Week 5

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5-1 Capacity Planning
Operations Management
William J. Stevenson
8th edition
5-2 Capacity Planning
CHAPTER
5
Capacity Planning
For Products and Services
McGraw-Hill/Irwin
Operations Management, Eighth Edition, by William J. Stevenson
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
5-3 Capacity Planning
Capacity Planning
Capacity is the upper limit or ceiling on the
load that an operating unit can handle.
• The basic questions in capacity handling are:
•
What kind of capacity is needed?
• How much is needed?
• When is it needed?
•
5-4 Capacity Planning
Importance of Capacity Decisions
1.
2.
3.
4.
5.
6.
7.
8.
Impacts ability to meet future demands
Affects operating costs
Major determinant of initial costs
Involves long-term commitment
Affects competitiveness
Affects ease of management
Globalization adds complexity
Impacts long range planning
5-5 Capacity Planning
Capacity
•
Design capacity
•
•
Effective capacity
•
•
maximum output rate or service capacity an
operation, process, or facility is designed for
Design capacity minus allowances such as
personal time, maintenance, and scrap
Actual output
•
rate of output actually achieved--cannot
exceed effective capacity.
5-6 Capacity Planning
Efficiency and Utilization
Efficiency =
Utilization =
Actual output
Effective capacity
Actual output
Design capacity
Both measures expressed as percentages
5-7 Capacity Planning
Efficiency/Utilization Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
Actual output
=
36 units/day
Efficiency =
= 90%
Effective capacity
Utilization =
Actual output
40 units/ day
=
Design capacity
36 units/day
50 units/day
= 72%
5-8 Capacity Planning
Determinants of Effective Capacity
Facilities
Product and service factors
• Process factors
• Human factors
• Operational factors
• Supply chain factors
• External factors
•
•
5-9 Capacity Planning
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
5-10 Capacity Planning
Key Decisions of Capacity Planning
1.
2.
3.
4.
Amount of capacity needed
Timing of changes
Need to maintain balance
Extent of flexibility of facilities
Capacity cushion – extra demand intended to offset uncertainty
5-11 Capacity Planning
Steps for Capacity Planning
1.
2.
3.
4.
5.
6.
7.
8.
Estimate future capacity requirements
Evaluate existing capacity
Identify alternatives
Conduct financial analysis
Assess key qualitative issues
Select one alternative
Implement alternative chosen
Monitor results
5-12 Capacity Planning
Make or Buy
1.
2.
3.
4.
5.
6.
Available capacity
Expertise
Quality considerations
Nature of demand
Cost
Risk
5-13 Capacity Planning
Developing Capacity Alternatives
1.
2.
3.
4.
5.
6.
Design flexibility into systems
Take stage of life cycle into account
Take a “big picture” approach to capacity
changes
Prepare to deal with capacity “chunks”
Attempt to smooth out capacity requirements
Identify the optimal operating level
5-14 Capacity Planning
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
5-15 Capacity Planning
Evaluating Alternatives
Figure 5.3
Average cost per unit
Production units have an optimal rate of output for minimal cost.
Minimum average cost per unit
Minimum
cost
0
Rate of output
5-16 Capacity Planning
Evaluating Alternatives
Figure 5.4
Average cost per unit
Minimum cost & optimal operating rate are
functions of size of production unit.
Small
plant
Medium
plant
0
Large
plant
Output rate
5-17 Capacity Planning
Planning Service Capacity
•
Need to be near customers
•
•
Inability to store services
•
•
Capacity and location are closely tied
Capacity must be matched with timing of
demand
Degree of volatility of demand
•
Peak demand periods
5-18 Capacity Planning
Cost-Volume Relationships
Amount ($)
Figure 5.5a
T
os
lc
o ta
T
VC
t=
a
ari
lv
a
t
o
+F
bl
C
t (V
os
ec
C)
Fixed cost (FC)
0
Q (volume in units)
5-19 Capacity Planning
Cost-Volume Relationships
Figure 5.5b
Amount ($)
ue
en
ev
r
l
ta
To
0
Q (volume in units)
5-20 Capacity Planning
Cost-Volume Relationships
Figure 5.5c
Amount ($)
ue
en
fit
v
Pro
re
l
ta
st
co
To
t al
o
T
0
BEP units
Q (volume in units)
5-21 Capacity Planning
Break-Even Problem with Step Fixed Costs
Figure 5.6a
FC
FC
FC
T
C=
+V
C=
+V
C=
+V
TC
TC
3 machines
C
2 machines
1 machine
Quantity
Step fixed costs and variable costs.
5-22 Capacity Planning
Break-Even Problem with Step Fixed Costs
Figure 5.6b
$
BEP
3
TC
BEP2
TC
3
TC
2
TR 1
Quantity
Multiple break-even points
5-23 Capacity Planning
Assumptions of Cost-Volume Analysis
1.
2.
3.
4.
5.
6.
One product is involved
Everything produced can be sold
Variable cost per unit is the same regardless
of volume
Fixed costs do not change with volume
Revenue per unit constant with volume
Revenue per unit exceeds variable cost per
unit
5-24 Capacity Planning
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.
5-25 Capacity Planning
Calculating Processing Requirements
Standard
processing time
per unit (hr.)
Product
Annual
Demand
Processing time
needed (hr.)
#1
400
5.0
2,000
#2
300
8.0
2,400
#3
700
2.0
1,400
5,800
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