chap005 - capacity planning

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5-1 Capacity Planning

Operations Management

William J. Stevenson

8th edition

5-2 Capacity Planning



Capacity Planning For Products and Services


Operations Management, Eighth Edition, by William J. Stevenson Copyright 2005 by The McGraw-Hill Companies, Inc. All rights

5-3 Capacity Planning

Capacity Planning

Capacity is the upper limit or ceiling on the load that an operating unit can handle. The basic questions in capacity handling are:

What kind of capacity is needed? How much is needed? When is it needed?

5-4 Capacity Planning

Importance of Capacity Decisions1. 2. 3. 4. 5. 6. 7. 8.

Impacts ability to meet future demands Affects operating costs Major determinant of initial costs Involves long-term commitment Affects competitiveness Affects ease of management Globalization adds complexity Impacts long range planning

5-5 Capacity Planning


Design capacity

maximum output rate or service capacity an operation, process, or facility is designed for Design capacity minus allowances such as personal time, maintenance, and scrap rate of output actually achieved--cannot exceed effective capacity.

Effective capacity

Actual output

5-6 Capacity Planning

Efficiency and UtilizationActual output Effective capacity Actual output Design capacity

Efficiency =

Utilization =

Both measures expressed as percentages

5-7 Capacity Planning

Efficiency/Utilization Example

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

Efficiency =90%

Actual output Effective capacity Actual output Design capacity


36 units/day 40 units/ day


Utilization =72%


36 units/day 50 units/day


5-8 Capacity Planning

Determinants of Effective Capacity

Facilities Product and service factors Process factors Human factors Operational factors Supply chain factors External factors

5-9 Capacity Planning

Strategy Formulation

Capacity strategy for long-term demand Demand patterns Growth rate and variability Facilities

Cost of building and operating Rate and direction of technology changes

Technological changes

Behavior of competitors Availability of capital and other inputs

5-10 Capacity Planning

Key Decisions of Capacity Planning1. 2. 3. 4.

Amount of capacity needed Timing of changes Need to maintain balance Extent of flexibility of facilities

city cushion extra demand intended to offset unce

5-11 Capacity Planning

Steps for Capacity Planning

1. 2. 3. 4. 5. 6. 7. 8.

Estimate future capacity requirements Evaluate existing capacity Identify alternatives Conduct financial analysis Assess key qualitative issues Select one alternative Implement alternative chosen Monitor results

5-12 Capacity Planning

Make or Buy

1. 2. 3. 4. 5. 6.

Available capacity Expertise Quality considerations Nature of demand Cost Risk

5-13 Capacity Planning

Developing Capacity Alternatives1. 2. 3.

Design flexibility into systems Take stage of life cycle into account Take a big picture approach to capacity changes Prepare to deal with capacity chunks Attempt to smooth out capacity requirements Identify the optimal operating level

4. 5. 6.

5-14 Capacity Planning

Economies of Scale

Economies of scale

If the output rate is less than the optimal level, increasing output rate results in decreasing average unit costs If the output rate is more than the optimal level, increasing the output rate results in increasing average unit costs

Diseconomies of scale

5-15 Capacity Planning

Evaluating AlternativesAverage cost per unit

Figure 5.3Production units have an optimal rate of output for minimal cost.

Minimum average cost per unit

Minimum cost


Rate of output

5-16 Capacity Planning

Evaluating AlternativesMinimum cost & optimal operating rate are functions of size of production unit.

Figure 5.4

Average cost per unit


Medium plant

Large plant


Output rate

5-17 Capacity Planning

Planning Service Capacity

Need to be near customers

Capacity and location are closely tied Capacity must be matched with timing of demand Peak demand periods

Inability to store services

Degree of volatility of demand

5-18 Capacity Planning

Cost-Volume Relationships

Figure 5.5a

Amount ($)

s st o co c al t ble To ri a a lv ota T Fixed cost (FC)

VC =

FC +

C) t (V


Q (volume in units)

5-19 Capacity Planning

Cost-Volume Relationships

Figure 5.5bue en ev lr ta To

Amount ($)0

Q (volume in units)

5-20 Capacity Planning

Cost-Volume Relationships

Figure 5.5cue en fit ev Pro lr t ta os To al c t To

Amount ($)0

BEP units Q (volume in units)

5-21 Capacity Planning

Break-Even Problem with Step Fixed CostsFigure 5.6a+ FC TC C= V

+ FC+V C =T C C


C =T C

3 machines


2 machines

1 machine Quantity Step fixed costs and variable costs.

Break-Even Problem with Step Fixed CostsFigure 5.6b $BEP2 TC TC 2TR 1

5-22 Capacity Planning





Quantity Multiple break-even points

5-23 Capacity Planning

Assumptions of Cost-Volume Analysis1. 2. 3. 4. 5. 6.

One product is involved Everything produced can be sold Variable cost per unit is the same regardless of volume Fixed costs do not change with volume Revenue per unit constant with volume Revenue per unit exceeds variable cost per unit

5-24 Capacity Planning

Financial 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.

5-25 Capacity Planning

Calculating Processing RequirementsS t a n d a r d A n n u p a r l o c e s s i Pn g o tc i me s e s i n r r o d uD c e t m a pn ed r u n i t (n h e r e. ) d e d (


# 1 # 2 # 3

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5 . 0 8 . 0 2 . 0

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