Chapter 5 Capacity
What is Capacity?
The upper limit or ceiling on the load that an operating unit can handle.
Ex:Can’t take more work than you can handle
3 Basic Questions for capacity planning
1. What kind of capacity is needed?
2. How much is needed?
3. When is it needed?
Capacity Decisions are Strategic (GOALS)
Impacts ability to meet future demands (Increase number of employees if capacity is low)
Affects operating costs (Increase capacity correlates with imp
Major determinant of initial costs (Start ups)
Involves long-term commitment (Hire Full time, Payments, don’t know for next season)
Affect competitiveness (Don’t increase capacity clients will go to another business as for line)
Effects ease of management (Easy or hard to manage the capacity, work smoothly)
Globalization adds complexity (Offshoring) (adds complexity to small companies)
Impacts long range planning (Risk for long term)
Increase the capacity to keep the customers happy by keeping their orders in time
Providing enough time to employees to get high quality high efficiency
Increase Capacity when demand is higher
Maintain capacity but do not compromise customer service, work life balance, work environment
5 employ 50 Orders
?10 employ
100 Orders
Measuring capacity
Design capacity: Maximum output rate or service capacity an operation, process, or facility for
Car 5 people
40 Chairs 40 people
Maximum
Effective Capacity: Design capacity minus allowances such as personal time, maintenance, and
scrap
100 units
70 units if only black inc
5000 seats no one can sit behind keeper
4400 seats available
8 hours but change battery for 1 hour 7 hours
Actual output: Rate of output that actually achieved, cannot exceed effective capacity.
Measuring Capacity
Capacity is measured in some form of units
Measuring capacity in dollars is problematic
Due to inflation
Design changes that affect cost
Measure inputs
Efficiency and Utilization
Efficiency is a ratio of outputs to effective capacity
Utilization is a ratio of outputs to design capacity
Determinants of Effective Capacity
Facilities
Product and service design factors
Process factors
Human factors (can’t work as fast as design capacity)
Management policy factors
Operational factors
Supply chain factors
External factors like safety regulations
Strategy Formulation
Long-term demand patterns
Anticipated tech changes
Behavior of its competitors (both go up noth happens
Steps for Capacity Planning
Estimate future capacity requirements
Evaluate existing capacity
Identify alternatives
Conduct financial analysis
Assess key qualitative issues
Select one alternative
Implement alternative chosen
Monitor results
Planning Service Capacity
Need to be near customers
Capacity and location are closely tied
Inability to inventory services
Capacity must be matched with timing of demand(Peak demands)
Degree of volatility of demand
Peak demand periods
Evaluating Alternatives
Cost volume analysis
-Break even point
Financial flow
Present value
Decision theory
Waiting line analysis
Operations Strategy
Capacity planning impacts all areas of the firm
Sets conditions operations will function under
Flexibility allows a firm to be agile
Capacity expansions are important
Capacity contraction is sometimes necessary
Factors influencing capacity
Developing capacity alternatives
Evaluating alternatives
Capacity is the upper limit on the load that an operating
Importance of Capacity
●
●
●
●
●
Impacts ability to meet future demands
Affects operating costs
Major determinant of initial costs
Involves long-term commitment
Affects competitiveness
Forecast demand 1 to 5 years
Calculate capacity requirements to meet the forecasts
Measure current capacity
Decide if and how the bridged gap in capacity
Decision node ()
Chance node (Probability)
Best expected value = Decision node
20.2
EVSI greater go with consultant
EVSI is less don’t hire
Measuring capacity
Design capacity
●
Maximum obtainable output under ideal conditions (best scenario) early on when
designing
Effective capacity
● Maximum capacity given delays, product mix, scheduling difficulties, and other realities
(realistic measure of capacity) Beg. planning period
Actual output
● Rate of output actually - end of period
Efficiency
Actual distribution/ effective capacity
Utilization
Design Capacity/Efficiency capacity
Facilities have floor space and layouts
Facilities
Floor space, layout
Products or services
Limited menu in a restaurant
Human
Training, skills and experience
Planning and operational
No shifts per day, inventory, quality control
Capacity infrequency in chunks accommodate some cushion
Bottleneck
An operation in a sequence of operations whose capacity is lower than that of the other
operations
Economies and diseconomies of scale
Fixed costs (facilities, equipment, management) spread out over more units
Volume purchase discounts
Diseconomies of scale
Worker fatigue, equipment breakdown, more room for error, difficulties in coordination
Economic considerations
Economic considerations
Cost, useful life, compatibility, revenue
Non economic considerations
Public opinion, reactions from employees, community pressure
Techniques used for evaluation
1.Break Even Analysis
2.Payback Period
3.Net Present Value
Break even analysis
Formula’s
TC=Total Cost
FC=Total Fixed Cost
VC=Total Variable Cost
TR=Total Revenue
v=variable cost per unit
r=revenue per unit
Q=volume of output
Qbep=break even volume
P=profit
TC=FC+VC
VC=Qxv
TR=Qxr
P=TR-TC=Qxr-(FC+Qxv)
Qbep=FC/r-v
Break even point= Total revenue=Total cost
P=Total revenue - Total Cost
Q x r - (FC + VC)
0=Qr - (FC + Qv)
Q=FC+ QbepV
Qbep= FC/r-v
Example: Break-Even
Fixed costs=40,000
Labour costs=3/unit
Material=$1.50
Sell
Qbep=FC/R
Outsourcing =$6 per case
In sourcing FC= 14,000,000 over 10 years= $1,400,000 per year
In sourcing v=$5.5 per case
a) $14,000,000/10 years=$1,400,000 per year
b) Let Q= no. of cases of cans we need per year
Annual buying cost=$6Q
Annual making cost=$1,400,000 + $5.50Q
6Q=1,400,000 + 5.50
0.50Q=1,400,000
Qbep=2,800,000
Decision Analysis
Is suitable for a wide range of opportunities
Alternatives
EV small
Payoff Table
Alternative Low(p=0.3) Moderate (p=0.5) High(p=0.2)
Small facility 10
10
10
Meduim Facility 7
12
12
Large Facility -4
2
16
Small 0.3(10) Moderate 0.5(10) High 10(.2)
Practice Problems
Decision trees
1. Draw the decision tree
2. Assign probabilities to the status of nature
3. Estimate payoffs for each possible combination of decision alternatives and states of
nature
4. Working from right to left, calculate EV for each state of nature (circular node)
5. Choose alternative with highest EV (or lowest expected cost)
EV=.4(10,000) + .2(15,000) + 4(14,000)