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3aunit-5 Capacity Planning
3aunit-5 Capacity Planning
Capacity Planning
For Products and
Services
McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
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
5-2
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?
5-3
Importance of Capacity Decisions
5-4
Capacity
Design capacity
maximum output rate or service capacity an
operation, process, or facility is designed for
Effective capacity
Design capacity minus allowances such as
personal time, maintenance, and scrap
Actual output
rate of output actually achieved--cannot
exceed effective capacity.
5-5
Efficiency and Utilization
Actual output
Efficiency =
Effective capacity
Actual output
Utilization =
Design capacity
5-6
Efficiency/Utilization Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
5-7
Determinants of Effective
Capacity
Facilities
Product and service factors
Process factors
Human factors
Policy factors
Operational factors
Supply chain factors
External factors
5-8
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
5-9
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
5-10
Steps for Capacity Planning
1. Estimate future capacity requirements
2. Evaluate existing capacity
3. Identify alternatives
4. Conduct financial analysis
5. Assess key qualitative issues
6. Select one alternative
7. Implement alternative chosen
8. Monitor results
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
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AA nn nn uu aa l l pp r roo ccee ssssi ni n gg t ti mi m ee PP r roo ccee ssssi ni n gg t ti mi m ee
PP r roo dd uu cct t DD ee mm aa nn dd pp ee r r uu nn i ti t ( (hh r r. .) ) nn ee ee dd ee dd ( (hh r r. .) )
## 11 44 00 00 55 . .00 22 , ,00 00 00
## 22 33 00 00 88 . .00 22 , ,44 00 00
## 33 77 00 00 22 . .00 11 , ,44 00 00
55 , ,88 00 00
If annual capacity is 2000 hours, then we need three machines to handle the
required volume: 5,800 hours/2,000 hours = 2.90 machines
5-13
Planning Service Capacity
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
5-14
In-House or Outsourcing
Outsource: obtain a good or service
from an external provider
1. Available capacity
2. Expertise
3. Quality considerations
4. Nature of demand
5. Cost
6. Risk
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 Operation
Figure 5.2 Bottleneck operation: An operation
in a sequence of operations whose
10/hr capacity is lower than that of the
Machine
Machine #1
#1 other operations
10/hr
Machine
Machine #2
#2 Bottleneck
Bottleneck 30/hr
Operation
Operation
Machine
Machine #3
#3 10/hr
Machine
Machine #4
#4 10/hr
5-17
Bottleneck Operation
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
Figure 5.4
Production units have an optimal rate of output for minimal cost.
Average cost per unit
Minimum
cost
0 Rate of output
5-20
Economies of Scale
Figure 5.5
Minimum cost & optimal operating rate are
functions of size of production unit.
Average cost per unit
Small
plant Medium
plant Large
plant
0 Output rate
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
Figure 5.6a
FC
+
Amount ($)
VC C)
=t t (V
co
s
cos
tal e l
o ab
T ari
l v
o ta
T
Fixed cost (FC)
0
Q (volume in units)
5-23
Cost-Volume Relationships
Figure 5.6b
ue
en
Amount ($)
ev
r
t al
To
0
Q (volume in units)
5-24
Cost-Volume Relationships
Figure 5.6c
u e
e n f i t
Amount ($)
e v r o
r P
al t
t o s
To t a l c
To
0 BEP units
Q (volume in units)
5-25
Break-Even Problem with Step
Figure 5.7a Fixed Costs
C =
+ V
FC
C TC
C =T
+V
FC 3 machines
T C
C =
V
+ 2 machines
FC
1 machine
Quantity
Step fixed costs and variable costs.
5-26
Break-Even Problem with Step
Figure 5.7b
Fixed Costs
$
BEP
3
TC
BEP2
TC
3
TC
2
TR 1
Quantity
Multiple break-even points
5-27
Assumptions of Cost-Volume
Analysis
1.One product is involved
2.Everything produced can be sold
3.Variable cost per unit is the same
regardless of volume
4.Fixed costs do not change with volume
5.Revenue per unit constant with volume
6.Revenue per unit exceeds variable cost
per unit
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
Decision Theory
Helpful tool for financial comparison of
alternatives under conditions of risk or
uncertainty
Suited to capacity decisions
See Chapter 5 Supplement
5-30
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
5-31