Presentation on theme: "Capacity Planning For Products and Services"— Presentation transcript:
1 Capacity Planning For Products and Services 5Capacity PlanningFor Products and Services
2 Strategic Capacity Planning Chapter 5 - Lesson 2 Lecture/DiscussionCapacity planning – what and whyMeasures of Capacity - Utilization and EfficiencyComparing Capacity Alternatives - Breakeven AnalysisManagement tools exercises:Capacity Planning Exercise - Running the Business SchoolProblem Solving:Utilization and EfficiencyBreakeven Analysis
3 Capacity PlanningCapacity is the upper limit or ceiling on the load that an operating unit can handle.Capacity also includesEquipmentSpaceEmployee skillsThe basic questions in capacity handling are:What kind of capacity is needed?How much is needed?When is it needed?
4 Importance of Capacity Decisions Impacts ability to meet future demandsAffects operating costsMajor determinant of initial costsInvolves long-term commitmentAffects competitivenessAffects ease of managementGlobalization adds complexityImpacts long range planning
5 Capacity Design capacity Effective capacity Actual output maximum output rate or service capacity an operation, process, or facility is designed forEffective capacityDesign capacity minus allowances such as personal time, maintenance, and scrapActual outputrate of output actually achieved--cannot exceed effective capacity.
6 Efficiency and Utilization Actual outputEfficiency =Effective capacityUtilization =Design capacityBoth measures expressed as percentages
8 Determinants of Effective Capacity FacilitiesProduct and service factorsProcess factorsHuman factorsPolicy factorsOperational factorsSupply chain factorsExternal factors
9 Key Decisions of Capacity Planning Amount of capacity neededCapacity cushion (100% - Utilization)Timing of changesNeed to maintain balanceExtent of flexibility of facilitiesCapacity cushion – extra demand intended to offset uncertainty
10 Steps for Capacity Planning Estimate future capacity requirementsEvaluate existing capacityIdentify alternativesConduct financial analysisAssess key qualitative issuesSelect one alternativeImplement alternative chosenMonitor results
11 Forecasting Capacity Requirements Long-term vs. short-term capacity needsLong-term relates to overall level of capacity such as facility size, trends, and cyclesShort-term relates to variations from seasonal, random, and irregular fluctuations in demand
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 Planning Service Capacity Need to be near customersCapacity and location are closely tiedInability to store servicesCapacity must be matched with timing of demandDegree of volatility of demandPeak demand periods
14 In-House or Outsourcing Outsource: obtain a good or service from an external providerAvailable capacityExpertiseQuality considerationsNature of demandCostRisk
15 Developing Capacity Alternatives Design flexibility into systemsTake stage of life cycle into accountTake a “big picture” approach to capacity changesPrepare to deal with capacity “chunks”Attempt to smooth out capacity requirementsIdentify the optimal operating level
16 Bottleneck Operation Machine #1 Machine #2 Bottleneck Operation Figure 5.2Bottleneck operation: An operation in a sequence of operations whose capacity is lower than that of the other operationsBottleneckOperationMachine #1Machine #3Machine #410/hr30/hrMachine #2
17 Bottleneck Operation Operation 1 20/hr. Operation 2 10/hr. Maximum output rate limited by bottleneck
22 Break-Even Problem with Step Fixed Costs Figure 5.7aQuantityFC + VC = TCStep fixed costs and variable costs.1 machine2 machines3 machines
23 Break-Even Problem with Step Fixed Costs Figure 5.7b$TCBEP23TRQuantity1Multiple break-even points
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 professorsNumber of adjunct professorsClassrooms (not for this exercise)
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 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 Breakeven AnalysisA 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.What volume per month is required in order to break even?What profit would be realized on a monthly volume of 61,000 units? 87,000 units?
28 Breakeven AnalysisA 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.What volume is needed to obtain a profit of $16,000 per month?
29 Breakeven AnalysisA small firm intends to increase the capacity of a bottleneck operation by adding a new machine.Alternative A Alternative BAnnual fixed cost $40, $30,000Variable cost/unit $ $15Revenue / unit = $15Determine each alternative’s breakeven point.
30 Breakeven AnalysisA small firm intends to increase the capacity of a bottleneck operation by adding a new machine.Alternative A Alternative BAnnual fixed cost $40, $30,000Variable cost/unit $ $11Revenue / unit = $15At what volume would the two alternative yield the same profit?