capacity planning

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  • Capacity Planning

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  • CapacityProductive Capacity, generally measured in physical units, refers either to the maximum output rate for products or services or to the amounts of key resources available in each operating period.

  • Strategic Capacity PlanningCapacity is the ability to hold, receive, store, or accommodate raw materials, finished products, customers, etc.Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labour force size.Capacity used is the rate of output actually achieved.The best operating level is nominally the capacity for which the process was designed.

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  • Capacity DecisionsCapacitymaximum capability to producerated capacity is theoreticaleffective capacity includes efficiency and utilization

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  • Capacity utilizationpercent of available time spent workingCapacity efficiencyhow well a machine or worker performs compared to a standard output levelCapacity load standard hours of work assigned to a facilityCapacity load percent ratio of load to capacity

  • Dimension of DemandEffect on capacity requirements

    QuantityHow much capacity is needed?

    Timing When should capacity be available?QualityWhat kind of capacity is needed?LocationWhere should capacity be installed?

  • Capacity planningCapacity is the maximum output rate of a production or service facilityCapacity planning is the process of establishing the output rate that may be needed at a facility:Capacity is usually purchased in chunksStrategic issues: how much and when to spend capital for additional facility & equipmentTactical issues: workforce & inventory levels, & day-to-day use of equipment

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  • Measuring Capacity ExamplesThere is no one best way to measure capacityOutput measures like cars per day are easier to understand With multiple products, inputs measures work better

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  • FacilityUnit of MeasureClass A Uniform output characteristicsSteel MillTons of steel produced daily

    Shoe factoryPairs of shoes/shiftCommercial airlinePassenger per routeBottling plantgallon

  • FacilityUnit of MeasureClass A Variable output characteristicsHospital (or hotel)Number of beds

    Machine shopMachine hours dailyStadium, night clubSeating capacityTelephone switchboardNumber of trunklines

  • Best Operating LevelExample:Engineers design engines and assembly lines to operate at an ideal or best operating level to maximize output and minimize wear.

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  • Under-utilization

    Best Operating LevelAverageunit costof outputVolume Over-utilizationBest Operating Level

  • Best Operating Level for a Hotel

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  • How Much Capacity Is Best?The Best Operating Level is the output than results in the lowest average unit costEconomies of Scale:Where the cost per unit of output drops as volume of output increasesSpread the fixed costs of buildings & equipment over multiple units, allow bulk purchasing & handling of material

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  • Diseconomies of Scale:Where the cost per unit rises as volume increasesOften caused by congestion (overwhelming the process with too much work-in-process) and scheduling complexity

  • Economies of Scale

    100-unitplant200-unitplant300-unitplant400-unitplantVolume Averageunit costof outputEconomies of scale and operating level curves

    Diseconomies of scale start to take effect

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

    Total accumulated production of unitsCost/price per unit

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  • Capacity Decisions (cont.)Capacity increase depends onvolume and certainty of anticipated demandstrategic objectivescosts of expansion and operationBest operating level% of capacity utilization that minimizes unit costsCapacity cushion% of capacity held in reserve for unexpected occurrences

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  • Economies of Scaleit costs less per unit to produce high levels of outputfixed costs can be spread over a larger number of unitsproduction or operating costs do not increase linearly with output levelsquantity discounts are available for material purchasesoperating efficiency increases as workers gain experience

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  • Diseconomies of ScaleOccur above a certain level of outputDiseconomies of DistributionDiseconomies of BureaucracyDiseconomies of ConfusionDiseconomies of Vulnerability

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  • Diseconomies of Confusion

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  • Capacity UtilizationExample:During one week of production, a plant produced 83 units of a product. Its historic best utilization was 120 units per week. What is this plants capacity utilization rate?

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  • Capacity PlanningThree important considerations in capacity planning:Maintaining system balanceIn the ideal case, the output of one stage is the exact input requirements for the next stage.Frequency of capacity additionsThere are costs in adding capacity too frequently as well as too infrequently.External sources of capacity It might be cheaper to outsource some production.

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  • Determining capacity requirementsForecast sales (within each individual product line)Calculate equipment and labour requirements to meet forecastsProject equipment and labour availability

  • Making Capacity Planning DecisionsThe three-step procedure for making capacity planning decisions is as follows:Step 1: Identify Capacity RequirementsStep 2: Develop Capacity AlternativesStep 3: Evaluate Capacity Alternatives

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  • Determine project capacity requirements given a demand forecast Formulate alternatives to meet future capacity requirementsEvaluate alternatives based on economicFactors, costs, revenues, risks, competition, Flexibility, quality, organizational and managerial adjustmentsSelect optimum alternative and implement capacity development planProcedure for developing a plan to change capacity

  • Capacity Requirements ExampleA manufacturer produces mustard in small and family-sized plastic bottles, with the following demand forecasts.

    Three 100,000 units-per-year machines are available for small bottle production. 2 operators are required per machine.Two 120,000 units-per-year machines are available for family-sized bottle production. 3 operators are required per machine.

    How much capacity is used and what are the machine and labour requirements?

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  • Machine capacity: 300 000 small, 240 000 family sizeLabour availability: 6 for small, 6 for family size

    Capacity Requirements Example (2)

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