capacity planning for products and services. what kind what kind of capacity is needed? how much how...
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CAPACITY PLANNING CAPACITY PLANNING
FOR PRODUCTS AND SERVICESFOR PRODUCTS AND SERVICES
What kindWhat kind of capacity is needed? How muchHow much capacity is needed to match demand? WhenWhen more capacity is needed? WhereWhere facilities should be located (location) HowHow facilities should be arranged (layout)
Facility planning answers:
FFACILITY PLANNINGACILITY PLANNING
CAPACITY (DEFINITION OF)CAPACITY (DEFINITION OF)
The number of units a facility can hold, receive, store or produce in a period of time
It is the upper limit or ceiling on the load that an operating unit can handle. It includes equipment, space, employee skills
STRATEGIC CAPACITY PLANNINGSTRATEGIC CAPACITY PLANNING
Goal To achieve a match between the long-term supply
capabilities of an organization and the predicted level of long-run demand OvercapacityOvercapacity operating costs that are too
high UndercapacityUndercapacity strained resources and
possible loss of customers
CAPACITY PLANNING QUESTIONSCAPACITY PLANNING QUESTIONS Key Questions:Key Questions:
What kind of capacity is needed?How much capacity is needed to match demand?When is it needed?
Related Questions: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 changesCan the supply chain handle the necessary changes?
ISSUES TO BE CONSIDERED IN ISSUES TO BE CONSIDERED IN STRATEGY FORMULATIONSTRATEGY FORMULATION
Capacity strategyDemand patternsGrowth rate and variabilityFacilities (Cost of the building and operating)Technological changes (Rate and direction of technology changes)Behavior of competitorsAvailability of capital and other inputs.
TYPES OF PLANNING OVER A TYPES OF PLANNING OVER A TIME HORIZONTIME HORIZON
Add FacilitiesAdd long lead time equipment
Schedule Jobs* Schedule Personnel AllocateMachinery
Sub-ContractAdd EquipmentAdd Shifts
Add PersonnelBuild or Use Inventory
Long Range Planning
Intermediate Range Planning
Short Range Planning
Modify Capacity Use Capacity
*
*
*Limited options exist
1. impact the ability of the organization to meet future demands2. affect operating costs3. affect lead time responsiveness4. are a major determinant of initial costs5. involve long-term commitment of resources6. affect competitiveness7. affect ease of management8. are more important and complex due to globalization9. need to be planned for in advance due to their consumption
of financial and other resources
IMPORTANCE OF CAPACITY IMPORTANCE OF CAPACITY DECISIONSDECISIONS
CAPACITY MEASURESCAPACITY MEASURES
Design capacityDesign capacity
Maximum output rate or service capacity an operation, process, or facility is designed for
Effective capacityEffective capacity
Capacity a firm can expect to attain given its product mix, methods of scheduling, maintenance and standards of quality. Design capacity minus allowances such as personal time, maintenance and scrap
CAPACITY RELATED CONCEPTSCAPACITY RELATED CONCEPTS
Actual outputActual output
Rate of output actually achieved—cannot exceed effective capacity
UtilizationUtilization
Actual output as a percent of design capacity EfficiencyEfficiency
Actual output as a percent of effective capacity
Measure of how well a facility or machine is performing when used
EfficiencyActual output
Effective Capacity=
EFFICIENCYEFFICIENCY
(expressed as a percentage)
Measure of actual capacity usage of a facility, work center, or machine
UtilizationActual Output
Design Capacity=
UTILIZATIONUTILIZATION
(expressed as a percentage)
Actual output = 36 units/day Efficiency = =
90% Effective capacity 40 units/ day
Utilization = Actual output = 36 units/day =
72% Design capacity 50 units/day
EXAMPLE- EFFICIENCY/UTILIZATIONEXAMPLE- EFFICIENCY/UTILIZATION
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
DETERMINANTS OF EFFECTIVE DETERMINANTS OF EFFECTIVE CAPACITYCAPACITY
FacilitiesProduct and Service FactorsProcess FactorsHuman FactorsPolicy FactorsOperational FactorsSupply Chain FactorsExternal Factors
STRATEGY FORMULATIONSTRATEGY FORMULATION
Strategies are typically based on assumptions and predictions about:Long-term demand patternsTechnological changeCompetitor behavior
SPECIAL REQUIREMENTS FOR SPECIAL REQUIREMENTS FOR MAKING GOOD CAPACITY MAKING GOOD CAPACITY
DECISIONSDECISIONS
Forecasting the demand accurately Understanding the technology and capacity
increments Finding the optimal operating level (volume) Building for change
KEY DECISIONS IN CAPACITY KEY DECISIONS IN CAPACITY PLANNINGPLANNING
Amount of capacity needed Timing of changes (frequency of capacity additions) Extent of flexibility of facilities External sources of capacity Need to maintain balance
AMOUNT OF CAPACITY NEEDEDAMOUNT OF CAPACITY NEEDED
STEPS OF CAPACITY PLANNINGSTEPS OF CAPACITY PLANNING
Estimate future capacity requirements Evaluate existing capacity and facilities and
identify gaps Identify alternatives for meeting requirements Conduct financial analysis Assess key qualitative issues Select the best alternative for the long term Implement the alternative chosen Monitor results
Long-term considerations relate to overall level of capacity requirements
Short-term considerations relate to probable variations in capacity requirements
FORECASTING CAPACITY FORECASTING CAPACITY REQUIREMENTS REQUIREMENTS
CALCULATING PROCESSING CALCULATING PROCESSING REQUIREMENTSREQUIREMENTS
Forecast sales within each individual product line
Calculate equipment and labor requirements to meet the forecasts
CALCULATING PROCESSING CALCULATING PROCESSING REQUIREMENTSREQUIREMENTS
Calculating processing requirements requires reasonably accurate demand forecasts, standard processing times, and available work time
horizon planning theduring available timeprocessing
horizon planning theduring product for demand
product for timeprocessing standard
machines required ofnumber
where
1
T
iD
ip
N
T
DpN
i
i
R
k
iii
R
CCALCULATING PROCESSING ALCULATING PROCESSING REQUIREMENTS: EXAMPLE 1 (1 of 2)REQUIREMENTS: EXAMPLE 1 (1 of 2)
P r o d u c tA n n u a l
D e m a n d
S t a n d a r dp r o c e s s i n g t i m e
p e r u n i t ( h r . )P r o c e s s i n g t i m e
n e e d e d ( h r . )
# 1
# 2
# 3
4 0 0
3 0 0
7 0 0
5 . 0
8 . 0
2 . 0
2 , 0 0 0
2 , 4 0 0
1 , 4 0 0 5 , 8 0 0
P r o d u c tA n n u a l
D e m a n d
S t a n d a r dp r o c e s s i n g t i m e
p e r u n i t ( h r . )P r o c e s s i n g t i m e
n e e d e d ( h r . )
# 1
# 2
# 3
4 0 0
3 0 0
7 0 0
5 . 0
8 . 0
2 . 0
2 , 0 0 0
2 , 4 0 0
1 , 4 0 0 5 , 8 0 0
CCALCULATING PROCESSING ALCULATING PROCESSING REQUIREMENTS: EXAMPLE 1 (2 of 2)REQUIREMENTS: EXAMPLE 1 (2 of 2)
If the department works one eight hour shift, 250 days a year, calculate the number of machines that would be needed to handle the required volume.
Solution:
5800/(250)(8) = 2.9 (3 machines are needed)
CAPACITY CUSHIONCAPACITY CUSHION
Capacity Cushion Extra capacity used to offset demand uncertainty Capacity cushion = 100% - Utilization Capacity cushion strategy
Organizations that have greater demand uncertainty typically have greater capacity cushion
Organizations that have standard products and services generally have greater capacity cushion
SERVICE CAPACITY PLANNINGSERVICE CAPACITY PLANNING
Service capacity planning can present a number of challenges related to: The inability to store services The need to be near customer The degree of demand volatility
SERVICE CAPACITY PLANNINGSERVICE CAPACITY PLANNING Time: Inability to store services for later consumption.
Capacity must be available to provide a service when it is needed (capacity must be matched with the timing of demand)
Location: Need to be near customers for convenience. Capacity and location are closely tied. Service goods must be at the customer demand point and capacity must be located near the customer
Volatility of Demand: (Much greater than in manufacturing) Volume and timing of demand Time required to service individual customers
CCAPACITY UTILIZATION APACITY UTILIZATION & & SSERVICE QUALITYERVICE QUALITY
Best operating point is near 70% of capacity
From 70% to 100% of service capacity, what do you think happens to service quality?
TIMING AND SIZE OF CHANGESTIMING AND SIZE OF CHANGES
(FREQUENCY OF CAPACITY (FREQUENCY OF CAPACITY ADDITIONS)ADDITIONS)
CAPACITY EXPANSIONCAPACITY EXPANSION
Factors to be considered: Volume and certainty of anticipated demand Strategic objectives for growth Costs of expansion and operation Incremental or one-step expansion Frequency of capacity additions
CAPACITY EXPANSION STRATEGIESCAPACITY EXPANSION STRATEGIES (1 of 5) (1 of 5)
Expected Demand Expected Demand
Expected Demand Expected Demand
Time in Years Time in Years
Time in YearsTime in Years
Dem
and
Dem
and
Dem
and
Dem
and
New Capacity
New Capacity New Capacity
New Capacity
Capacity leads demand with an incremental expansion Capacity leads demand with a one-step expansion
Capacity lags demand with an incremental expansionAttempts to have an average capacity, with
an incremental expansion
CAPACITY EXPANSION STRATEGIESCAPACITY EXPANSION STRATEGIES (2 of 5) (2 of 5)
Expected Demand
Time in Years
Dem
and
New Capacity
Capacity leads demand with an incremental expansion
CAPACITY EXPANSION STRATEGIESCAPACITY EXPANSION STRATEGIES (3 of 5) (3 of 5)
Expected Demand
Time in Years
Dem
and
New Capacity
Capacity leads demand with a one-step expansion
CAPACITY EXPANSION STRATEGIESCAPACITY EXPANSION STRATEGIES (4 of 5) (4 of 5)
Expected Demand
Time in Years
Dem
and
New Capacity
Capacity lags demand with an incremental expansion
CAPACITY EXPANSION STRATEGIESCAPACITY EXPANSION STRATEGIES (5 of 5) (5 of 5)
Expected Demand
Time in Years
Dem
and
New Capacity
Attempts to have an average capacity, with an incremental expansion
MAKE OR BUY?MAKE OR BUY?
1. Available capacity
2. Expertise
3. Quality considerations
4. Nature of demand
5. Cost
6. Risk
OPTIMAL OPERATING LEVELOPTIMAL OPERATING LEVEL
OPTIMAL OPERATING LEVELOPTIMAL OPERATING LEVELA
vera
ge
cost
per
ro
om
Ave
rag
e co
st p
er r
oo
m
Best operating Best operating levellevel
Economies Economies of scaleof scale
Diseconomies Diseconomies of scaleof scale
250250 500500 10001000
# Rooms# Rooms
ECONOMIES OF SCALEECONOMIES OF SCALE
Economies of scaleEconomies of scale If the output rate is less than the optimal level,
increasing output rate results in decreasing average unit costs
Reasons for economies of scale:Fixed costs are spread over a larger number of
unitsConstruction costs increase at a decreasing rate as
facility size increasesProcessing costs decrease due to standardization
DISECONOMIES OF SCALEDISECONOMIES OF SCALE
Diseconomies of scaleDiseconomies of scale If the output rate is more than the optimal level, increasing
the output rate results in increasing average unit costs
Reasons for diseconomies of scaleDistribution costs increase due to traffic congestion and
shipping from a centralized facility rather than multiple smaller facilities
Complexity increases costs Inflexibility can be an issueAdditional levels of bureaucracy
ECONOMIES OF SCALEECONOMIES OF SCALE
Minimum cost & optimal operating rate are functions of size of production unit.
Ave
rage
cos
t p
er u
nit
0
Smallplant Medium
plant Largeplant
Volume or output rate
ECONOMIES AND DISECONOMIES OF ECONOMIES AND DISECONOMIES OF SCALESCALE
100-unitplant
200-unitplant 300-unit
plant
400-unitplant
Volume
Averageunit costof output
Economies of Scale and the Experience Curve workingEconomies of Scale and the Experience Curve working
Diseconomies of Scale start workingDiseconomies of Scale start working
THE EXPERIENCE
CURVE
As plants produce more products, they gain experience in the best production methods and reduce their costs per unit
As plants produce more products, they gain experience in the best production methods and reduce their costs per unit
Total accumulated production of units
Cost orpriceper unit
Yesterday
Today
Tomorrow
EXTERNAL SOURCES OF CAPACITYEXTERNAL SOURCES OF CAPACITY
IN-HOUSE OR OURSOURCE?IN-HOUSE OR OURSOURCE?
Once capacity requirements are determined, the organization must decide whether to produce a good or service itself or outsource
Factors to consider:Available capacityExpertiseQuality considerationsThe nature of demandCostRisks
NEED TO MAINTAIN BALANCENEED TO MAINTAIN BALANCE
CAPACITY PLANNING: BALANCECAPACITY PLANNING: BALANCE
Stage 1 Stage 2 Stage 3Unitsper
month6,000 7,000 5,000
Unbalanced stages of productionUnbalanced stages of production
Stage 1 Stage 2 Stage 3Unitsper
month6,000 6,000 6,000
Balanced stages of productionBalanced stages of production
Maintaining System Balance: Output of one stage is the exact input requirements for the next stage
BOTTLENECK OPERATIONBOTTLENECK OPERATION
Machine #2Machine #2BottleneckOperation
BottleneckOperation
Machine #1Machine #1
Machine #3Machine #3
Machine #4Machine #4
10/hr
10/hr
10/hr
10/hr
30/hr
Bottleneck operation: An operationin a sequence of operations whosecapacity is lower than that of theother operations
BOTTLENECK OPERATIONBOTTLENECK OPERATION
Operation 120/hr.
Operation 210/hr.
Operation 315/hr.
10/hr.
Bottleneck
Maximum output ratelimited by bottleneck
CONSTRAINT MANAGEMENTCONSTRAINT MANAGEMENT ConstraintConstraint
Something that limits the performance of a process or system in achieving its goals
CategoriesMarketResourceMaterialFinancialKnowledge or competencyPolicy
RESOLVING CONSTRAINT ISSUESRESOLVING CONSTRAINT ISSUES Identify the most pressing constraint Change the operation to achieve maximum benefit,
given the constraint Make sure other portions of the process are supportive
of the constraint Explore and evaluate ways to overcome the constraint Repeat the process until the constraint levels are at
acceptable levels
STRATEGIES FOR MATCHING STRATEGIES FOR MATCHING CAPACITY TO DEMANDCAPACITY TO DEMAND
DEMAND MANAGEMENT DEMAND MANAGEMENT STRATEGIESSTRATEGIES
Strategies used to offset capacity limitations and that are intended to achieve a closer match between supply and demand
Pricing Promotions Backorders Offering complementary products Discounts Other tactics to shift demand from peak periods into slow periods
Time (Months)
Sales (Units)
Jet Skis
Snow-mobiles
Total
01,000
2,000
3,000
4,0005,000
J M M J S N J M M J S N J
COMPLEMENTARY PRODUCTSCOMPLEMENTARY PRODUCTS
CAPACITY MANAGEMENT CAPACITY MANAGEMENT STRATEGIESSTRATEGIES
1. Adjusting equipment and processes – which might include purchasing additional machinery or selling or leasing out existing equipment
2. Making staffing changes (increasing or decreasing the number of employees)
3. Improving methods to increase throughput
4. Redesigning the product to facilitate more throughput (for faster processing)
THINGS THAT CAN BE DONE TO THINGS THAT CAN BE DONE TO ENHANCE CAPACITY MANAGEMENTENHANCE CAPACITY MANAGEMENT
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
7. Choose a strategy if expansion is involved
CAPACITY FLEXIBILITYCAPACITY FLEXIBILITY
CAPACITY FLEXIBILITYCAPACITY FLEXIBILITY
Flexible plants
Flexible processes
Flexible workers
EVALUATING ALTERNATIVESEVALUATING ALTERNATIVES Alternatives should be evaluated from varying
perspectivesECONOMIC Cost-volume analysis
Break-even point Financial analysis
Cash flow Present value
Decision theory Waiting-line analysis SimulationNON-ECONOMIC Public opinion
COST-VOLUME RELATIONSHIPS COST-VOLUME RELATIONSHIPS (1 OF 3)(1 OF 3)
Am
oun
t ($
)
0Q (volume in units)
Total cost = VC + FC
Total variable cost (VC)
Fixed cost (FC)
COST-VOLUME RELATIONSHIPS COST-VOLUME RELATIONSHIPS (2 OF 3)(2 OF 3)
Am
oun
t ($
)
Q (volume in units)0
Total rev
enue
COST-VOLUME RELATIONSHIPS COST-VOLUME RELATIONSHIPS (3 OF 3)(3 OF 3)
Am
oun
t ($
)
Q (volume in units)0 BEP units
Profit
Total r
even
ue
Total cost
BREAK-EVEN POINT (BEP)BREAK-EVEN POINT (BEP)
BEPThe volume of output at which total cost and total
revenue are equalProfit (P) = TR – TC = R x Q – (FC +v x Q)
= Q(R – v) – FC
vRQBEP
FC
COST-VOLUME RELATIONSHIPSCOST-VOLUME RELATIONSHIPS
BBREAK-EVEN PROBLEM WITH STEP REAK-EVEN PROBLEM WITH STEP FIXED COSTS (1 of 2)FIXED COSTS (1 of 2)
Quantity
FC + VC = TC
FC + VC = TC
FC + VC = TC
Step fixed costs and variable costs.
1 machine
2 machines
3 machines
BBREAK-EVEN PROBLEM WITH STEP REAK-EVEN PROBLEM WITH STEP FIXED COSTS (2 of 2)FIXED COSTS (2 of 2)
$
TC
TC
TCBEP2
BEP3
TR
Quantity
1
2
3
Multiple break-even points
1. One product is involved2. Everything produced can be sold3. Variable cost per unit is the same regardless of
volume4. Fixed costs do not change with volume5. Revenue per unit is the same regardless of
volume6. Revenue per unit exceeds variable cost per unit
ASSUMPTIONS OF COST-VOLUME ASSUMPTIONS OF COST-VOLUME ANALYSISANALYSIS
FINANCIAL ANALYSISFINANCIAL 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.
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