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*McGraw-Hill/Irwin*

5 Capacity Planning For Products and Services

*Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.*

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 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 1. Impacts ability to meet future demands 2. Affects operating costs 3. Major determinant of initial costs 4. Involves long-term commitment 5. Affects competitiveness 6. Affects ease of management 7. Globalization adds complexity 8. Impacts long range planning

**5-4**

Design capacity … Effective capacity … Actual output …

**5-5**

**Efficiency = Actual output Effective capacity Utilization = Actual output Design capacity**

*Both measures expressed as percentages*

**5-6**

Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 trucks/day Efficiency = Utilization = Actual output = units/day Effective capacity units/ day = Actual output Design capacity = units/day = 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**

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 Capacity cushion – extra demand intended to offset uncertainty

**5-10**

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

**5-11**

Tot Product Calculating Processing Requirements Annual Demand Standard processing time per unit (hr.) Processing time needed (hr.) #1 #2 #3 Total 400 300 700 5.0 8.0 2.0 If annual capacity is 2000 hours, then how many machines do we need to handle the required volume of …. ?

**5-12**

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

**5-13**

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

**5-14**

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

**5-15**

Figure 5.2

Machine #1 10/hr Bottleneck operation: An operation in a sequence of operations whose capacity is lower than that of the other operations Machine #2 10/hr Bottleneck Operation 30/hr Machine #3 10/hr Machine #4 10/hr

**5-16**

Which operation is the Bottleneck operation?

Operation 1 20/hr.

Operation 2 10/hr.

Operation 3 15/hr.

?

Maximum output rate limited by bottleneck

**5-17**

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

**5-18**

Figure 5.4

Production units have an optimal rate of output for minimal cost.

Minimum average cost per unit

**Minimum cost 0 Rate of output 5-19**

Figure 5.5

**Minimum cost & optimal operating rate are functions of size of production unit.**

**0 Small plant Medium plant Large plant Output rate 5-20**

Cost-volume analysis Break-even point Financial analysis Cash flow Present value Decision theory Waiting-line analysis

**5-21**

Figure 5.6a

**0 Fixed cost (FC) Q (volume in units) 5-22**

Figure 5.6b

**0 Q (volume in units) 5-23**

Figure 5.6c

**0 BEP units Q (volume in units) 5-24**

Break-Even Problem with Step Figure 5.7a

Fixed Costs

**3 machines 2 machines 1 machine Quantity Step fixed costs and variable costs.**

**5-25**

Break-Even Problem with Step Fixed Costs Figure 5.7b

**$ BEP 3 FC 3 FC 2 BEP 2 3 FC 1 2 1 Quantity Multiple break-even points TP = (P – VC) Q 5-26**

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

**5-27**

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.

**5-28**

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

**5-29**