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Chapter 5 Strategic Capacity Planning 1Saba Bahouth – UCO.

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Presentation on theme: "Chapter 5 Strategic Capacity Planning 1Saba Bahouth – UCO."— Presentation transcript:

1 Chapter 5 Strategic Capacity Planning 1Saba Bahouth – UCO

2 2 Sputnik

3 Capacity Planning Capacity is the upper limit or ceiling on the load that an operating unit can handle. The basic questions in capacity handling are: – What kind of capacity is needed? – How much is needed? – When is it needed? 3Saba Bahouth – UCO

4 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 4Saba Bahouth – UCO

5 Types of Capacity Planning Over Time Horizon Add Facilities Add equipment Schedule Jobs Schedule Personnel Allocate Machinery Sub-Contract Add Equipment Add Shifts Long Range Planning Intermediate Range Planning Short Range Planning Modify CapacityManage with existing Capacity * * *Limited options Add Personnel Build or Use Inventory 5Saba Bahouth – UCO

6 Definitions and Measurements Capacity: The throughput, or number of units a facility can hold, receive, store, or produce in a period of time. Design Capacity: Maximum theoretical output Effective Capacity: Capacity a firm can expect to receive given its product mix, methods of scheduling, maintenance, scrap, personal time. Actual Output: What is actually being produced, in units. Efficiency:Actual Output / Effective Capacity (Actual Output in units / Standard Output in units) Utilization: Actual Output / Design Capacity (Hours used / Total hours available) 6Saba Bahouth – UCO

7 Simple Example A dentist assistant schedules a patient every 10 minutes. This dentist treated 40 patients today. The dentist works 8 hours a day. The office is set up to handle a maximum of 60 patients a day. What is the efficiency of this dentist office? What is the utilizations of this dentist office? 7Saba Bahouth – UCO

8 Special Requirements for Making Good Capacity Decisions Forecasting demand accurately – Cycles; overestimating growth; seasons; complementary products Building for change Understanding capacity increments Finding the optimal operating level (volume) 8Saba Bahouth – UCO

9 Understanding Capacity Increments 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 9Saba Bahouth – UCO

10 Economies of Scale Cost per unit 0 Small plant Medium plant Large plant Output rate 10Saba Bahouth – UCO

11 Tools for Capacity Decisions 1. Break-even Analysis Single-product case Break-even in units: Break-even in Dollar Sales: 2. Decision Theory Decision Making Tools 3. Financial Analysis Net Present Value (NPV): 4. Queueing / Waiting lines ( Simulation) Saba Bahouth – UCO

12 Cost-Volume Relationships Amount ($) BEP (Quantity in units) 0 Profit Total revenue Total cost 12Saba Bahouth – UCO

13 Crossover Chart Fixed cost - Process A Fixed cost - Process B Fixed cost - Process C Total cost - Process C Total cost - Process B Total cost - Process A Process A: low volume, high variety Process B: Repetitive Process C: High volume, low variety Process C Process BProcess A Quantity Cost 13Saba Bahouth – UCO

14 Break-Even Problem with Step Fixed Costs Quantity $ Revenues TC 1 machine2 machines3 machines 14Saba Bahouth – UCO

15 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 Assumptions of Cost-Volume Analysis 15Saba Bahouth – UCO

16 Vary staffing Change equipment & processes Change methods Redesign the product for faster processing Capacity Management Vary prices Vary promotion Change lead times (e.g., backorders) Offer complementary products Demand Management Managing Existing Capacity 16Saba Bahouth – UCO

17 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 17Saba Bahouth – UCO


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