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McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 5 Capacity Planning For Products and Services.

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Presentation on theme: "McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 5 Capacity Planning For Products and Services."— Presentation transcript:

1 McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 5 Capacity Planning For Products and Services

2 5-2 Strategic Capacity Planning Chapter 5 - Lesson 2 Lecture/Discussion Capacity planning – what and why Measures of Capacity - Utilization and Efficiency Comparing Capacity Alternatives - Breakeven Analysis Management tools exercises: Capacity Planning Exercise - Running the Business School Problem Solving: Utilization and Efficiency Breakeven Analysis

3 5-3 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?

4 5-4 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 6.Affects ease of management 7.Globalization adds complexity 8.Impacts long range planning Importance of Capacity Decisions

5 5-5 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.

6 5-6 Efficiency and Utilization Actual output Efficiency = Effective capacity Actual output Utilization = Design capacity Both measures expressed as percentages

7 5-7 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

8 5-8 Determinants of Effective Capacity Facilities Product and service factors Process factors Human factors Policy factors Operational factors Supply chain factors External factors

9 5-9 Key Decisions of Capacity Planning 1.Amount of capacity needed Capacity cushion (100% - Utilization) 2.Timing of changes 3.Need to maintain balance 4.Extent of flexibility of facilities Capacity cushion – extra demand intended to offset uncertainty

10 5-10 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

11 5-11 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 demand

12 5-12 Calculating Processing Requirements 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

13 5-13 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 Planning Service Capacity

14 5-14 In-House or Outsourcing 1.Available capacity 2.Expertise 3.Quality considerations 4.Nature of demand 5.Cost 6.Risk Outsource: obtain a good or service from an external provider

15 5-15 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

16 5-16 Bottleneck Operation Figure 5.2 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

17 5-17 Bottleneck Operation Operation 1 20/hr. Operation 2 10/hr. Operation 3 15/hr. 10/hr. Bottleneck Maximum output rate limited by bottleneck

18 5-18 Evaluating Alternatives Cost-volume analysis Break-even point Financial analysis Cash flow Present value Decision theory Waiting-line analysis

19 5-19 Cost-Volume Relationships Amount ($) 0 Q (volume in units) Total cost = VC + FC Total variable cost (VC) Fixed cost (FC) Figure 5.6a

20 5-20 Cost-Volume Relationships Amount ($) Q (volume in units) 0 Total revenue Figure 5.6b

21 5-21 Cost-Volume Relationships Amount ($) Q (volume in units) 0 BEP units Profit Total revenue Total cost Figure 5.6c

22 5-22 Break-Even Problem with Step Fixed Costs Quantity FC + VC = TC Step fixed costs and variable costs. 1 machine 2 machines 3 machines Figure 5.7a

23 5-23 Break-Even Problem with Step Fixed Costs $ TC BEP 2 3 TR Quantity Multiple break-even points Figure 5.7b

24 5-24 Capacity Planning Exercise Running the Business School What is the major capacity planning issue when operating a University School? How would you go about developing a strategic capacity plan for the Stetson School of Business? What data is important to obtain? __ Develop a capacity plan for: Number of full time professors Number of adjunct professors Classrooms (not for this exercise)

25 5-25 Utilization and Efficiency Exercises Determine the utilization and efficiency for the following: a. A loan processing operation that processes an average of 7 loans per day. The operation has a design capacity of 10 loans per day and an effective capacity of 8 loans per day. b. A furnace repair team that services an average of four furnaces a day if the design capacity is six furnaces per day and the effective capacity is five furnaces a day.

26 5-26 Utilization and Efficiency Exercises In a job shop, effective capacity is only 50 percent of design capacity, and actual output is 80% of effective output. What design capacity would be needed to achieve an actual output of eight jobs per week?

27 5-27 Breakeven Analysis A producer of pottery is considering the addition of a new plant to absorb the backlog of demand. The primary location being considered will have fixed costs of $9,200 per month and variable costs of 70 cents per unit produced. Each item is to retailers at a price that averages 90 cents. a.What volume per month is required in order to break even? b.What profit would be realized on a monthly volume of 61,000 units? 87,000 units?

28 5-28 Breakeven Analysis A producer of pottery is considering the addition of a new plant to absorb the backlog of demand. The primary location being considered will have fixed costs of $9,200 per month and variable costs of 70 cents per unit produced. Each item is to retailers at a price that averages 90 cents. c.What volume is needed to obtain a profit of $16,000 per month?

29 5-29 Breakeven Analysis A small firm intends to increase the capacity of a bottleneck operation by adding a new machine. Alternative A Alternative B Annual fixed cost $40,000 $30,000 Variable cost/unit $10 $15 Revenue / unit = $15 a.Determine each alternatives breakeven point.

30 5-30 Breakeven Analysis A small firm intends to increase the capacity of a bottleneck operation by adding a new machine. Alternative A Alternative B Annual fixed cost $40,000 $30,000 Variable cost/unit $10 $11 Revenue / unit = $15 b.At what volume would the two alternative yield the same profit?


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