your Questions?
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