CAPACITYCAPACITY

LOAD

OUTPUT

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 alternatives5-2

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• location• aggregate planning, and• scheduling

are 3 essential factors in the decision making of selecting capacity, independent if it is:• short term• intermediate, or• long term capacity.

Introduction

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Activities

6

Time horizon

(months)12 18 24

0

Location decisions

Aggregate Planning

Scheduling

Short termIntermediate

Long term5-4

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Capacity Planning

Capacity is the upper limit or ceiling on the load that an operating unit can handle.–The load might be in terms of the

number of physical units produced, e.g. bicycles assembled per hour or the number of services performed, e.g. computers upgraded per hour.

–An operating unit can be a plant, department, machine, store or worker.

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Capacity Planning Capacity is the upper limit or ceiling on the

load that an operating unit can handle.

Capacity also includes – Equipment– Space– Employee skills

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Basic questions in capacity handling

What kind of capacity is needed? How much is needed? When is it needed?

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1. Impacts ability to meet future demands2. Affects operating costs3. Major determinant of initial costs4. Involves long-term commitment5. Affects competitiveness, e.g. speed6. Affects ease of management7. Globalization adds complexity8. Impacts long range planning

Importance of Capacity Decisions

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Designing and Measuring 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.5-10

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Actual outputEfficiency =

Effective capacity

Actual outputUtilization =

Design capacity

Both measures expressed as percentages

Designing and Measuring Capacity

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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 Example

Design capacity = 50 trucks/day

Effective capacity = 40 trucks/day

Actual output = 36 units/day

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Decisions that have an impact on Capacity

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

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Capacity Strategy Formulation

For long-term demand patterns and variability of demand

The growth rate The cost of building and operating facilities The rate and direction of technological

innovation The likely behavior of competitors Availability of capital and other inputs

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Key Decisions of Capacity Planning

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

2. Timing of changes

3. Need to maintain balance thruout the system

4. Extent of flexibility of facilities and workforce

Capacity cushion = extra demand intended to offset uncertainty

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Capacity Expansion Strategies

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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

Calculate the number of machines needed?

A company works one 8 hour shift, 250 days/year, and has the following figures:

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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

If annual capacity is 2000 hours [= 8 x 250], then we need:5,800 hours/2,000 hours = 2.90 machines = 3 machines

A company works one 8 hour shift, 250 days/year, and has the following figures:

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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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Optimal Rate of Output

Minimumcost

Ave

rage

cos

t p

er 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

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Economies of scale Dis-economies of scaleς

250,000 PC

125,000 PC

375,000 PC

Ave

rage

cos

t p

er u

nit

Output rate

Economies of scale(Under - utilization)

Dis-economies of scale(Over - utilization)

Optimum operating level

MinimumcostA

vera

ge c

ost

per

un

it

Output rate

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Output10/hr

Operation 3

10/hr

Operation 4

20/hr

Operation 2

30/hr

Operation 120/hr

Input

Bottleneck Operation

Bottleneck

Maximum output ratelimited by bottleneck

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Stevenson, p. 188-192, it can include slides 22 - here

Developing 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

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END

Techniques for Evaluating Capacity Alternatives

Cost-volume analysis– Break-even point

Financial analysis– Cash flow– Present value

Decision theory Waiting-line analysis

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Cost-Volume Relationships

Am

oun

t ($

)

0Q (volume in units)

Total cost = VC + FC

Total variable cost (VC)

Fixed cost (FC)A

mou

nt

($)

Q (volume in units)0

Total rev

enue

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Break-Even Problem with Step Fixed Costs

Quantity

FC + VC = TC

FC + VC = TCFC + VC = TC

Step fixed costs and variable costs.

1 machine

2 machines

3 machines

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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 Analysis

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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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Decision Theory

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

Suited to capacity decisions

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EXAMPLES

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