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Adeyl Khan, Faculty, BBA, NSU
Chapter 5Capacity Planning
For Products and ServicesCeiling on the amount of load
Capacity at NSU
Adeyl Khan, Faculty, BBA, NSU
Capacity Planning
Capacity is the upper limit or ceiling on the load that an operating unit can handle.
5-2
• Equipment• Space• Employee skills
Capacity also includes
• What kind of capacity is needed?• How much is needed?• When is it needed?
The basic questions in capacity handling are:
Adeyl Khan, Faculty, BBA, NSU
Importance of Capacity Decisions
Impacts ability to meet future demandsAffects operating costsMajor determinant of initial costsInvolves long-term commitmentAffects competitivenessAffects ease of managementGlobalization adds complexityImpacts long range planning
5-3
Read moreFind Examples
…
Adeyl Khan, Faculty, BBA, NSU
Capacity
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.
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Adeyl Khan, Faculty, BBA, NSU
Efficiency and Utilization
5-5
Actual outputEfficiency =
Effective capacity
Actual outputUtilization =
Design capacity
Both measures expressed as percentages
Adeyl Khan, Faculty, BBA, NSU
Efficiency/Utilization Example
5-6
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
Actual output = 36 units/day
Efficiency = ----------------------------------- = 90%
Effective capacity = 40 units/ day
Actual output = 36 units/day
Utilization = ----------------------------------- = 72%
Design capacity = 50 units/day
Adeyl Khan, Faculty, BBA, NSU
Determinants of Effective Capacity
FacilitiesProduct and service factorsProcess factorsHuman factorsPolicy factorsOperational factorsSupply chain factorsExternal factors
5-7
Adeyl Khan, Faculty, BBA, NSU
Strategy Formulation
Capacity strategy for long-term demandDemand patternsGrowth rate and variabilityFacilities
Cost of building and operatingTechnological changes
Rate and direction of technology changesBehavior of competitorsAvailability of capital and other inputs
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Adeyl Khan, Faculty, BBA, NSU
Key Decisions of Capacity Planning
Amount of capacity needed Capacity cushion (100% - Utilization)
Timing of changesNeed to maintain balanceExtent of flexibility of facilities
5-9
Capacity cushion – extra demand intended to offset uncertainty
Adeyl Khan, Faculty, BBA, NSU10
Adeyl Khan, Faculty, BBA, NSU
Steps for Capacity Planning
Estimate future capacity requirementsEvaluate existing capacityIdentify alternativesConduct financial analysisAssess key qualitative issuesSelect one alternativeImplement alternative chosenMonitor results
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Adeyl Khan, Faculty, BBA, NSU
Forecasting Capacity Requirements
Long-term vs. short-term capacity needsLong-term relates to overall level of capacity such as facility size, trends, and cyclesShort-term relates to variations from seasonal, random, and irregular fluctuations in demand
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Adeyl Khan, Faculty, BBA, NSU
Calculating Processing Requirements
ProductAnnual
Demand
Standard processing time
per unit (hr.)Processing time
needed (hr.)
#1#2#3
400300700
5.0 8.0 2.0
2,000 2,400 1,400 5,800
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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
Adeyl Khan, Faculty, BBA, NSU
Planning Service Capacity
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
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Adeyl Khan, Faculty, BBA, NSU
In-House or Outsourcing
Available capacityExpertiseQuality considerationsNature of demandCostRisk
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Outsource: obtain a good or service from an external provider
Adeyl Khan, Faculty, BBA, NSU
Developing Capacity Alternatives
Design flexibility into systemsTake stage of life cycle into account
Take a “big picture” approach to capacity changesPrepare to deal with capacity “chunks”Attempt to smooth out capacity requirementsIdentify the optimal operating level
5-16
Adeyl Khan, Faculty, BBA, NSU
Bottleneck Operation
5-17Figure 5.2
Machine #2
BottleneckOperation
Machine #1
Machine #3
Machine #4
10/hr
10/hr
10/hr
10/hr
30/hr
Bottleneck operation: An operationin a sequence of operations whosecapacity is lower than that of theother operations
Adeyl Khan, Faculty, BBA, NSU
Machine Type
40
40
40
40
120
120
50
50
50
50
50
700
700
700
30
30
30200
E FBA C D
Output
Adeyl Khan, Faculty, BBA, NSU
Bottleneck Operation
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Operation 120/hr.
Operation 210/hr.
Operation 315/hr.
__/hr.
Bottleneck ?
Maximum output ratelimited by bottleneck
Adeyl Khan, Faculty, BBA, NSU
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
Diseconomies of scale If the output rate is more than the optimal level, increasing the output rate results in increasing average unit costs
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Adeyl Khan, Faculty, BBA, NSU
Optimal Rate of Output
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Minimumcost
Ave
rag
e c
ost
pe
r u
nit
0 Rate of output
Production units have an optimal rate of output for minimal cost.
Figure 5.4
Minimum average cost per unit
Adeyl Khan, Faculty, BBA, NSU
Economies of Scale
5-22
Minimum cost & optimal operating rate are functions of size of production unit.
Ave
rag
e c
ost
pe
r u
nit
0
Smallplant Medium
plant Largeplant
Output rateFigure 5.5100 250 400
Adeyl Khan, Faculty, BBA, NSU
Evaluating Alternatives
Cost-volume analysis Break-even point
Financial analysis Cash flow Present value
Decision theoryWaiting-line analysis
5-23
Adeyl Khan, Faculty, BBA, NSU
Cost-Volume Relationships
5-24
Am
ou
nt
($)
0Q (volume in units)
Total cost = VC + FC
Total variable cost (V
C)
Fixed cost (FC)
Figure 5.6
Am
ou
nt
($)
Q (volume in units)
0
Tota
l revenue
Adeyl Khan, Faculty, BBA, NSU
Cost-Volume Relationships
5-25
Am
ou
nt
($)
Q (volume in units)0 BEP units
Profit
Tota
l rev
enue
Total cost
Figure 5.6c
Adeyl Khan, Faculty, BBA, NSU
BEP Problem with Step Fixed Costs
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Quantity
FC + VC = TC
FC + VC = TC
FC + VC =
TC
Step fixed costs and variable costs.
1 machine
2 machines
3 machines
Figure 5.7a 100 200 300
Adeyl Khan, Faculty, BBA, NSU
BEP Problem with Step Fixed Costs
5-27
$
TC
TC
TCBEP2
BEP3
TR
Quantity
1
2
3
Multiple break-even pointsFigure 5.7b
Adeyl Khan, Faculty, BBA, NSU
Assumptions of Cost-Volume Analysis
One product is involvedEverything produced can be soldVariable cost per unit is the same
regardless of volumeFixed costs do not change with volumeRevenue per unit constant with volumeRevenue per unit exceeds variable cost per
unit
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Simple Solution to
our Capacity Problem?
Adeyl Khan, Faculty, BBA, NSU
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.
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Adeyl Khan, Faculty, BBA, NSU
Decision Theory
Helpful tool for financial comparison of alternatives under conditions of risk or uncertaintySuited to capacity decisionsSee Chapter 5 Supplement
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Adeyl Khan, Faculty, BBA, NSU
Waiting-Line Analysis
Useful for designing or modifying service systemsWaiting-lines occur across a wide variety of service systemsWaiting-lines are caused by bottlenecks in the processHelps 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
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Adeyl Khan, Faculty, BBA, NSU
Chapter 5Example 4Purchase 1, 2 or 3 machines
Variable cost 10/unit Revenue 40/piece
BEP for each range?Demand 580-660, how many to buy?
32
No. of Machines
Total Annual Fixed Cost
Corresponding range of output
1 9600 0-300
2 15000 301-600
3 20000 601-900
Adeyl Khan, Faculty, BBA, NSU
QBEP = FC/(R-v)
QBEP = $9600/($40/unit -$10/unit) = 320 unit
QBEP = $15000/($40/unit -$10/unit) = 500 unit
QBEP = $20000/($40/unit -$10/unit) = 666.67 unit
Answer part B Demand 580-660, how many to buy?
33
No. of Machines
Total Annual Fixed Cost
Corresponding range of output
1 9600 0-300
2 15000 301-600
3 20000 601-900
Adeyl Khan, Faculty, BBA, NSU34
Adeyl Khan, Faculty, BBA, NSU
Learning 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
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