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Strategic Capacity
Planning forProducts and
ServicesGerlyn BonusAgnes Regala
Roselyn Pudao
Mary Grace IbanezMatex Carillo
BSBA. Management
Prof. Joey Acua
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Capacity Capacity is the upper limit or ceiling on the
load that an operating unit can handle.
Capacity also includes:
Equipment
Space
Employee skill
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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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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Efficiency and Utilization
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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
Utilization = Actual output = 36 units/day= 72%
Design capacity 50 units/day
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Determinants of Effective Capacity
FACILITIES
The design of facilities, including size and provisionfor expansion, is key.
Locational factors, such as transportation costs,
distance to market, labor supply, energy sources and
room for expansion are also important.
Likewise, layout of the work area andenvironmental factors also play a significant role.
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PRODUCT AND SERVICE FACTORS
Product and service design can have a tremendousinfluence on capacity.
The more uniform the output, the more
opportunities there are for standardization of
methods and materials.PROCESS FACTORS
The quantity capability of a process is an obvious
determinant of capacity but subtle determinant isthe influence of output quality.
Process improvement that increase quality and
productivity can result in increased capacity.
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HUMAN FACTORS
The tasks that make up a job, the variety of activities
involved, also the training, skill and experiencerequired to perform a job all have an impact on the
potential and actual output.
Employee motivation has a very basic relationship tocapacity , as do absenteeism.
POLICY FACTORS
Management policy can affect capacity by allowingor not allowing capacity options such as overtime or
second or third shifts.
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OPERATIONAL FACTORS
Inventory stocking decisions, late deliveries,
purchasing requirements, acceptability of purchasedmaterials, quality inspection and control procedures
also have an impact on effective capacity.
SUPPLY CHAIN FACTORS It must be taken into account in capacity planning ifsubstantial capacity changes are involved.
EXTERNAL FACTORS Product standards , especially minimum quality andperformance standards, can restrict managements
options for increasing capacity.
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Strategy Formulation
An organization typically its base its capacitystrategy on assumption and predictions about
long term demand patterns, technological
changes , and the behavior of its competitors.
Key decisions of capacity planning The amount of capacity needed
The timing of changes The need to maintain balance throughout the system
The extent of flexibility of facilities and the
workforce.
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Deciding on the amount capacity
involves consideration of expected
demand and capacity cost.
Capacity cushion which is an amount
capacity in excess of expected demand
when there is some uncertainty about
demand. the greater the degree of demand uncertainty , the greater
the amount cushion used.
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Steps in the Capacity Planning Process Estimate future capacity requirement
Evaluate existing capacity and facilities and identify
gaps.
Identify alternative for meeting requirements
Conduct financial analyses of each alternative Assess key qualitative issues for each alternative
Select the alternative to pursue that will be bests in
long term Implement the selected alternative
Monitor results
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Forecasting Capacity Requirements
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 demandCalculating Processing Requirements
A department works one 8-hour shift, 250
days a year , and has these figures for usage ofa machine that is currently being considered:
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Working one 8 hour shift 250 days a year provides an
annual capacity of 8250=2000 hours per year.
5800 hours/2000 hours/machine=2.90 Machines
Product Annualdemand
Standard
Processing
time per unit
Processing
time needed
1 400 5 2000
2 300 8 2400
3 700 2 1400
5800
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The Challenge of Planning Service
CapacityThree Important Factors in planning service capacity
The need to be near customers
Convenience for customers is often an
important aspects of services. Generally, a
service must be located near customer.
The inability to store service
Speed of the delivery, or customers waiting time
become a major concern in a service capacityplanning .
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The degree of volatility
Demand volatility presents problem for capacity
planners. Demand volatility tend to be higher forservices than goods, not only in timing of demand,
But also in amount of time required to the service
individual customers.
Make Or Buy
Once capacity requirements have been determined ,
the organization must decide whether to produce a
good or provide a service itself. or outsource (buy)from another organization.
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Factors:
Available Capacity
If an organization has available the equipment,
necessary skills, and time, if often makes sense to
produce an item of perform a service in-house, The
additional cost would be relatively small comparedwith those required to buy items or subcontract
services.
Expertise If a firm lacks the expertise to do the job satisfactory
buying might be reasonable alternative.
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Quality Considerations
Firm that specialize can usually offer higher quality
than an organization can attain itself. Converselyunique quality requirements or the desire to closely
monitor quality may cause an organization to
perform a job itself.
The nature of Demand
When demand for an items is high and steady, the
organization is often better off doing the work itself.
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Cost
Any cost savings achieved from buying of making
must weighed against the preceding factors. Costsavings might come from the item itself or from
transportation cost savings. If there are fixed cost
associated with making an item that cannot be
reallocated if the service or product outsourced, thathas to recognized in the analysis.
Risk
Outsourcing may involved certain risks. One is loss ofcontrol over operations. Another is the need to
disclosed proprietary information.
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Developing Capacity Alternatives
Design Flexibility into system.o Provisions for Future Expansion in the original
design.
Take Stage of life cycle into account
o Capacity requirements are often closely linked to the
stage of the life cycle that a product or service is in.
Introductionphase
Growthphase
Maturityphase
Declinephase
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Take a Big Picture approach to capacity changes
o When developing capacity alternatives, it is important
to consider how parts of the system interrelate.o Bottleneck Operation
Bottleneck
Operation
Machine #1
Machine #3
Machine #4
10/hr
10/hr
10/hr
10/hr
30/hrMachine #2
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Prepare to deal with capacity chunks.
o no machine comes in continuous capacities.
Attempt to smooth out capacity requirements.
o Unevenness in capacity requirements also can create
certain problems.
Identify the optimal operating level.o Production units typically have an ideal or optimal
level of operation in terms of unit cost of output.
Economies of Scaleo If the output rate is less than the optimal level,
increasing the output rate results in decreasing
average unit costs.
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Diseconomies of scale
o If the output rate is more than the optimal level,
increasing the output rate results in increasingaverage unit costs.
Choose a strategy if expansion is involved.
o Consider whether incremental expansion or single
step is more appropriate.
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Cost-Volume Analysis
o Focuses on relationships between cost, revenue and
volume of output.FC= Fixed Cost
VC= Total variable cost
v= variable cost per unitTC= Total Cost
TR= Total revenue
R= Revenue per unitQ= Quantity or Volume of output
QBEP= Break even quantity P=Profit
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Fixed Costs (FC)
tend to remain constant regardless of output
volume
Variable Costs (VC)
vary directly with volume of output
VC = Quantity(Q) x variable cost per unit (v)
Total Cost TC = Q x v
Total Revenue (TR)
TR = revenue per unit (R) x QProfit (P) = TR TC = Rx Q (FC +vx
Q)= Q(R v) FC
= + - = -
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Examples:
The owner of Old-Fashioned Berry Pies, Simon Chen, is
contemplating adding a new line of pies, which willrequire leasing new equipment for a monthly payment
of $6000. Variable costs would be $ 2.00 per pie, and
pies would retail for $7.00.
a) How many pies must be sold in order to break-even?b) What would the profit be if 1000 pies are made and
sold in a month?
c) How many pies must be sold to realize a profit of
$4000?d) If 2000 can be sold, and a profit target is $5000,
what price should be charged per pie?
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Solution:
FC=$6000 VC=$2 per pie REV=$7 per pie
a) QBEP= FC/R-V =$6000/$7-$2 =1200 pies/month
b) For Q=1000; P=Q(R-V)-FC =1000($7-$2)-$6000= $1000
c) P=$4000; SOLVE for Q using Q=P+FC/R-V
Q=$4000+$6000/$7-$2 = 2000 pies
d) Profit=Q(R-V)-FC
$5000=$2000(R-$2)-$6000
R=$7.50
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A manager has the option of purchasing one, two, or
three machines. Fixed costs and potential volumes
are as follows:
VC is $10 per unit and R is $40 per unit.
a) Determine the break-even point for each range.
b) If projected annual demand is between 580 and
660 units, how many machines should the manager
purchase?
Number of
Machines
Total annual
Fixed Costs
Corresponding
range of output
1 $9 600 0-300
2 15000 301-6003 20000 601-900
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I. Solution:
a) For one machine:
QBEP= $9600/$40 per unit-$10 per unit
= 320 units( not in range, so there is no BEP)
b) For two machines:
QBEP= $15000/$40 per unit- $10 per unit
=500 units
c) For three machines:
QBEP= $20000/$40 per unit- $10 per unit
=666.67 units
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B. Comparing the projected range of demand to thetwo ranges for which a break-even point occurs,
you can see that the break-even point is 500,
which is in the range 301-600. this means that
even if demand is at the low end of the range, it
would be above the break-even point and thus
yield a profit. At the top end of projecteddemand, the volume would still be less than the
break-even point for that range, so there would
be no profit.
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Assumptions of Cost-Volume Analysis
One product is involved.
Everything produced can be sold.
The variable cost per unit is the same regardless of
the volume.
Fixed costs do not change with volume changes, orthey are step changes.
The revenue per unit is the same regardless of
volume.
Revenue per unit exceeds variable cost per unit.
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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 futurecash flow of an investment proposal
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Decision Theory
represents a general approach to decision making
which is suitable for a wide range of operationsmanagement decisions, including:
capacity
planning
product and
service design
equipment
selection
location
planning