Facility Capacity
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Overview
Facility Planning
Long-Range Capacity Planning
Facility Location
Facility layout
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Capacity Planning
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Definitions of Capacity
In general, production capacity is the maximum
production rate of an organization. Eg. 1lakh cars per
month, 1000 barrels of oil produced in a month, 100
customers served per day etc.
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Measurements of Capacity
Output Rate Capacity
For a facility having a single product or a few
homogeneous products, the unit of measure is
straightforward (barrels of beer per month)
For a facility having a diverse mix of products, an
aggregate unit of capacity must be established
using a common unit of output (sales dollars per
week, litres of juice produced)
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Measurements of Capacity
Input Rate Capacity
Commonly used for service operations where
output measures are particularly difficult
Hospitals use available beds per month
Airlines use available seat-miles per month
Movie theatres use available seats per month
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Facility Capacity Planning
HOW MUCH capacity is needed ( long range,
medium and short range)
WHEN additional capacity is needed
WHERE is the capacity needed
How to achieve the required capacity
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Capacity planning
Long term ( time frame -greater than 1 year)
Medium term ( less than a year)
Short tem ( days to few months)
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Steps in the Capacity Planning Process
Estimate the capacity of the present facilities.
Forecast the future ( long term/ medium term/short
term) capacity needs.
Identify and analyze sources of capacity to meet these
needs.
Select from among the alternative sources of capacity.
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Long-Term Capacity planning options
( in case of need for greater capacity)
Subcontract with other companies
Acquire other companies, facilities, or resources
Develop sites, construct buildings, buy equipment
Expand, update, or modify existing facilities
Reactivate standby facilities
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Reduction of Long-Term Capacity
Sell off existing resources, lay off employees
Mothball facilities, transfer employees
Develop and phase in new products/services
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Short – medium Term capacity changes
Inventories
Customer order backlogs
Hire or fire
Overtime
Employee training and utilization
Process design
Sub-contracting ( getting part of the work done from
outside)
Maintenance
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Economies of Scale
Best operating level - least average unit cost
Economies of scale - average cost per unit decreases
as the volume increases toward the best operating
level
Diseconomies of scale - average cost per unit
increases as the volume increases beyond the best
operating level
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Economies and Diseconomies of Scale
Average Unit
Cost of Output ($)
Economies Diseconomies
of Scale of Scale
Best Operating Level
Annual Volume (units)
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Example: King Publishing
Break-Even Analysis
King Publishing intends to publish a book in
residential landscaping. Fixed costs are Rs125,000
per year, variable costs per unit are Rs32, and selling
price per unit is Rs42.
A) What is the cost of producing 1000 pcs.What is
the per unit cost? What is the profit? B)What is the
cost of producing 20,000 pcs. What is the per unit
cost? What is the profit? C) How many units must be
sold per year to break even??
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Example: King Publishing
Break-Even Analysis
A) What is the cost of producing 1000 pcs.What is the
per unit cost? What is the profit?
Cost = Rs125,000 + (32*1000)=157000
Per unit cost=157000/1000= 157 rs
Profit= (42*1000)-157000= loss of 115000
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Example: King Publishing
Break-Even Analysis
B)What is the cost of producing 20,000 pcs. What is the
per unit cost? What is the profit?
Cost = Rs125,000 + (32*20000)=765000
Per unit cost=765000/20000= 38.25 rs
Profit= (42*20000)-765000=75000 profit
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Example: King Publishing
Break-Even Analysis
C)Profit =0
0 = pQ – (FC + vQ)
= 42(x) – [125,000 + 32(x)]
= 10x – 125,000
x = 125000/10=12500 units
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Example: King Publishing
Break-Even Analysis
D) What variable cost per unit would result in $100,000
annual profits if annual sales are 20,000 units?
P = pQ – (FC + vQ)
100,000 = 42(20,000) – [125,000 + v(20,000)]
100,000 = 840,000 – 125,000 – 20,000v
20,000v = 615,000
v = Rs30.75
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