Strategic Capacity Planning

Made by :- Abhishek Malik 206 Achin Jain 207 Aditya Krishna 208 Ajit Rajian 209 Akshay Khandelwal 210

Strategic Capacity Planning Capacity

The maximum level of output .

The amount of resource inputs available relative to output requirements at a particular time.

Capacity is the upper limit or ceiling on the load that an operating unit can handle.

Examples of Capacity Measures

Type of Measures of CapacityOrganization Inputs Outputs

Manufacturer Machine hoursper shift

Number of unitsper shift

Hospital Number of beds Number ofpatients treated

Airline Number of planesor seats

Number ofseat-miles flown

Restaurant Number of seats Customers/timeRetailer Area of store Sales dollarsTheater Number of seats Customers/time

Capacity Planning The basic questions in capacity

planning are:What type of capacity is needed?How much is needed?When is it needed?How does productivity relate to capacity?

Two Capacity Strategies

Time between increments

Forecast of capacity needed

Forecast of capacity needed

Planned unused capacity Planned use of

short-term options

Expansionist Strategy Wait-and-See Strategy

Cap

acity

Cap

acity

Capacity UtilizationCapacity used

rate of output actually achieved Best operating level

capacity for which the process was designed (effective or maximum capacity)

Utilization = _______________Capacity Used

Best Operating Level

Utilization--Example

Best operating level = 120 units/week

Actual output = 83 units/week

Utilization = ? .692

units/wk 120units/wk 83=

level operatingBest usedCapacity nUtilizatio

Best Operating Level

Underutilization

Best OperatingLevel

Averageunit costof output

Volume

Over-utilization

Break-Even Problem with Step Fixed Costs

Quantity

FC + VC = TC FC + VC = TCFC + VC =

TC

Step fixed costs and variable costs.

1 machine

2 machines

3 machines

Break-Even Problem with Step Fixed Costs

$

TC

TC

TCBEP2

BEP 3

TR

Quantity1

2

3

Multiple break-even points

Breakeven Analysis

Breakeven quantity = Fixed CostsPrice - Variable Costs

Breakeven exampleThomas Manufacturing intends to increase capacity by overcoming a bottleneck operation through the addition of new equipment. Two vendors have presented proposals as follows:

Proposal Fixed Costs Variable Costs A $ 50,000 $12 B $ 70,000 $10

The revenue for each product is $20 What is the breakeven quantity for each proposal?

Breakeven Solution

BEQ = FC

P- VC

Proposal A

BEQ = = 6250$ 50,000

$20 - 12

Proposal B

BEQ = = 7000$ 70,000

$20 - 10

Breakeven Analysis

In the previous example, at what capacity would both plans incur the same cost?

Solution -consider total cost

Total cost = Fixed cost + Variable Cost (Q)

$50,000 + $12Q = $70,000 + $10 Q

Q = 10,000

The Experience Curve

Total accumulated production of units

Cost orpriceper unit

As plants produce more products, they gain experience in the best production methods and reduce their costs per unit.

Capacity Flexibility: Having the ability to respond rapidly to demand volume changes and product mix changes.

Flexible plantsFlexible processesFlexible workers

Capacity Bottlenecks

Rawmaterial

200/hour 75/hour 200/hour

Operation 1 Operation 2 Operation 3

BottleneckOperation

Determining Capacity Requirements

Forecast sales within each individual product line

Calculate equipment and labor requirements to meet the forecasts

Project equipment and labor availability over the planning horizon

Example--Capacity Requirements

A manufacturer produces two lines of ketchup, FancyFine and a generic line. Each is sold in small and family-size plastic bottles.

The following table shows forecast demand for the next four years.

Year: 1 2 3 4FancyFineSmall (000s) 50 60 80 100Family (000s) 35 50 70 90GenericSmall (000s) 100 110 120 140Family (000s) 80 90 100 110

Example of Capacity Requirements: The Product from a Capacity Viewpoint

Question: Are we really producing two different types of ketchup from the standpoint of capacity requirements?

Answer: No, it’s the same product just packaged differently.

Example of Capacity Requirements: Equipment and Labor Requirements

Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200

Three 100,000 units-per-year machines are available for small-bottle production. Two operators required per machine.

Two 120,000 units-per-year machines are available for family-sized-bottle production. Three operators required per machine.

Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6Family-size Mach. Cap. 240,000 Labor 6

SmallPercent capacity used 50.00%Machine requirement 1.50Labor requirement 3.00Family-sizePercent capacity used 47.92%Machine requirement 0.96Labor requirement 2.88

Question: Identify the Year 1 values for capacity, machine, and labor?

150,000/300,000=50% At 1 machine for 100,000, it takes 1.5 machines for 150,000

At 2 operators for 100,000, it takes 3 operators for 150,000

©The McGraw-Hill Companies, Inc., 2001

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Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6Family-size Mach. Cap. 240,000 Labor 6

SmallPercent capacity used 50.00%Machine requirement 1.50Labor requirement 3.00Family-sizePercent capacity used 47.92%Machine requirement 0.96Labor requirement 2.88

Question: What are the values for columns 2, 3 and 4 in the table below?

56.67%1.703.40

58.33%1.173.50

66.67%2.004.00

70.83%1.424.25

80.00%2.404.80

83.33%1.675.00

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©The McGraw-Hill Companies, Inc., 2001

Capacity Cushion

Capacity Cushion = level of capacity in excess of the average utilization rate or level of capacity in excess of the expected demand .

Cushion = Best Operating Level Capacity Used

- 1

Large capacity cushionRequired to handle uncertainty in demand

service industries high level of uncertainty in demand (in

terms of both volume and product-mix) to permit allowances for vacations, holidays,

supply of materials delays, equipment breakdowns, etc.

if subcontracting, overtime, or the cost of missed demand is very high

Sources of Uncertainty

Customer Demand•Past performance•Market research•Analytical techniques•Promotions / Incentives

Manufacturing•Process design•Product design•Capacity•Quality

Supplier Performance•Responsiveness•Transportation•Location•Quality•Information

Customer Deliveries•Transportation•Location•Information

Small capacity cushion

Unused capacity still incurs the fixed costs

highly capital intensive businesses time perishable capacity

Example: Target 5% Cushion

- 1cushion = Best Operating LevelCapacity Used

.05 = (1800/x) - 11.05 = (1800/x) 1714.3/1800 = .95241.05x = 1800x = 1714.3

Decision TreesA glass factory specializing in crystal is experiencing a substantial backlog, and the firm's management is considering three courses of action:

A) Arrange for subcontracting,B) Construct new facilities.C) Do nothing (no change)

The correct choice depends largely upon demand, which may be low, medium, or high. By consensus, management ranks the respective probabilities as .10, .50, and .40. A cost analysis that reveals the effects upon costs is shown in the following table.

Payoff Table

0.1 0.5 0.4Low Medium High

A 10 50 90B -120 25 200C 20 40 60

We start with our decisions...

AB

C

Subcontracting

Do nothing

Construct new facilities

Then add our possible states of nature, probabilities, and payoffs

AB

C

High demand (.4)

Medium demand (.5)

Low demand (.1)

$90k$50k$10k

High demand (.4)

Medium demand (.5)

Low demand (.1)

$200k$25k

-$120k

High demand (.4)

Medium demand (.5)

Low demand (.1)

$60k$40k$20k

Determine the expected value of each decision

High demand (.4)

Medium demand (.5)

Low demand (.1)

A

$90k$50k$10k

EVA=.4(90)+.5(50)+.1(10)=$62k

$62k

SolutionHigh demand (.4)

Medium demand (.5)

Low demand (.1)

High demand (.4)

Medium demand (.5)

Low demand (.1)

AB

CHigh demand (.4)

Medium demand (.5)

Low demand (.1)

$90k$50k$10k

$200k$25k

-$120k

$60k$40k$20k

$62k

$80.5k

$46k

Planning Service CapacityTime

Location

Volatility of Demand

Capacity Utilization & Service Quality

Best operating point is near 70% of capacity

From 70% to 100% of service capacity, what do you think happens to service quality? Why?

Two Capacity Strategies

Time between increments

Forecast of capacity needed

Forecast of capacity needed

Planned unused capacity Planned use of

short-term options

Expansionist Strategy Wait-and-See Strategy

Cap

acity

Cap

acity

Advantages/Disadvantages of each strategy

Expansionist • ahead of competition • risky if demand • no lost sales changes

Wait-and-See • no unused capacity • rely on short- • easier to adapt to term options new technologies

Advantages Disadvantages

Some Short-Term Capacity Options lease extra space temporarily authorize overtime staff second or third shift with temporary workers add weekend shifts alternate routings, using different work

stations that may have excess capacity schedule longer runs to minimize

capacity losses