Presentation on theme: "Capacity Planning For Products and Services"— Presentation transcript:
1 Capacity Planning For Products and Services 5Capacity PlanningFor Products and Services
2 Learning Objectives Explain the importance of capacity planning. Discuss ways of defining and measuring capacity.Describe the determinants of effective capacity.Discuss the major considerations related to developing capacity alternatives.Briefly describe approaches that are useful for evaluating capacity alternatives
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
8 Determinants of Effective Capacity FacilitiesProduct and service factorsProcess factorsHuman factorsPolicy factorsOperational factorsSupply chain factorsExternal factors
9 Strategy Formulation Capacity strategy for long-term demand Demand patternsGrowth rate and variabilityFacilitiesCost of building and operatingTechnological changesRate and direction of technology changesBehavior of competitorsAvailability of capital and other inputs
10 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
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 how many machines do we need to handle the required volume of …. ?
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. ?Which operation is the Bottleneck operation?Maximum output rate limited by bottleneck
18 Economies of Scale Economies of scale Diseconomies of scale If the output rate is less than the optimal level, increasing output rate results in decreasing average unit costsDiseconomies of scaleIf the output rate is more than the optimal level, increasing the output rate results in increasing average unit costs
19 Production units have an optimal rate of output for minimal cost. Figure 5.4Production units have an optimal rate of output for minimal cost.MinimumcostAverage cost per unitRate of outputMinimum average cost per unit
20 Economies of Scale Figure 5.5 Small Medium plant Large plant Minimum cost & optimal operating rate arefunctions of size of production unit.SmallplantAverage cost per unitMediumplantLargeplantOutput rate
25 Break-Even Problem with Step Fixed Costs Figure 5.7aQuantityFC + VC = TCStep fixed costs and variable costs.1 machine2 machines3 machines
26 Break-Even Problem with Step Fixed Costs Figure 5.7b$FC1FC2FC3BEP23TPQuantity1Multiple break-even pointsTP = (P – VC) Q
27 Assumptions of Cost-Volume Analysis One product is involvedEverything produced can be soldVariable cost per unit is the same regardless of volumeFixed costs do not change with volumeRevenue per unit constant with volumeRevenue per unit exceeds variable cost per unit
28 Financial AnalysisCash 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.
29 Waiting-Line Analysis Useful for designing or modifying service systemsWaiting-lines occur across a wide variety of service systemsWaiting-lines are caused by bottlenecks in the processHelps 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