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McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
55
Capacity Planning
For Products and Services
5-2
Strategic Capacity PlanningStrategic Capacity PlanningChapter 5 - Lesson 2Chapter 5 - Lesson 2
Lecture/Discussion Capacity planning – what and why Measures of Capacity - Utilization and Efficiency Comparing Capacity Alternatives - Breakeven
Analysis
Management tools exercises: Capacity Planning Exercise - Running the Business
SchoolProblem Solving: Utilization and Efficiency Breakeven Analysis
5-3
Capacity PlanningCapacity Planning
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?
5-4
1. Impacts ability to meet future demands2. Affects operating costs3. Major determinant of initial costs4. Involves long-term commitment5. Affects competitiveness6. Affects ease of management7. Globalization adds complexity8. Impacts long range planning
Importance of Capacity DecisionsImportance of Capacity Decisions
5-5
CapacityCapacity
Design capacity maximum output rate or service capacity an
operation, process, or facility is designed for
Effective capacity Design capacity minus allowances such as
personal time, maintenance, and scrap
Actual output rate of output actually achieved--cannot
exceed effective capacity.
5-6
Efficiency and UtilizationEfficiency and Utilization
Actual outputEfficiency =
Effective capacity
Actual outputUtilization =
Design capacity
Both measures expressed as percentages
5-7
Actual output = 36 units/day Efficiency = =
90% Effective capacity 40 units/ day
Utilization = Actual output = 36 units/day =
72% Design capacity 50 units/day
Efficiency/Utilization ExampleEfficiency/Utilization Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
5-8
Determinants of Effective Determinants of Effective CapacityCapacity
Facilities Product and service factors Process factors Human factors Policy factors Operational factors Supply chain factors External factors
5-9
Key Decisions of Capacity Key Decisions of Capacity PlanningPlanning
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
Steps for Capacity PlanningSteps for Capacity Planning
1. Estimate future capacity requirements
2. Evaluate existing capacity
3. Identify alternatives
4. Conduct financial analysis
5. Assess key qualitative issues
6. Select one alternative
7. Implement alternative chosen
8. Monitor results
5-11
Forecasting Capacity Forecasting Capacity RequirementsRequirements
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
5-12
Calculating Processing Calculating Processing RequirementsRequirements
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
If annual capacity is 2000 hours, then we need three machines to handle the required volume: 5,800 hours/2,000 hours = 2.90 machines
5-13
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
Planning Service CapacityPlanning Service Capacity
5-14
In-House or OutsourcingIn-House or Outsourcing
1. Available capacity
2. Expertise
3. Quality considerations
4. Nature of demand
5. Cost
6. Risk
Outsource: obtain a good or service from an external provider
5-15
Developing Capacity AlternativesDeveloping 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
5-16
Bottleneck OperationBottleneck OperationFigure 5.2
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
5-17
Bottleneck OperationBottleneck Operation
Operation 120/hr.
Operation 210/hr.
Operation 315/hr.
10/hr.
Bottleneck
Maximum output ratelimited by bottleneck
5-18
Evaluating AlternativesEvaluating Alternatives
Cost-volume analysis Break-even point
Financial analysis Cash flow Present value
Decision theory Waiting-line analysis
5-19
Cost-Volume RelationshipsCost-Volume Relationships
Am
ou
nt
($)
0Q (volume in units)
Total cost = VC + FC
Total variable cost (V
C)
Fixed cost (FC)
Figure 5.6a
5-20
Cost-Volume RelationshipsCost-Volume Relationships
Am
ou
nt
($)
Q (volume in units)0
Total r
evenue
Figure 5.6b
5-21
Cost-Volume RelationshipsCost-Volume Relationships
Am
ou
nt
($)
Q (volume in units)0 BEP units
Profit
Total r
even
ue
Total cost
Figure 5.6c
5-22
Break-Even Problem with Step Break-Even Problem with Step Fixed CostsFixed Costs
Quantity
FC + VC = TC
FC + VC = TC
FC + VC =
TC
Step fixed costs and variable costs.
1 machine
2 machines
3 machines
Figure 5.7a
5-23
Break-Even Problem with Step Break-Even Problem with Step Fixed CostsFixed Costs
$
TC
TC
TCBEP2
BEP3
TR
Quantity
1
2
3
Multiple break-even points
Figure 5.7b
5-24
Capacity Planning ExerciseCapacity Planning ExerciseRunning the Business SchoolRunning the Business School
What is the major capacity planning issue when operating a University “School”?
How would you go about developing a strategic capacity plan for the Stetson School of Business?
What data is important to obtain? __ __ __
Develop a capacity plan for: Number of full time professors Number of adjunct professors Classrooms (not for this exercise)
5-25
Utilization and Efficiency ExercisesUtilization and Efficiency Exercises
Determine the utilization and efficiency for the following:
a. A loan processing operation that processes an average of 7 loans per day. The operation has a design capacity of 10 loans per day and an effective capacity of 8 loans per day.
b. A furnace repair team that services an average of four furnaces a day if the design capacity is six furnaces per day and the effective capacity is five furnaces a day.
5-26
Utilization and Efficiency ExercisesUtilization and Efficiency Exercises
In a job shop, effective capacity is only 50 percent of design capacity, and actual output is 80% of effective output. What design capacity would be needed to achieve an actual output of eight jobs per week?
5-27
Breakeven AnalysisBreakeven Analysis
A producer of pottery is considering the addition of a new plant to absorb the backlog of demand. The primary location being considered will have fixed costs of $9,200 per month and variable costs of 70 cents per unit produced. Each item is to retailers at a price that averages 90 cents.
a. What volume per month is required in order to break even?
b. What profit would be realized on a monthly volume of 61,000 units? 87,000 units?
5-28
Breakeven AnalysisBreakeven Analysis
A producer of pottery is considering the addition of a new plant to absorb the backlog of demand. The primary location being considered will have fixed costs of $9,200 per month and variable costs of 70 cents per unit produced. Each item is to retailers at a price that averages 90 cents.
c. What volume is needed to obtain a profit of $16,000 per month?
5-29
Breakeven AnalysisBreakeven Analysis
A small firm intends to increase the capacity of a bottleneck operation by adding a new machine.
Alternative A Alternative B
Annual fixed cost $40,000 $30,000
Variable cost/unit $10 $15
Revenue / unit = $15
a. Determine each alternative’s breakeven point.
5-30
Breakeven AnalysisBreakeven Analysis
A small firm intends to increase the capacity of a bottleneck operation by adding a new machine.
Alternative A Alternative B
Annual fixed cost $40,000 $30,000
Variable cost/unit $10 $11
Revenue / unit = $15
b. At what volume would the two alternative yield the same profit?
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