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5-1 Capacity Planning
Capacity Planning
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5-2 Capacity Planning
Capacity PlanningCapacity Planning
Capacity planning is the process ofdetermining the production capacity needed by
an organization to meet changing demands for
its products.
The basic questions in capacity handling are:
What kind of capacity is needed?
How much is needed? When is it needed?
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5-3 Capacity Planning
1. Impacts ability to meet future demands2. Affects operating costs
3. Involves long-term commitment
4. Affects competitiveness
5. Affects ease of management
Importance of Capacity DecisionsImportance of Capacity Decisions
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5-4 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.
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5-5 Capacity Planning
Efficiency and UtilizationEfficiency and Utilization
Actual outputEfficiency =Effective capacity
Actual outputUtilization =
Design capacity
Both measures expressed as percentages
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5-6 Capacity Planning
Actual output = 36 units/dayEfficiency = =
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
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5-7 Capacity Planning
Determinants of Effective CapacityDeterminants of Effective Capacity
Facilities (equipments , tools) Product and service factors Human factors
Operational factors Supply chain factors External factors
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5-8 Capacity Planning
Key Decisions of Capacity PlanningKey Decisions of Capacity Planning
1. Amount of capacity needed2. Timing of changes
3. Need to maintain balance
4. Extent of flexibility of facilities
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5-9 Capacity Planning
Steps for Capacity PlanningSteps for Capacity Planning
1. Estimate future capacity requirements2. 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
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5-10 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 increasingaverage unit costs
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5-11 Capacity Planning
Evaluating AlternativesEvaluating Alternatives
Minimum cost & optimal operating rate arefunctions of size of production unit.
A
verag
ecos
tp
erunit
0
Smallplant Medium
plant Largeplant
Output rate
Figure 5.4
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5-12 Capacity Planning
Cost-Volume RelationshipsCost-Volume Relationships
Amou n
t($)
0Q (volume in units)
Totalcost
=VC
+FC
Total
variable
cost(V
C)
Fixed cost (FC)
Figure 5.5a
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5-13 Capacity Planning
Cost-Volume RelationshipsCost-Volume Relationships
Amou
nt($)
Q (volume in units)0
Totalrev
enue
Figure 5.5b
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5-14 Capacity Planning
Cost-Volume RelationshipsCost-Volume Relationships
Amou
nt($)
Q (volume in units)0 BEP units
Profi
t
Totalr
even
ue
Totalcos
t
Figure 5.5c
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5-15 Capacity Planning
Break-Even Problem with Step Fixed CostsBreak-Even Problem with Step Fixed Costs
Quantity
FC+VC
=TC
FC+
VC=T
C
FC+V
C=
TC
Step fixed costs and variable costs.
1 machine
2 machines
3 machines
Figure 5.6a
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5-16 Capacity Planning
Break-Even Problem with Step Fixed CostsBreak-Even Problem with Step Fixed Costs
$
TC
TCTC
BEP2
BEP3
TR
Quantity
1
2
3
Multiple break-even points
Figure 5.6b
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5-17 Capacity Planning
1. One product is involved2. Everything produced can be sold
3. Variable cost per unit is the same regardless
of volume4. Fixed costs do not change with volume
5. Revenue per unit constant with volume
6. Revenue per unit exceeds average cost perunit
Assumptions of Cost-Volume AnalysisAssumptions of Cost-Volume Analysis
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5-18 Capacity Planning