chapter 5 capacity planning
DESCRIPTION
PRODMAN LECTURETRANSCRIPT
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Presented by:
Peter Ventura
Monterey Avendano
Rod Steven Vasquez
Charina Rose Ventura
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Capacity Planning
• Capacity– The upper limit or ceiling on the load that an
operating unit can handle– Goal
• To achieve a match between the long-term supply capabilities of an organization and the predicted level of long-run demand.
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Capacity Planning Questions
• Key Questions:– What kind of capacity is needed?
– How much capacity is needed to match demand?
– When is it needed?
• Related Questions:– How much will it cost?
– What are the potential benefits and risks?
– Are there sustainability issues?
– Should capacity be changed all at once, or through several smaller changes
– Can the supply chain handle the necessary changes?
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Capacity Decisions Are Strategic
impact the ability of the organization to meet future demands
affect operating costs are a major determinant of initial cost often involve long-term commitment of resources can affect competitiveness affect the ease of management are more important and complex due to globalization need to be planned for in advance due to their consumption
of financial and other resources
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Defining and Measuring Capacity
• Measure capacity in units that do not require updating– Why is measuring capacity in dollars problematic?
• Two useful definitions of capacitya) Design capacity
• The maximum output rate or service capacity an operation, process, or facility is designed for
b) Effective capacity
• Design capacity minus allowances such as personal time and maintenance
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Measuring System Effectiveness
• Actual output– The rate of output actually achieved– It cannot exceed effective capacity
• Efficiency
• Utilization
capacity effective
output actualEfficiency
capacitydesign
output actualnUtilizatio
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Example 1:
Given the following information, compute the
efficiency and the utilization of the vehicle repair
department:
Design Capacity = 50 trucks per day
Effective Capacity = 40 trucks per day
Actual Output = 36 trucks per day
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Solution:
=36 trucks per day
40 trucks per day
= 90%
capacity effective
output actualEfficiency
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Solution:
=36 trucks per day
50 trucks per day
= 72%
capacitydesign
output actualnUtilizatio
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Determinants of Effective Capacity
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Determinants of Effective Capacity
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Determinants of Effective Capacity
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Strategy Formulation
• Capacity strategy for long-term demand• Demand patterns• Growth rate and variability• Facilities
– Cost of building and operating
• Technological changes– Rate and direction of technology changes
• Behavior of competitors• Availability of capital and other inputs
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Capacity Cushion
– Extra capacity used to offset demand uncertainty– Capacity cushion = 100% - Utilization– Capacity cushion strategy
• Organizations that have greater demand uncertainty typically have greater capacity cushion
• Organizations that have standard products and services generally have greater capacity cushion
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Steps in Capacity Planning
1. Estimate future capacity requirements
2. Evaluate existing capacity and facilities; identify gaps
3. Identify alternatives for meeting requirements
4. Conduct financial analyses
5. Assess key qualitative issues
6. Select the best alternative for the long term
7. Implement alternative chosen
8. Monitor results
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Forecasting Capacity Requirements
• 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
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Calculating Processing Requirements
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
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The Challenges of Planning Service Capacity
IMPORTANT FACTORS IN PLANNING SERVICE CAPACITY:
1.The need to be near customers
2.The inability to store services
3.The degree of volatility
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MAKE OR BUY? FACTORS:
1. Available capacity
2. Expertise
3. Quality considerations
4. The nature of demand
5. Cost
6. Risk
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Developing Capacity Alternatives
1. Design flexibility into systems
2. Take stage of life cycle into account Introduction phase Growth phase Maturity phase Decline phase
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Developing Capacity Alternatives
3. Take a “big picture” (i.e., systems) approach to capacity changes
Bottleneck operations
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Developing Capacity Alternatives
4. Prepare to deal with capacity “chunks”
5. Attempt to smooth out capacity requirements
6. Identify the optimal operating level Economies of Scale Diseconomies of Scale
7. Choose a strategy if expansion is involved
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Evaluating Alternatives
Economic considerations:• Will an alternative be economically feasible?• How much will it cost?• How soon can we have it?• What will operating and maintenance cost be?• What will its useful life be?• Will it be compatible with present personnel
and present operations?
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Techniques used for Evaluating Capacity Alternatives
1) Financial Analysis
2) Waiting Line analysis
3) Decision Theory
4) Cost-Volume Analysis
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FINANCIAL ANALYSIS
Important terms:
Cash flow- refers to the difference between the cash
received from sales (of goods of services) and other sources and the cash outflow for labor, materials, overhead and taxes.
Present Value- expresses in current value the sum of all
future cash flows of a investment proposal.
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FINANCIAL ANALYSIS - Methods
a) Payback- is a simple but widely used method that
focuses on the length of time it will take for an investment to return its original cost.
Payback period = Payback period = Investment required Net annual cash inflow
Investment required Net annual cash inflow
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FINANCIAL ANALYSIS - Methods
b) Present Value- method summarizes the initial cost of an
investment, its estimated annual cash flows and any expected salvage value in a single value called the equivalent current value, taking into account the time value of money, w/c is the interest rates.
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FINANCIAL ANALYSIS - Methods
c) Internal Rate of Return- summarizes the initial cost, expected annual
cash flows, and estimated future salvage of an investment proposal in an equivalent interest rate.
Investment required Net annual cash flows Investment required Net annual cash flows
PV factor for theinternal rate of return
PV factor for theinternal rate of return ==
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WAITING-LINE ANALYSIS
• It’s goal is to minimize the sum of two costs: customer waiting cost and service capacity cost.
• Analysis of lines is often useful for designing for modifying service systems.
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DECISION THEORY
• Is a helpful tool for financial comparison of alternatives under conditions of risk or uncertainty.
• It is suited to capacity decisions and to a wide range of other decisions managers must make.
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TOOLS FOR ANALYZING DECISION PROBLEM
1) Decision Trees:
- a schematic representation of the available alternatives and their possible consequences.
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DECISION THEORY
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TOOLS FOR ANALYZING DECISION PROBLEM
2) Sensitivity Analysis:
• Provides a range of probability over which the choice of alternatives would remain the same.
• Determining the range of probability for which an alternative has the best expected payoff.
• A graphical solution• Makes use of Algebra
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COST VOLUME ANALYSIS
• It focuses on relationship between cost and volume of output.
• It’s purpose is to estimate the income of an organization under different operating conditions and it’s particularly useful as a tool for comparing capacity alternatives.
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COST VOLUME ANALYSIS
Fixed Cost
Variable Cost
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TERMS
P = Profit
TR = Total Revenue
TC = Total Cost
R = Revenue
Q = Quantity or volume of output
FC = Fixed Cost
v = Variable cost /unit
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COST VOLUME RELATIONSHIPS
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COST VOLUME RELATIONSHIPS
TR = R X Q
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COST VOLUME RELATIONSHIPS
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TOTAL PROFIT
P = TR – TC
P = R X Q – (FC + v X Q)
P= Q(R-v)-FC
P+FC=Q (R-v)
Q=(P+FC)/(R-v)
P = Profit
TR = Total Revenue
TC = Total Cost
R = Revenue
Q = Quantity or volume of output
FC = Fixed Cost
v = Variable cost /unit
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CONTRIBUTION MARGIN
• The difference between revenue per unit and variable cost per unit, R – v
P + FCR - v
Q =
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BREAK-EVEN POINT
• The volume of output at which total cost and total revenue are equal.
FCR - v
QBEP =
FC(R – v)/R
QBES =
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COST VOLUME RELATIONSHIPS
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COST VOLUME RELATIONSHIPS
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EXAMPLE
The owner of Old-Fashioned Berry Pies, S. Simon, is contemplating adding a new line of pies, which will require leasing new equipment for a monthly payment of $6,000. Variable costs would be $2.00 per pie and pies would retail for $7.00 each.
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EXAMPLE
a. How many pies must be sold in order to break even in units & dollar?
b. What would the profit (loss) be if 1,000 pies are made and sold in a month?
c. How many pies must be sold to realize a profit of $4,000?
d. If 2,000 can be sold and a profit target is $5,000, what price should be charged per pie?
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SOLUTIONa) How many pies must be sold in order to break even in
units?
Given: FC: $6,000 VC:$2/pie Rev:$7/pie
= $6,000 $7 - $2
= 1,200 pies/month
FCR - v
QBEP =
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SOLUTIONa) How many pies must be sold in order to break even in
dollar?
Given: FC: $6,000 VC:$2/pie Rev:$7/pie
= $6,000 ($7 - $2)/$7
= $8,400 pies/month
FC(R – v)/R
QBES =
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SOLUTION:
b. What would the profit (loss) be if 1,000 pies are made and sold in a month?
= 1,000 ($7-$2)-$6,000
= -$1,000
P= Q(R-v)-FC
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SOLUTION:
c. How many pies must be sold to realize a profit of $4,000?
= $4,000+$6,000$7-$2
= 2,000 pies
P + FCR - v
Q =
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SOLUTION:
d. If 2,000 can be sold and a profit target is $5,000, what price should be charged per pie?
$5,000= 2,000 (R-$2)-$6,000
R = $7.50
P= Q(R-v)-FC
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EXAMPLE
The Business Owner of a sports good factory in Sialkot is contemplating adding a new line of cricket bats, which will require leasing new equipment for a monthly payment or P60,000. Variable costs would be P200 per bat and bats would sold for P2,000 only.
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EXAMPLE
1. How many bats would be sold in order to break-even?
2. What would be the profit or loss if the 100 bats are made and sold in 1 month?
3. How many bats must be sold to realize a profit of P40,000?
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SOLUTION1. How many bats would be sold in order to break-even?
Given: FC: P60,000 VC:P200/batRev:P2,000/bat
= P60,000 P2,000 – P200
= 33.33 bats
FCR - v
QBEP =
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SOLUTION:
2. What would be the profit or loss if the 100 bats are made and sold in 1 month?
P= 100(P2,000 – P200)-P60,000
P = P120,000
P= Q(R-v)-FC
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SOLUTION:
3. How many bats must be sold to realize a profit of P40,000?
Q= P40,000+P60,000 P2,000-P200Q = 56 bats
P + FCR - v
Q =
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CAPACITY ALTERNATIVES:
Step Cost:- which are costs
that increase stepwise
as potential volume
increases.
FC1 machine
FC2 machines
FC3 machines
TC=
FC+ VC
TC=
FC+ VC
TC=
FC+ VC
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CAPACITY ALTERNATIVES:
Multiple
Break-Even:
1
2
3
TC
BEP
BEP
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EXAMPLE:
A manager has the option of purchasing one, two or
three machines. Fixed costs and potential volumes are
as follows:
VC = $10/unit Rev = $40/unit
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Problem & Solution
a) Determine the break-even point for each range.
QBEP = $9,600 $40-$10 320 units
QBEP = $15,000 $40-$10
500 units
QBEP = $20,000 $40-$10 666.67 units
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Problem & Solution:
b) If projected annual demand is between 580 and 660 units, how many machines should the manager purchase?
P = TR – TCP = Q(R-v)-FC
P = 580($40-$10)-$15,000P = $2,400
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Problem & Solution:
b) If projected annual demand is between 580 and 660 units, how many machines should the manager purchase?
P = TR – TCP = Q(R-v)-FC
P = 660($40-$10)-$20,000
P = ($200)
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Problem & Solution:
b) If projected annual demand is between 580 and 660 units, how many machines should the manager purchase?
2M- P = $2,400
3M – P= ($200)
1 2 3
TC
$20,200
$26,600
$23,200
$26,400
Choose 2 MachinesChoose 2 Machines
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Cost Volume Analysis valuable tool to Capacity Alternatives:
1. One product is involved.2. Everything produced can be sold.3. The variable cost per unit is the same regardless of
the volume.4. Fixed cost do not change with volume changes, or
they are step changes.5. The revenue per unit is the same regardless of
volume.6. Revenue per unit exceeds variable cost per unit.
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Operations Strategy
• Capacity planning impacts all areas of the organization– It determines the conditions under which operations
will have to function– Flexibility allows an organization to be agile
• It reduces the organization’s dependence on forecast accuracy and reliability
• Many organizations utilize capacity cushions to achieve flexibility
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Operations Strategy
– Bottleneck management is one way by which organizations can enhance their effective capacities.
– Capacity expansion strategies are important organizational considerations
• Expand-early strategy
• Wait-and-see strategy
– Capacity contraction is sometimes necessary• Capacity disposal strategies become important under
these
conditions
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Problem 1:A firm’s manager must decide whether to make or buy a certain item
used in the production of vending machines. Making the item would involve annual lease costs of $150,000. Cost and volume estimates are as follows:
Make BuyAnnual fixed cost $150,000 NoneVariable cost/unit $60 $80Annual volume (units) 12,000 12,000 a. Given those numbers, should the firm buy or make this item?b. There is possibility that volume could change in the future. At what volume would the manager be indifferent between making and buying?
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Problem 2:A small firm produces and sells automotive items in a five-state
area. The firm expects to consolidate assembly of its battery charges line at a single location. Currently, operations are in three widely scattered locations. The leading candidate for location will have a monthly fixed cost of $42,000 and variable costs of $3 per charger. Charges sell for $7 each.
Required:1. Prepare a table that shows total profits, fixed costs, variable cost,
and revenues for monthly volumes of 10,000; 12,000 and 15,000 units.
2. What is the break-even point?
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Problem 3:
A small firm produces and sells automotive items in a five-state area. The firm expects to consolidate assembly of its battery charges line at a single location. Currently, operations are in three widely scattered locations. The leading candidate for location will have a monthly fixed cost of $42,000 and variable costs of $3 per charger. Charges sell for $7 each.
Required:
Determine profit when volume equals 22,000 units.
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Problem 4:
A manager must decide which type of equipment to buy, Type A or Type B. Type A equipment cost $15,000 each and Type B cost $11,000 each. The equipment can be operated 8 hours a day, 250 days a year.
Either a machine can be used to perform two types of chemical analysis, C1 & C2. Annual service requirements and processing times are shown in the following table.
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Problem 4:
Required:
Which type of equipments should be purchased, and how many that type will be needed? The goal is to minimize total purchase cost.
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Answer Question no.1:
a. Given those numbers, should the firm buy or make this item?
TC= FC+Q(VC)
Make = $150,000+12,000($60) = $870,000
Buy = 0+12,000($80) = $960,000
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Answer Question no.1:
b. There is possibility that volume could change in the future. At what volume would the manager be indifferent between making and
buying?
TCmake= TCbuy
$150,000 + Q($60) = 0 + Q($80)$80Q-$60Q=$150,000
$20Q=$150,000Q=$7,500
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Answer Question no.2:
a. Prepare a table that shows total profits, fixed costs, variable cost, and revenues for monthly volumes of 10,000; 12,000 and 15,000 units.
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Answer Question no.2:
b. What is the break-even point?
Q=$42,000
$7-$3
Q=10,500 units per month
P + FCR - v
Q =
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Answer Question no.3:
Determine profit when volume equals 22,000 units.
P=Q($7-$3)-$42,000
$4(22,000)-$42,000
=$46,000
P= Q(R-v)-FC