chap005 - capacity planning
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5-1 Capacity Planning
William J. Stevenson
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 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
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.
5-6 Capacity Planning
Efficiency and UtilizationActual output Effective capacity Actual output Design capacity
Both measures expressed as percentages
5-7 Capacity Planning
Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 units/day
Actual output Effective capacity Actual output Design capacity
36 units/day 40 units/ day
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
Capacity strategy for long-term demand Demand patterns Growth rate and variability Facilities
Cost of building and operating Rate and direction of technology 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
Rate of output
5-16 Capacity Planning
Evaluating AlternativesMinimum cost & optimal operating rate are functions of size of production unit.
Average cost per unit
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
s st o co c al t ble To ri a a lv ota T Fixed cost (FC)
C) t (V
Q (volume in units)
5-19 Capacity Planning
Figure 5.5bue en ev lr ta To
Q (volume in units)
5-20 Capacity Planning
Figure 5.5cue en fit ev Pro lr t ta os To al c t To
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
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
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
4 0 0 3 0 0 7 0 0
5 . 0 8 . 0 2 . 0
2 , 0 0 2 , 4 0 1 , 4 0 5 , 8 0