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CAPACITY PLANNING FOR PRODUCTS AND SERVICES. What kind What kind of capacity is needed? How much How much capacity is needed to match demand? When When.

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Presentation on theme: "CAPACITY PLANNING FOR PRODUCTS AND SERVICES. What kind What kind of capacity is needed? How much How much capacity is needed to match demand? When When."— Presentation transcript:

1 CAPACITY PLANNING FOR PRODUCTS AND SERVICES

2 What kind What kind of capacity is needed? How much How much capacity is needed to match demand? When When more capacity is needed? Where Where facilities should be located (location) How How facilities should be arranged (layout) Facility planning answers: FACILITY PLANNING

3 CAPACITY (DEFINITION OF) The number of units a facility can hold, receive, store or produce in a period of time It is the upper limit or ceiling on the load that an operating unit can handle. It includes equipment, space, employee skills

4 STRATEGIC CAPACITY PLANNING Goal To achieve a match between the long-term supply capabilities of an organization and the predicted level of long-run demand Overcapacity Overcapacity operating costs that are too high Undercapacity Undercapacity strained resources and possible loss of customers

5 CAPACITY PLANNING QUESTIONS Key Questions: Key Questions: What kind of capacity is needed? How much capacity is needed to match demand? When is it needed? Related Questions: Related Questions: How much will it cost? What are the potential benefits and risks? Are there sustainability issues? Should capacity be changed all at once, or through several smaller changes Can the supply chain handle the necessary changes?

6 ISSUES TO BE CONSIDERED IN STRATEGY FORMULATION Capacity strategy Demand patterns Growth rate and variability Facilities (Cost of the building and operating) Technological changes (Rate and direction of technology changes) Behavior of competitors Availability of capital and other inputs.

7 TYPES OF PLANNING OVER A TIME HORIZON Add Facilities Add long lead time equipment Schedule Jobs * Schedule Personnel AllocateMachinery Sub-Contract Add Equipment Add Shifts Add Personnel Build or Use Inventory Long Range Planning Intermediate Range Planning Short Range Planning Modify CapacityUse Capacity * * * Limited options exist

8 1.impact the ability of the organization to meet future demands 2.affect operating costs 3.affect lead time responsiveness 4.are a major determinant of initial costs 5.involve long-term commitment of resources 6.affect competitiveness 7.affect ease of management 8.are more important and complex due to globalization 9.need to be planned for in advance due to their consumption of financial and other resources IMPORTANCE OF CAPACITY DECISIONS

9 CAPACITY MEASURES Design capacity Maximum output rate or service capacity an operation, process, or facility is designed for Effective capacity Capacity a firm can expect to attain given its product mix, methods of scheduling, maintenance and standards of quality. Design capacity minus allowances such as personal time, maintenance and scrap

10 CAPACITY RELATED CONCEPTS Actual output Actual output Rate of output actually achievedcannot exceed effective capacity Utilization Utilization Actual output as a percent of design capacity Efficiency Efficiency Actual output as a percent of effective capacity

11 Measure of how well a facility or machine is performing when used Efficiency Actual output Effective Capacity = EFFICIENCY (expressed as a percentage)

12 Measure of actual capacity usage of a facility, work center, or machine Utilization Actual Output Design Capacity = UTILIZATION (expressed as a percentage)

13 Actual output = 36 units/day Efficiency = = 90% Effective capacity 40 units/ day Utilization = Actual output = 36 units/day = 72% Design capacity 50 units/day EXAMPLE- EFFICIENCY/UTILIZATION Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 units/day

14 DETERMINANTS OF EFFECTIVE CAPACITY Facilities Product and Service Factors Process Factors Human Factors Policy Factors Operational Factors Supply Chain Factors External Factors

15 STRATEGY FORMULATION Strategies are typically based on assumptions and predictions about: Long-term demand patterns Technological change Competitor behavior

16 SPECIAL REQUIREMENTS FOR MAKING GOOD CAPACITY DECISIONS Forecasting the demand accurately Understanding the technology and capacity increments Finding the optimal operating level (volume) Building for change

17 KEY DECISIONS IN CAPACITY PLANNING Amount of capacity needed Timing of changes (frequency of capacity additions) Extent of flexibility of facilities External sources of capacity Need to maintain balance

18 AMOUNT OF CAPACITY NEEDED

19 STEPS OF CAPACITY PLANNING Estimate future capacity requirements Evaluate existing capacity and facilities and identify gaps Identify alternatives for meeting requirements Conduct financial analysis Assess key qualitative issues Select the best alternative for the long term Implement the alternative chosen Monitor results

20 Long-term considerations relate to overall level of capacity requirements Short-term considerations relate to probable variations in capacity requirements FORECASTING CAPACITY REQUIREMENTS

21 CALCULATING PROCESSING REQUIREMENTS Forecast sales within each individual product line Calculate equipment and labor requirements to meet the forecasts

22 CALCULATING PROCESSING REQUIREMENTS Calculating processing requirements requires reasonably accurate demand forecasts, standard processing times, and available work time

23 CALCULATING PROCESSING REQUIREMENTS: EXAMPLE 1 (1 of 2)

24 CALCULATING PROCESSING REQUIREMENTS: EXAMPLE 1 (2 of 2) If the department works one eight hour shift, 250 days a year, calculate the number of machines that would be needed to handle the required volume. Solution: 5800/(250)(8) = 2.9 (3 machines are needed)

25 CAPACITY CUSHION Capacity Cushion Extra capacity used to offset demand uncertainty Capacity cushion = 100% - Utilization Capacity cushion strategy Organizations that have greater demand uncertainty typically have greater capacity cushion Organizations that have standard products and services generally have greater capacity cushion

26 SERVICE CAPACITY PLANNING Service capacity planning can present a number of challenges related to: The inability to store services The need to be near customer The degree of demand volatility

27 SERVICE CAPACITY PLANNING Time: Inability to store services for later consumption. Capacity must be available to provide a service when it is needed (capacity must be matched with the timing of demand) Location: Need to be near customers for convenience. Capacity and location are closely tied. Service goods must be at the customer demand point and capacity must be located near the customer Volatility of Demand: (Much greater than in manufacturing) Volume and timing of demand Time required to service individual customers

28 CAPACITY UTILIZATION & SERVICE QUALITY Best operating point is near 70% of capacity From 70% to 100% of service capacity, what do you think happens to service quality?

29 TIMING AND SIZE OF CHANGES (FREQUENCY OF CAPACITY ADDITIONS)

30 CAPACITY EXPANSION Factors to be considered: Volume and certainty of anticipated demand Strategic objectives for growth Costs of expansion and operation Incremental or one-step expansion Frequency of capacity additions

31 CAPACITY EXPANSION STRATEGIES (1 of 5) Expected Demand Time in Years Demand New Capacity Capacity leads demand with an incremental expansion Capacity leads demand with a one-step expansion Capacity lags demand with an incremental expansion Attempts to have an average capacity, with an incremental expansion

32 CAPACITY EXPANSION STRATEGIES (2 of 5) Expected Demand Time in Years Demand New Capacity Capacity leads demand with an incremental expansion

33 CAPACITY EXPANSION STRATEGIES (3 of 5) Expected Demand Time in Years Demand New Capacity Capacity leads demand with a one-step expansion

34 CAPACITY EXPANSION STRATEGIES (4 of 5) Expected Demand Time in Years Demand New Capacity Capacity lags demand with an incremental expansion

35 CAPACITY EXPANSION STRATEGIES (5 of 5) Expected Demand Time in Years Demand New Capacity Attempts to have an average capacity, with an incremental expansion

36 MAKE OR BUY? 1.Available capacity 2.Expertise 3.Quality considerations 4.Nature of demand 5.Cost 6.Risk

37 OPTIMAL OPERATING LEVEL

38 Average cost per room Best operating level Economies of scale Diseconomies of scale # Rooms

39 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 Reasons for economies of scale: Fixed costs are spread over a larger number of units Construction costs increase at a decreasing rate as facility size increases Processing costs decrease due to standardization

40 DISECONOMIES OF SCALE Diseconomies of scale If the output rate is more than the optimal level, increasing the output rate results in increasing average unit costs Reasons for diseconomies of scale Distribution costs increase due to traffic congestion and shipping from a centralized facility rather than multiple smaller facilities Complexity increases costs Inflexibility can be an issue Additional levels of bureaucracy

41 ECONOMIES OF SCALE Minimum cost & optimal operating rate are functions of size of production unit. Average cost per unit 0 Small plant Medium plant Large plant Volume or output rate

42 ECONOMIES AND DISECONOMIES OF SCALE 100-unit plant 200-unit plant 300-unit plant 400-unit plant Volume Average unit cost of output Economies of Scale and the Experience Curve working Diseconomies of Scale start working

43 THE EXPERIENCE CURVE As plants produce more products, they gain experience in the best production methods and reduce their costs per unit Total accumulated production of units Cost or price per unit Yesterday Today Tomorrow

44 EXTERNAL SOURCES OF CAPACITY

45 IN-HOUSE OR OURSOURCE? Once capacity requirements are determined, the organization must decide whether to produce a good or service itself or outsource Factors to consider: Available capacity Expertise Quality considerations The nature of demand Cost Risks

46 NEED TO MAINTAIN BALANCE

47 CAPACITY PLANNING: BALANCE Stage 1Stage 2Stage 3 Units per month 6,000 7,0005,000 Unbalanced stages of production Stage 1Stage 2Stage 3 Units per month 6,000 Balanced stages of production Maintaining System Balance: Output of one stage is the exact input requirements for the next stage

48 BOTTLENECK OPERATION Machine #2 Bottleneck Operation Bottleneck Operation Machine #1 Machine #3 Machine #4 10/hr 30/hr Bottleneck operation: An operation in a sequence of operations whose capacity is lower than that of the other operations

49 BOTTLENECK OPERATION Operation 1 20/hr. Operation 2 10/hr. Operation 3 15/hr. 10/hr. Bottleneck Maximum output rate limited by bottleneck

50 CONSTRAINT MANAGEMENT Constraint Constraint Something that limits the performance of a process or system in achieving its goals Categories Market Resource Material Financial Knowledge or competency Policy

51 RESOLVING CONSTRAINT ISSUES Identify the most pressing constraint Change the operation to achieve maximum benefit, given the constraint Make sure other portions of the process are supportive of the constraint Explore and evaluate ways to overcome the constraint Repeat the process until the constraint levels are at acceptable levels

52 STRATEGIES FOR MATCHING CAPACITY TO DEMAND

53 DEMAND MANAGEMENT STRATEGIES Strategies used to offset capacity limitations and that are intended to achieve a closer match between supply and demand Pricing Promotions Backorders Offering complementary products Discounts Other tactics to shift demand from peak periods into slow periods

54 Time (Months) Sales (Units) Jet Skis Snow- mobiles Total 0 1,000 2,000 3,000 4,000 5,000 JMMJSNJMMJSNJ COMPLEMENTARY PRODUCTS

55 CAPACITY MANAGEMENT STRATEGIES 1.Adjusting equipment and processes – which might include purchasing additional machinery or selling or leasing out existing equipment 2.Making staffing changes (increasing or decreasing the number of employees) 3.Improving methods to increase throughput 4.Redesigning the product to facilitate more throughput (for faster processing)

56 THINGS THAT CAN BE DONE TO ENHANCE CAPACITY MANAGEMENT 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 7.Choose a strategy if expansion is involved

57 CAPACITY FLEXIBILITY

58 Flexible plants Flexible processes Flexible workers

59 EVALUATING ALTERNATIVES Alternatives should be evaluated from varying perspectives ECONOMIC Cost-volume analysis Break-even point Financial analysis Cash flow Present value Decision theory Waiting-line analysis Simulation NON-ECONOMIC Public opinion

60 COST-VOLUME RELATIONSHIPS (1 OF 3) Amount ($) 0 Q (volume in units) Total cost = VC + FC Total variable cost (VC) Fixed cost (FC)

61 COST-VOLUME RELATIONSHIPS (2 OF 3) Amount ($) Q (volume in units) 0 Total revenue

62 COST-VOLUME RELATIONSHIPS (3 OF 3) Amount ($) Q (volume in units) 0 BEP units Profit Total revenue Total cost

63 BREAK-EVEN POINT (BEP) BEP The volume of output at which total cost and total revenue are equal Profit (P) = TR – TC = R x Q – (FC +v x Q) = Q(R – v) – FC

64 COST-VOLUME RELATIONSHIPS

65 BREAK-EVEN PROBLEM WITH STEP FIXED COSTS (1 of 2) Quantity FC + VC = TC Step fixed costs and variable costs. 1 machine 2 machines 3 machines

66 BREAK-EVEN PROBLEM WITH STEP FIXED COSTS (2 of 2) $ TC BEP 2 3 TR Quantity Multiple break-even points

67 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 is the same regardless of volume 6.Revenue per unit exceeds variable cost per unit ASSUMPTIONS OF COST-VOLUME ANALYSIS

68 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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