5-1 Capacity Planning

William J. Stevenson

Operations Management

8th edition

5-2 Capacity Planning

CHAPTER5

Capacity PlanningFor Products and Services

McGraw-Hill/IrwinOperations Management, Eighth Edition, by William J. StevensonCopyright © 2005 by The McGraw-Hill Companies, Inc. All rights

reserved.

5-3 Capacity Planning

Capacity PlanningCapacity 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

1. Impacts ability to meet future demands2. Affects operating costs3. Major determinant of initial costs4. Involves long-term commitment5. Affects competitiveness6. Affects ease of management7. Globalization adds complexity8. Impacts long range planning

Importance of Capacity DecisionsImportance of Capacity Decisions

5-5 Capacity Planning

CapacityCapacity

Design capacity maximum output rate or service capacity an

operation, process, or facility is designed for Effective capacity

Design capacity minus allowances such as personal time, maintenance, and scrap

Actual output rate of output actually achieved--cannot

exceed effective capacity.

5-6 Capacity Planning

Efficiency and UtilizationEfficiency and Utilization

Actual outputEfficiency =

Effective capacity

Actual outputUtilization =

Design capacity

Both measures expressed as percentages

5-7 Capacity Planning

Actual output = 36 units/day Efficiency = =

90% Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day =

72% Design capacity 50 units/day

Efficiency/Utilization ExampleEfficiency/Utilization Example

Design capacity = 50 trucks/day

Effective capacity = 40 trucks/day

Actual output = 36 units/day

5-8 Capacity Planning

Determinants of Effective CapacityDeterminants of Effective Capacity

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

5-9 Capacity Planning

Strategy FormulationStrategy 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

5-10 Capacity Planning

Key Decisions of Capacity PlanningKey Decisions of Capacity Planning

1. Amount of capacity needed

2. Timing of changes

3. Need to maintain balance

4. Extent of flexibility of facilities

Capacity cushion – extra demand intended to offset uncertainty

5-11 Capacity Planning

Steps for Capacity PlanningSteps for Capacity Planning

1. Estimate future capacity requirements

2. Evaluate existing capacity

3. Identify alternatives

4. Conduct financial analysis

5. Assess key qualitative issues

6. Select one alternative

7. Implement alternative chosen

8. Monitor results

5-12 Capacity Planning

Make or BuyMake or Buy

1. Available capacity

2. Expertise

3. Quality considerations

4. Nature of demand

5. Cost

6. Risk

5-13 Capacity Planning

Developing Capacity AlternativesDeveloping Capacity Alternatives

1. Design flexibility into systems

2. Take stage of life cycle into account

3. Take a “big picture” approach to capacity changes

4. Prepare to deal with capacity “chunks”

5. Attempt to smooth out capacity requirements

6. Identify the optimal operating level

5-14 Capacity Planning

Economies of ScaleEconomies of Scale

Economies of scale If the output rate is less than the optimal level,

increasing output rate results in decreasing average unit costs

Diseconomies of scale If the output rate is more than the optimal level,

increasing the output rate results in increasing average unit costs

5-15 Capacity Planning

Evaluating AlternativesEvaluating Alternatives

Minimumcost

Av

era

ge

co

st

per

un

it

0 Rate of output

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

Figure 5.3

Minimum average cost per unit

5-16 Capacity Planning

Evaluating AlternativesEvaluating Alternatives

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

Av

era

ge

co

st

per

un

it

0

Smallplant Medium

plant Largeplant

Output rate

Figure 5.4

5-17 Capacity Planning

Need to be near customers Capacity and location are closely tied

Inability to store services Capacity must be matched with timing of

demand Degree of volatility of demand

Peak demand periods

Planning Service CapacityPlanning Service Capacity

5-18 Capacity Planning

Cost-Volume RelationshipsCost-Volume Relationships

Am

ou

nt

($)

0Q (volume in units)

Total cost = VC + FC

Total variable cost (V

C)

Fixed cost (FC)

Figure 5.5a

5-19 Capacity Planning

Cost-Volume RelationshipsCost-Volume Relationships

Am

ou

nt

($)

Q (volume in units)0

Total r

evenue

Figure 5.5b

5-20 Capacity Planning

Cost-Volume RelationshipsCost-Volume Relationships

Am

ou

nt

($)

Q (volume in units)0 BEP units

Profit

Total r

even

ue

Total cost

Figure 5.5c

5-21 Capacity Planning

Break-Even Problem with Step Fixed CostsBreak-Even Problem with Step Fixed Costs

Quantity

FC + VC = TC

FC + VC = TC

FC + VC =

TC

Step fixed costs and variable costs.

1 machine

2 machines

3 machines

Figure 5.6a

5-22 Capacity Planning

Break-Even Problem with Step Fixed CostsBreak-Even Problem with Step Fixed Costs

$

TC

TC

TCBEP2

BEP3

TR

Quantity

1

2

3

Multiple break-even points

Figure 5.6b

5-23 Capacity Planning

1. One product is involved2. Everything produced can be sold3. Variable cost per unit is the same regardless

of volume4. Fixed costs do not change with volume5. Revenue per unit constant with volume6. Revenue per unit exceeds variable cost per

unit

Assumptions of Cost-Volume AnalysisAssumptions of Cost-Volume Analysis

5-24 Capacity Planning

Financial AnalysisFinancial 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 RequirementsCalculating 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