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Chapter 5 Strategic Capacity Planning

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1 Chapter 5 Strategic Capacity Planning
Saba Bahouth – UCO

2 Sputnik Saba Bahouth – UCO

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? Saba Bahouth – UCO

4 In-House or Outsourcing
Outsource: obtain a good or service from an external provider Available capacity Expertise Quality considerations Nature of demand Cost Risk Saba Bahouth – UCO

5 Types of Capacity Planning Over Time Horizon
Long Range Planning Add Facilities Add equipment * Intermediate Range Planning Sub-Contract Add Equipment Add Shifts Add Personnel Build or Use Inventory Short Range Planning Schedule Jobs Schedule Personnel Allocate Machinery * *Limited options Modify Capacity Manage with existing Capacity Saba 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) Saba 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? Saba 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) Saba 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 This slide probably requires some discussion or explanation. Perhaps the best place to start is the left hand column where capacity either leads or lags demand incrementally. As you continue to explain the options, ask students to suggest advantages or disadvantages of each. Saba Bahouth – UCO

10 Economies of Scale Small Medium plant Large plant Output rate
Cost per unit Small plant Medium plant Large plant Output rate Saba 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) Profit Total revenue Total cost Saba Bahouth – UCO

13 Crossover Chart Process A: low volume, high variety
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 B Process A Quantity Cost This slide can be used to introduce the role of breakeven analysis in the process selection decision. Saba Bahouth – UCO

14 Break-Even Problem with Step Fixed Costs
$ Revenues TC 1 machine 2 machines 3 machines Quantity Saba Bahouth – UCO

15 Assumptions of Cost-Volume Analysis
One product is involved Everything produced can be sold Variable cost per unit is the same regardless of volume Fixed costs do not change with volume Revenue per unit constant with volume Revenue per unit exceeds variable cost per unit Saba Bahouth – UCO

16 Managing Existing Capacity
Demand Management Capacity Management Vary prices Vary promotion Change lead times (e.g., backorders) Offer complementary products Vary staffing Change equipment & processes Change methods Redesign the product for faster processing You might begin by reminding students that the real issue is matching capacity to demand, and that we can do that by varying either capacity or demand. It might also be helpful to have students consider the magnitude of variation we can achieve for each of the alternatives listed above - and the consequences of using the alternative. Saba Bahouth – UCO

17 Planning Service Capacity
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 Saba Bahouth – UCO

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