ww.free-powerpoint-templates-design.com
STRATEGIC CAPACITY PLANNING
FOR PRODUCTS AND SERVICES
http://www.free-powerpoint-templates-design.com
CAPACITY
01
INTRODUCTION
- An upper limit or ceiling on
the load that an operating unit
can handle
02
• The load may be in terms of the
number
of physical
units
produced or number of services
performed.
• The operating unit might be a
plant, department, machine,
store, or worker
03
04
• Capacity
needs
include
equipment,
space,
and
employee skills
•
01
INTRODUCTION
The goal of strategic capacity planning is to
achieve a match between the long-term supply
capabilities of the organization and the
predicted long-term demand.
02
03
• Overcapacity causes operating costs
to be high.
• Under capacity causes
strained
resources and possible loss of
customers
• Key Questions in Capacity Planning
1. What kind of capacity is needed?
2. How much is needed to match
demand?
3. When is it needed?
CAPACITY DECISION IS STRATEGIC
1
Capacity
decisions
have a real
impact on the
ability of the
organization
to meet future
demands for
products and
services
2
3
4
5
Capacity
decisions
affect
operating
costs
Capacity is
usually a
major
determinant
of initial cost
Capacity
decisions
often involve
a long-term
commitment
of resources
Capacity
decisions can
affect
competitiveness
CAPACITY DECISION IS STRATEGIC
6
Capacity
affects the
ease of
management
7
Globalization
has increased
the
importance
and
complexity of
capacity
decisions
8
It is
necessary to
plan capacity
decisions in
advance
Defining and Measuring Capacity
Two Useful Definition of Capacity
Design Capacity
• Maximum output rate or service
capacity an operation, process,
or facility is designed for.
• The maximum designed service
capacity or output rate.
Availability of Inputs
• Measure of capacity.
Effective Capacity
• Design capacity minus
allowances such as
personal time ,
maintenance and scrap.
Actual Output
• Rate of output actually
achieved which cannot
exceed effective capacity.
Defining and Measuring Capacity
❖ Different measures of capacity are useful in defining two measures of
system effectiveness: efficiency and utilization
Capacity Utilization
Efficiency
The ratio of actual
output to design
capacity
The ratio of actual
output to effective
capacity
Efficiency = Actual Output
Effective Capacity
X 100%
Utilization =
Actual Output
Design Capacity
X 100%
Determinants of Effective Capacity
FACILITIES
➢The design of faciltiies, including size and provision for
expansion, is key.
➢Location factors, such as transportation costs, distance
market, labor supply, energy sources and room expansion
are also important
➢Layout of the work area and environmental factors also
play a significant role.
Determinants of Effective Capacity
PRODUCT AND SERVICE FACTORS
➢Product and service design can have a tremendous influence on
capacity.
➢The ore uniform the output, the more opportunities there are for
standardization of methods and materials
Determinants of Effective Capacity
PROCESS FACTORS
➢The quantity capability of a process is an obvious determinant of
capacity but subtle determinant is the influence of output capacity.
➢Process improvement that increase quality and productivity can
result in increased capacity.
Determinants of Effective Capacity
HUMAN FACTORS
➢The tasks that make up a job, the variety of activities involved,
also the training, skill and experience required to perform a job
all have an impact on the potential and actual output.
➢Employee motivation has a very basic relationship to capacity,
as do absenteeism.
Determinants of Effective Capacity
POLICY FACTORS
➢Management policy can affect capacity by allowing or not
allowing capacity options such as overtime or second ot third
shifts.
Determinants of Effective Capacity
OPERATIONAL FACTORS
➢Inventory stocking decisions, late deliveries, purchasing
requirements, acceptability of purchased materials, quality
inspection and control procedures also have an impact on
effective capacity
Determinants of Effective Capacity
SUPPLY CHAIN FACTORS
➢It must be taken into account in capacity planning if substantial
capacity changes are involved.
EXTERNAL FACTORS
➢Product standards, especially minimum quality and performance
standards, can restrict management options for increasing
capacity
Strategy Formulation
• An organization typically base its capacity
strategy on assumption and predictions
about
long-term
demand
patterns,
technological changes, and the behavior of
its competitors
Key Decisions of Capacity Planning
❖The amount of capacity needed
❖The timing of changes
❖The need to maintain balance throughout the
system
❖The extent of flexibility of facilities and the
workforce.
Strategy Formulation
Capacity Cushion
which is an amount
capacity in excess of
expected demand when
there is some
uncertainty about
demand
❖ The greater the degree of demand
uncertainty, the greater the amount of
cushion used.
• Deciding on the amount
of capacity involves
consideration of
expected demand and
capacity cost
Strategy Formulation
Steps in the Capacity Planning
Process
Estimate future capacity requirements
Evaluate existing capacity and facilities and
identify gaps.
Identify alternatives for meeting requirements.
Conduct financial analyses of each
alternative.
Assess key qualitative issues for each
alternative.
Select the alternative to pursue that will be
best in the long term.
Implement the selected alternative.
Monito results.
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.
• Shirt-term related to variations from seasonal, random, and irregular fluctuation
in demand
Calculating Process REquirements
• The task of determining capacity requirements should not be taken lightly.
• Substantial losses can occur when there are misjudgments on capacity needs.
The Challenge of Planning Service Capacity
• Three Important Factors:
✓ The need to be near customers
✓ The inability to store service
✓ The degree of volatility
DO IT IN-HOUSE OR OUTSOURCE IT?
FACTORS:
Available Capacity
• If
the
organization
has
available
equipment,
necessary skills, and time, if
often makes sense to produce
an item or perform a service
in-house.
• The additional cost would be
relatively small compared with
those required to buy items or
subcontract services.
Expertise
• If a firm lacks the expertise to
Content
Here do the job satisfactory, buying
might
be
alternative
Content
Here
a
reasonable
DO IT IN-HOUSE OR OUTSOURCE IT?
FACTORS:
Quality Considerations
• Firm that specializes can
usually offer higher quality
than an organization that can
attain itself.
• Conversely, unique quality
requirements or the desire to
closely monitor quality may
cause an organization to
perform a job itself
The Nature of Demand
• When demand for an item is
and
steady,
the
organization is often better off
doing the work itself.
Content
Content
Here high
Here
DO IT IN-HOUSE OR OUTSOURCE IT?
FACTORS:
Costs
• Any cost savings achieved from
buying or making must weighed
against the preceding factors.
• Cost savings might come from the
item itself or from transportation cost
savings.
• If there are fixed cost associated with
making an item that cannot be
reallocated if the service or product
outsourced, that has to recognized in
the analysis.
Risk
• Outsourcing may involved
certain risks.
Content
Here• One is loss of control over
operations.
is the need to
Content• Another
Here disclosed
proprietary
information.
DEVELOPING CAPACITY STRATEGIES
1. Design flexibility into system
• The long-term nature of many capacity decisions
and the risks inherent in long-term forecasts
suggests potential benefits from designing
flexible systems.
• Other considerations in flexible design involve
the layout of equipment, location, equipment
selection, production planning, scheduling, and
inventory policies.
DEVELOPING CAPACITY STRATEGIES
2. Take stage of life cycle into account
• Capacity requirements are often closely linked to
the stage of the life cycle.
Introduction
Growth
Maturity
Decline
DEVELOPING CAPACITY STRATEGIES
3. Take a “big picture” approach to capacity
changes.
• When developing capacity alternatives, it is
important to consider how parts of the system
interrelate.
• Evidence of an unbalanced system is the
existence of a bottleneck operation
• Bottleneck Operation is an operation in a
sequence of operations whose capacity is lower
than the capacities of other operations in the
sequence.
• The capacity of the bottleneck operation limits
the system capacity.
DEVELOPING CAPACITY STRATEGIES
4. Prepare to deal with capacity “chunks”
• No machine comes in continuous capacities
5. Attempt to smooth out capacity
requirements
• Unevenness in capacity requirements also can
create certain problems.
DEVELOPING CAPACITY STRATEGIES
6. Identify the optimal operating level
• Production units typically have an ideal or
optimal level of operation in terms of unit cost of
output.
• Economies of Scale. If the output rate is less
than the optimal level, increasing the 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.
DEVELOPING CAPACITY STRATEGIES
o Reasons for Economies of Scale:
1. Fixed costs are spread over more units,
reducing the fixed cost per unit.
2. Construction costs increase at a decreasing
rate with respect to the size of the facility to be
built.
3. Processing costs decrease as output rates
increase because operations become more
standardized, which reduces unit costs.
DEVELOPING CAPACITY STRATEGIES
o Reasons for Disconomies of Scale:
1. Distribution costs increase due to traffic
congestion and shipping from one large
centralized facility instead of several smaller,
decentralized facilities.
2. Complexity increases costs, control and
communication become more problematic.
3. Inflexibility can be an issue.
4. Additional levels of bureaucracy exist, slowing
decision making and approvals for change.
DEVELOPING CAPACITY STRATEGIES
7. Choose a strategy if expansion is involved
• Consider whether incremental expansion or
single step is more appropriate.
• Factors include competitive pressures, market
opportunities, costs and availability of funds,
disruption
of
operations,
and
training
requirements.
CONSTRAINT MANAGEMENT
Constraint
Something that limits the performance of a process or system
in achieving its goals.
Steps in Resolving Constraints Issues
1.Identify the most pressing constraint.
2.Change the operation to achieve the maximum benefit, given the
constraint.
3.Make sure other portions of the process are supportive of the
constraint
4.Explore and evaluate ways to overcome the constraint.
5.Repeat the process until the level of constraints may be an option
EVALUATING ALTERNATIVES
Cost-Volume Analysis
• Focuses on relationship between cost, revenue, and volume of output.
• The purpose is to estimate the income of an organization under
different operating conditions.
• Useful tool for comparing capacity alternatives
Fixed Cost
Variable Cost
• Remain constant
regardless of the volume of
output.
• Vary directly with volume of
output
Indifference Point
• The quantity at which a
decision maker would be
indifferent between two
competing alternatives
Break-even Point
• The volume of output at
which total cost and total
revenue are equal
EVALUATING ALTERNATIVES
FINANCIAL ANALYSIS
Use to rank investment proposals,
taking into account the
04 time value of
money.
02
Cash Flow
The difference between cash
received from sales and other
sources and the cash outflow for
labor, materials, overhead, and
taxes.
01
03
Present Value
Expresses in current value
the sum of all future cash
flows of an investment
proposal
Most commonly used methods of financial analysis:
Payback focuses on the length of
time it will take for an investment
to return its original cost
Present Value summarizes the
initial cost of an investment, its
estimated annual cash flows, any
expected salvage value in a
single value called equivalent
current value
Internal
Rate
of
Return
summarizes the initial cost,
expected annual cash flows, and
estimated future salvage value of
an investment proposal in an
equivalent interest rate
EVALUATING ALTERNATIVES
Decision Theory
Waiting Line Analysis
• helpful tool for financial
comparison of alternatives
under conditions of risk or
uncertainty
• Useful for designing or
modifying service systems.
• Involves identifying a set of
possible future conditions
that could influence results,
listing alternative courses of
action, and developing a
financial outcome for each
alternative-future condition
combination
• Useful in helping managers
choose a capacity level that
will be cost-effective through
balancing the cost of having
customers wait with the cost
of
providing
additional
capacity
Simulation
• Useful tool in evaluating
what-if scenarios.
THANK YOU
Stevenson, W. J. (2021).Operations management. 14th edition. McGraw-Hill