Operations Management Stevenson Chapter05

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Capacity Planning

For Products and Services

Learning ObjectivesLearning Objectives

Explain the importance of capacity planning.

Discuss ways of defining and measuring capacity.

Describe the determinants of effective capacity.

Discuss the major considerations related to developing capacity alternatives.

Briefly describe approaches that are useful for evaluating capacity alternatives

Capacity PlanningCapacity Planning

Capacity is the upper limit or ceiling on the load that an operating unit can handle.

Capacity also includes Equipment Space Employee skills

The basic questions in capacity handling are: What kind of capacity is needed? How much is needed? When is it needed?

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

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.

Efficiency and UtilizationEfficiency and Utilization

Actual outputEfficiency =

Effective capacity

Actual outputUtilization =

Design capacity

Both measures expressed as percentages

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

Determinants of Effective Determinants of Effective CapacityCapacity

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

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

Key Decisions of Capacity Key Decisions of Capacity PlanningPlanning

1. Amount of capacity needed• Capacity cushion (100% - Utilization)

2. Timing of changes

3. Need to maintain balance

4. Extent of flexibility of facilities

Capacity cushion – extra demand intended to offset uncertainty

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

Forecasting Capacity Forecasting Capacity RequirementsRequirements

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

Calculating Processing Calculating Processing RequirementsRequirements

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 . )

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 . )

2 , 0 0 0

2 , 4 0 0

1 , 4 0 0 5 , 8 0 0

If annual capacity is 2000 hours, then we need three machines to handle the required volume: 5,800 hours/2,000 hours = 2.90 machines

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

In-House or OutsourcingIn-House or Outsourcing

1. Available capacity

2. Expertise

3. Quality considerations

4. Nature of demand

5. Cost

6. Risk

Outsource: obtain a good or service from an external provider

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

Bottleneck OperationBottleneck OperationFigure 5.2

Machine #2Machine #2BottleneckOperation

BottleneckOperation

Machine #1Machine #1

Bottleneck operation: An operationin a sequence of operations whosecapacity is lower than that of theother operations

Bottleneck OperationBottleneck Operation

Operation 120/hr.

Operation 210/hr.

Operation 315/hr.

10/hr.

Bottleneck

Maximum output ratelimited by bottleneck

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

Optimal Rate of Output

Minimumcost

0 Rate of output

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

Figure 5.4

Minimum average cost per unit

Economies of ScaleEconomies of Scale

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

Smallplant Medium

plant Largeplant

Output rate

Figure 5.5

Evaluating AlternativesEvaluating Alternatives

Cost-volume analysis Break-even point

Financial analysis Cash flow Present value

Decision theory Waiting-line analysis

Cost-Volume RelationshipsCost-Volume Relationships

0Q (volume in units)

Total cost = VC + FC

Total variable cost (V

Fixed cost (FC)

Figure 5.6a

Q (volume in units)0

Total r

evenue

Figure 5.6b

Q (volume in units)0 BEP units

Profit

Total r

Total cost

Figure 5.6c

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

Quantity

FC + VC = TC

FC + VC =

Step fixed costs and variable costs.

1 machine

2 machines

3 machines

Figure 5.7a

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

TCBEP2

Quantity

Multiple break-even points

Figure 5.7b

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 Assumptions of Cost-Volume AnalysisAnalysis

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.

Decision TheoryDecision Theory

Helpful tool for financial comparison of alternatives under conditions of risk or uncertainty

Suited to capacity decisions See Chapter 5 Supplement

Waiting-Line AnalysisWaiting-Line Analysis

Useful for designing or modifying service systems

Waiting-lines occur across a wide variety of service systems

Waiting-lines are caused by bottlenecks in the process

Helps managers plan capacity level that will be cost-effective by balancing the cost of having customers wait in line with the cost of additional capacity

Video: CapacityVideo: Capacity

Video: Call Ctr. Cap.Video: Call Ctr. Cap.

Operations Management Stevenson Chapter05

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