6 Capacity Planning-Ch 5 (Stevenson)

Capacity Planning
Stevenson Chapter 5
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
The basic questions in capacity

handling are:
What kind of capacity is needed?
How much is needed?
When is it needed?
Strategic Capacity Planning

Balancing of long term supply capabilities
and predicted level of long term demand.

Forecasts are a key input.
Changes in demand
Changes in technology
Changes in the environment
Perceived threats and opportunities
Capacity Planning Considerations
Cost, availability of funds, expected returns
Potential benefits and risks.

Degree of uncertainty in forecasts.
Sustainability issues.
Rate of capacity addition?

All at once?
Incremental (piecemeal)?
Timing of capacity addition?

Leading, following, or tracking?
Supply chain support?
Importance of Capacity Decisions

Capacity decisions are strategic
1.
Impacts ability to meet future demands
2.
Affects operating costs
3.
Major determinant of initial costs
4.
Involves long-term commitment
5.
Affects competitiveness (can be a barrier to deter

potential new entry)
6.
Globalization adds complexity
7.
Impacts long range planning
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.
Efficiency and Utilization
Efficiency =
Utilization =
Actual output
Effective capacity
Actual output
Design capacity
Both measures expressed as percentages
Efficiency/Utilization (Example 1)
Design capacity
= 50 trucks/day
Effective capacity = 40 trucks/day

Actual output = 36 units/day
Efficiency =
-----------------------------------
= 90%
Effective capacity = 40 units/ day

Utilization =
----------------------------------Design capacity = 50 units/day
= 72%
Determinants of Effective Capacity

(TABLE 5.2)
Facilities
Product
and service factors
Process
factors
Human
factors
Policy
factors
Operational
Supply
factors
chain factors
External
factors
STRATEGY FORMULATION
3 Primary strategies are
Leading Capacity Strategy
Following Strategy
Tracking Strategy
An organization typically bases its capacity strategy on assumptions and

predictions about1. The growth rate and variability of demand
2. The cost of building and operating facilities of various sizes

3. The rate and direction of technological innovation
4. The likely behavior of competitors

5. Availability of capital and other inputs.
CAPACITY CUSHION=CAPACITY-EXPECTED DEMAND: THE GREATER THE DEGREE

OF DEMAND UNCERTAINTY, THE GREATER THE AMOUNT OF CUSHION USED.
ORGANIZATIONS THAT HAVE STANDARD OFFERINGS HAVE SMALLER CAPACITY
CUSHION.
Steps 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
Capacity planning can be difficult at times due to the

complex influence of market forces and technology.
Calculating Processing Requirements

(Example 2)
Product
Annual
Demand
#1
#2
#3
400
300
700
Standard
processing time per
unit (hr.)
5.0
8.0
2.0
Processing time
needed (hr.)
2,000
2,400
1,400
= 5,800
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= 3 machines
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
In-House or Outsourcing
Outsource: obtaining a good or service from an external
provider.
Available
capacity
Expertise
Quality
considerations
Nature
of demand
Cost
Risk
Developing Capacity Strategies

Design
Take
flexibility into systems
stage of life cycle into account
Take
a big picture approach to capacity

changes (Bottleneck Operations)
Prepare
to deal with capacity chunks
Attempt
to smooth out capacity

requirements
Identify
the optimal operating level

(EoS,DoS)
Capacity Utilization Strategy

Key to improving capacity utilization is to
increase effective capacity by correcting quality problems
maintaining
equipment in good
operating condition
fully training employees
fully utilizing bottleneck equipment.
Bottleneck Operation
Figure 5.2
Machine #1
Machine #2
Bottleneck operation: An operation

in a sequence of operations whose
capacity is lower than that of the
other operations
10/hr
10/hr
Machine #3
Bottleneck
Operation
10/hr
Machine #4
10/hr
30/hr
Bottleneck Operation
Bottleneck ?
Operation 1
20/hr.
Operation 2
10/hr.
Operation 3
15/hr.
Maximum
output rate
limited by
bottleneck
__/hr.
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
Optimal Rate of Output
Average cost per unit
Production units have an optimal rate of output for minimal cost.
Minimum average cost per unit
Minimum
cost
Rate of output
Economies of Scale
Average cost per unit
Minimum cost & optimal operating rate are

functions of size of production unit.
Small
plant
Medium
plant
Large
plant
Output rate
Factors contributing to Economies of Scale

Fixed costs and spread over more units
(products or customers), reducing the fixed cost

per unit
Construction
costs increase at a decreasing rate

with respect to the size of the facility
Processing costs decrease as output increases
because operations become more standardized

(over time) which reduces unit costs
Evaluating Alternatives
Cost-volume analysis
Break-even
point
Financial analysis
Cash flow
Present value
Decision theory
Waiting-line analysis
Assumptions of Cost-Volume Analysis

1. One product is involved
2. Everything produced can be sold
3. Variable cost per unit is the same regardless
of volume
4. Fixed costs do not change with volume
5. Revenue per unit constant with volume
6. Revenue per unit exceeds variable cost per
unit
Cost-Volume symbols
Cost-Volume Relationships
Cost-Volume Relationships
BEP Break Even Point
Volume of output needed for total revenue equaling
total cost
Production below BEP quantity results in loss
Production above BEP quantity results in profit
Production at BEP quantity: no profits, no loss.
Point of Indifference
the quantity at which a decision maker would be
indifferent between two competing alternatives
Example 3
The owner of Old-Fashioned Berry Pies is contemplating
adding a new line of pies, which will require leasing new
equipment for a monthly payment of $6,000. Variable costs
would be $2 per pie, and pies would retail for $7 each.
a.
How many pies must be sold in order to break even?
b.
What would the profit (loss) be if 1,000 pies are made

and sold in a month?
c.
How many pies must be sold to realize a profit of $4,000?
d.
If 2,000 can be sold, and a profit target is $5,000, what

price should be charged per pie?
Example 3
Break-Even Problem with Step Fixed

Costs
Example 4
A manager has the option of purchasing one, two, or three
machines. Fixed costs and potential volumes are as follows:
No. of
Machines
Total Annual
Fixed Cost
Corresponding range
of output
9600
0-300
15000
301-600
20000
601-900
Variable cost is $10 per unit, and revenue 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?
Example 4 Solution
QBEP =
QBEP =
QBEP =
QBEP =
FC/(R-v)
$9600/($40/unit -$10/unit) = 320 unit
$15000/($40/unit -$10/unit) = 500 unit
$20000/($40/unit -$10/unit) = 666.67 unit
b. Projected demand is between 580 and

660 units. BEP for 2 machines is 500, so
2 machines are suitable for demand up
to 600. However, BEP for 3 machine is
666.67, but the annual demand is no
more than 660. So 3 machines is not a
feasible option.
We should opt for 2 machines and

supply up to 600 units.
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.
Decision Theory
Helpful tool for financial
comparison of alternatives
under conditions of risk or
uncertainty
Suited to capacity decisions
See Chapter 5 Supplement
Waiting-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

6 Capacity Planning-Ch 5 (Stevenson)

Uploaded by

Copyright:

Available Formats

6 Capacity Planning-Ch 5 (Stevenson)

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

6 Capacity Planning-Ch 5 (Stevenson)

Uploaded by

Copyright:

Available Formats

What are the different types of capacity planning?

What are the different types of capacity planning?

What factors determine effective capacity?

What factors determine effective capacity?

Capacity Planning

Capacity is the upper limit or ceiling on the load that an

Capacity also includes

The basic questions in capacity

Strategic Capacity Planning

and predicted level of long term demand.

Perceived threats and opportunities

Capacity Planning Considerations

Cost, availability of funds, expected returns

Potential benefits and risks.

Rate of capacity addition?

Timing of capacity addition?

Supply chain support?

Importance of Capacity Decisions

Impacts ability to meet future demands

Affects operating costs

Major determinant of initial costs

Involves long-term commitment

Affects competitiveness (can be a barrier to deter

Globalization adds complexity

Impacts long range planning

rate or service capacity an

minus allowances such as

Efficiency and Utilization

Both measures expressed as percentages

Effective capacity = 40 trucks/day

Effective capacity = 40 units/ day

----------------------------------Design capacity = 50 units/day

Determinants of Effective Capacity

and service factors

3 Primary strategies are

Leading Capacity Strategy

An organization typically bases its capacity strategy on assumptions and

2. The cost of building and operating facilities of various sizes

4. The likely behavior of competitors

CAPACITY CUSHION=CAPACITY-EXPECTED DEMAND: THE GREATER THE DEGREE

Steps for Capacity Planning

Estimate future capacity requirements

Evaluate existing capacity

Conduct financial analysis

Assess key qualitative issues

Select one alternative

Implement alternative chosen

Capacity planning can be difficult at times due to the

Calculating Processing Requirements

5,800 hours/2,000 hours = 2.90 machines= 3 machines

Planning Service Capacity

Developing Capacity Strategies

flexibility into systems

stage of life cycle into account

a big picture approach to capacity

to deal with capacity chunks

to smooth out capacity

the optimal operating level

Capacity Utilization Strategy