STRATEGIC CAPACITY
PLANNING
CAPACITY DEFINED
• THE UPPER LIMIT OR CEILING ON THE LOAD THAT AN
OPERATING UNIT CAN HANDLE
• CAPACITY NEEDS INCLUDE
• EQUIPMENT
• SPACE
• EMPLOYEE SKILLS
5-2
CAPACITY MANAGEMENT IN OPERATIONS AND SUPPLY
CHAIN MANAGEMENT
• CAPACITY: THE ABILITY TO HOLD, RECEIVE, STORE, OR
ACCOMMODATE.
• IN BUSINESS, VIEWED AS THE AMOUNT OF OUTPUT THAT A SYSTEM IS
CAPABLE OF ACHIEVING OVER A SPECIFIC PERIOD OF TIME.
• CAPACITY MANAGEMENT NEEDS TO CONSIDER BOTH INPUTS AND
OUTPUTS.
• MANY INDUSTRIES MEASURE AND REPORT CAPACITY IN TERMS OF
OUTPUT.
• INDUSTRIES WHOSE PRODUCT MIX IS VERY UNCERTAIN, LIKE
HOSPITALS, OFTEN EXPRESS CAPACITY IN TERMS OF INPUTS.
3
CAPACITY PLANNING TIME DURATIONS
• LONG RANGE
• GREATER THAN ONE YEAR.
• INTERMEDIATE RANGE
• MONTHLY OR QUARTERLY PLANS COVERING THE NEXT 6 TO 18
MONTHS.
• SHORT RANGE
• LESS THAN ONE MONTH.
4
STRATEGIC CAPACITY PLANNING
• FINDING THE OVERALL LEVEL OF CAPACITY-INTENSIVE RESOURCES
THAT BEST SUPPORTS THE COMPANY’S LONG-RANGE COMPETITIVE
STRATEGY
• FACILITIES.
• EQUIPMENT.
• LABOR FORCE SIZE.
• CAPACITY LEVEL SELECTED HAS A CRITICAL IMPACT ON
RESPONSE RATE, ITS COST STRUCTURE, ITS INVENTORY
POLICIES, AND ITS MANAGEMENT AND STAFF SUPPORT
REQUIREMENTS.
• TOO LOW AND THE FIRM WILL LOSE CUSTOMERS AND ENCOURAGE
COMPETITORS.
• TOO HIGH AND FIRM MAY HAVE TO CUT COSTS OR UNDERUTILIZE ITS
5
CAPACITY PLANNING
QUESTIONS
• KEY QUESTIONS:
• WHAT KIND OF CAPACITY IS NEEDED?
• HOW MUCH IS NEEDED TO MATCH DEMAND?
• WHEN IS IT NEEDED?
• RELATED QUESTIONS:
• HOW MUCH WILL IT COST?
• WHAT ARE THE POTENTIAL BENEFITS AND RISKS?
• ARE THERE SUSTAINABILITY ISSUES?
• SHOULD CAPACITY BE CHANGED ALL AT ONCE, OR THROUGH SEVERAL
SMALLER CHANGES
• CAN THE SUPPLY CHAIN HANDLE THE NECESSARY CHANGES?
5-6
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
5-7
DEFINING AND MEASURING CAPACITY
• MEASURE CAPACITY IN UNITS THAT DO NOT REQUIRE UPDATING
• WHY IS MEASURING CAPACITY IN DOLLARS PROBLEMATIC?
• TWO USEFUL DEFINITIONS OF CAPACITY
• DESIGN CAPACITY
• THE MAXIMUM OUTPUT RATE OR SERVICE CAPACITY AN OPERATION, PROCESS, OR FACILITY IS
DESIGNED FOR
• EFFECTIVE CAPACITY
• DESIGN CAPACITY MINUS ALLOWANCES SUCH AS PERSONAL TIME AND MAINTENANCE, , AND
SCRAP
• ACTUAL OUTPUT
• RATE OF OUTPUT ACTUALLY ACHIEVED--CANNOT EXCEED EFFECTIVE CAPACITY.
MEASURING SYSTEM
EFFECTIVENESS & UTILIZATION
MEASURED AS PERCENTAGES
5-9
STEPS IN CAPACITY PLANNING
1. ESTIMATE FUTURE CAPACITY REQUIREMENTS
2. EVALUATE EXISTING CAPACITY AND FACILITIES; IDENTIFY GAPS
3. IDENTIFY ALTERNATIVES FOR MEETING REQUIREMENTS
4. CONDUCT FINANCIAL ANALYSES
5. ASSESS KEY QUALITATIVE ISSUES
6. SELECT THE BEST ALTERNATIVE FOR THE LONG TERM
7. IMPLEMENT ALTERNATIVE CHOSEN
8. MONITOR RESULTS
IN-HOUSE OR OUTSOURCE?
• ONCE CAPACITY REQUIREMENTS ARE DETERMINED, THE ORGANIZATION
MUST DECIDE WHETHER TO PRODUCE A GOOD OR SERVICE ITSELF OR
OUTSOURCE
• FACTORS TO CONSIDER:
• AVAILABLE CAPACITY
• EXPERTISE
• QUALITY CONSIDERATIONS
• THE NATURE OF DEMAND
• COST
• RISKS
EVALUATING CAPACITY
ALTERNATIVES
1. COST VOLUME ANALYSIS
2. FINANCIAL ANALYSIS
3. DECISION THEORY
4. WAITING LINE ANALYSIS
5-13
COST-VOLUME ANALYSIS
• COST-VOLUME ANALYSIS
• FOCUSES ON THE RELATIONSHIP BETWEEN COST, REVENUE, AND
VOLUME OF OUTPUT
• FIXED COSTS (FC)
• TEND TO REMAIN CONSTANT REGARDLESS OF OUTPUT VOLUME
• VARIABLE COSTS (VC)
• VARY DIRECTLY WITH VOLUME OF OUTPUT
• VC = QUANTITY(Q) X VARIABLE COST PER UNIT (V)
• TOTAL COST
• TC = FC + VC
• TOTAL REVENUE (TR)
• TR = REVENUE PER UNIT (R) X Q 5-14
BREAK-EVEN POINT (BEP)
• BEP
• THE VOLUME OF OUTPUT AT WHICH TOTAL COST AND TOTAL REVENUE ARE
EQUAL
• PROFIT (P) = TR – TC = R X Q – (FC +V X Q)
= Q(R – V) – FC
FC
QBEP
R v 5-15
A small firm produces and sells automotive items in a five-state area. The
firm expects to consolidate assembly of its battery chargers line at a single
location. Currently, operations are in three widely scattered locations. The
leading candidate for location will have a monthly fixed cost of $42,000 and
variable costs of $3 per charger. Chargers sell for $7 each. Prepare a table
that shows total profits, fixed costs, variable costs, and revenues for monthly
volumes of 10,000, 12,000, and 15,000 units. What is the break-even point?
FINANCIAL ANALYSIS
PRACTICE PROBLEMS
PRACTICE PROBLEMS
