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Adeyl Khan, Faculty, BBA, NSU Ceiling on the amount of load Capacity at NSU.

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Presentation on theme: "Adeyl Khan, Faculty, BBA, NSU Ceiling on the amount of load Capacity at NSU."— Presentation transcript:

1 Adeyl Khan, Faculty, BBA, NSU Ceiling on the amount of load Capacity at NSU

2 Adeyl Khan, Faculty, BBA, NSU Capacity Planning Capacity is the upper limit or ceiling on the load that an operating unit can handle. 5-2 Equipment Space Employee skills Capacity also includes What kind of capacity is needed? How much is needed? When is it needed? The basic questions in capacity handling are:

3 Adeyl Khan, Faculty, BBA, NSU Importance of Capacity Decisions Impacts ability to meet future demands Affects operating costs Major determinant of initial costs Involves long-term commitment Affects competitiveness Affects ease of management Globalization adds complexity Impacts long range planning 5-3 Read more Find Examples … Read more Find Examples …

4 Adeyl Khan, Faculty, BBA, NSU 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. 5-4

5 Adeyl Khan, Faculty, BBA, NSU Efficiency and Utilization 5-5 Actual output Efficiency = Effective capacity Actual output Utilization = Design capacity Both measures expressed as percentages

6 Adeyl Khan, Faculty, BBA, NSU Efficiency/Utilization Example 5-6 Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 units/day Efficiency =-----------------------------------= 90% Effective capacity = 40 units/ day Actual output = 36 units/day Utilization =-----------------------------------= 72% Design capacity = 50 units/day

7 Adeyl Khan, Faculty, BBA, NSU Determinants of Effective Capacity Facilities Product and service factors Process factors Human factors Policy factors Operational factors Supply chain factors External factors 5-7

8 Adeyl Khan, Faculty, BBA, NSU Strategy Formulation Capacity strategy for long-term demand Demand patterns Growth rate and variability Facilities Cost of building and operating Technological changes Rate and direction of technology changes Behavior of competitors Availability of capital and other inputs 5-8

9 Adeyl Khan, Faculty, BBA, NSU Key Decisions of Capacity Planning Amount of capacity needed Capacity cushion (100% - Utilization) Timing of changes Need to maintain balance Extent of flexibility of facilities 5-9 Capacity cushion – extra demand intended to offset uncertainty

10 Adeyl Khan, Faculty, BBA, NSU 10

11 Adeyl Khan, Faculty, BBA, NSU Steps for Capacity Planning Estimate future capacity requirements Evaluate existing capacity Identify alternatives Conduct financial analysis Assess key qualitative issues Select one alternative Implement alternative chosen Monitor results 5-11

12 Adeyl Khan, Faculty, BBA, NSU 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 5-12

13 Adeyl Khan, Faculty, BBA, NSU Calculating Processing Requirements Product Annual Demand Standard processing time per unit (hr.) Processing time needed (hr.) #1 #2 #3 400 300 700 5.0 8.0 2.0 2,000 2,400 1,400 5,800 5-13 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

14 Adeyl Khan, Faculty, BBA, NSU 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 5-14

15 Adeyl Khan, Faculty, BBA, NSU In-House or Outsourcing Available capacity Expertise Quality considerations Nature of demand Cost Risk 5-15 Outsource: obtain a good or service from an external provider

16 Adeyl Khan, Faculty, BBA, NSU Developing Capacity Alternatives Design flexibility into systems Take stage of life cycle into account Take a big picture approach to capacity changes Prepare to deal with capacity chunks Attempt to smooth out capacity requirements Identify the optimal operating level 5-16

17 Adeyl Khan, Faculty, BBA, NSU Bottleneck Operation 5-17 Figure 5.2 Machine #2 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

18 Adeyl Khan, Faculty, BBA, NSU Machine Type 40 120 50 700 30 200 EFBACD Output

19 Adeyl Khan, Faculty, BBA, NSU Bottleneck Operation 5-19 Operation 1 20/hr. Operation 2 10/hr. Operation 3 15/hr. __/hr. Bottleneck ? Maximum output rate limited by bottleneck

20 Adeyl Khan, Faculty, BBA, NSU Economies of Scale Economies of scale If the output rate is less than the optimal level, increasing output rate results in decreasing average unit costs Diseconomies of scale If the output rate is more than the optimal level, increasing the output rate results in increasing average unit costs 5-20

21 Adeyl Khan, Faculty, BBA, NSU Optimal Rate of Output 5-21 Minimum cost Average cost per unit 0 Rate of output Production units have an optimal rate of output for minimal cost. Figure 5.4 Minimum average cost per unit

22 Adeyl Khan, Faculty, BBA, NSU Economies of Scale 5-22 Minimum cost & optimal operating rate are functions of size of production unit. Average cost per unit 0 Small plant Medium plant Large plant Output rate Figure 5.5 100 250 400

23 Adeyl Khan, Faculty, BBA, NSU Evaluating Alternatives Cost-volume analysis Break-even point Financial analysis Cash flow Present value Decision theory Waiting-line analysis 5-23

24 Adeyl Khan, Faculty, BBA, NSU Cost-Volume Relationships 5-24 Amount ($) 0 Q (volume in units) Total cost = VC + FC Total variable cost (VC) Fixed cost (FC) Figure 5.6 Amount ($) Q (volume in units) 0 Total revenue

25 Adeyl Khan, Faculty, BBA, NSU Cost-Volume Relationships 5-25 Amount ($) Q (volume in units) 0 BEP units Profit Total revenue Total cost Figure 5.6c

26 Adeyl Khan, Faculty, BBA, NSU BEP Problem with Step Fixed Costs 5-26 Quantity FC + VC = TC Step fixed costs and variable costs. 1 machine 2 machines 3 machines Figure 5.7a 100 200 300

27 Adeyl Khan, Faculty, BBA, NSU BEP Problem with Step Fixed Costs 5-27 $ TC BEP 2 3 TR Quantity 1 2 3 Multiple break-even points Figure 5.7b

28 Adeyl Khan, Faculty, BBA, NSU 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 5-28 Simple Solution to our Capacity Problem?

29 Adeyl Khan, Faculty, BBA, NSU Financial Analysis Cash 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. 5-29

30 Adeyl Khan, Faculty, BBA, NSU Decision Theory Helpful tool for financial comparison of alternatives under conditions of risk or uncertainty Suited to capacity decisions See Chapter 5 Supplement 5-30

31 Adeyl Khan, Faculty, BBA, NSU Waiting-Line Analysis Useful for designing or modifying service systems Waiting-lines occur across a wide variety of service systems Waiting-lines are caused by bottlenecks in the process Helps 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 5-31

32 Adeyl Khan, Faculty, BBA, NSU Chapter 5 Example 4 Purchase 1, 2 or 3 machines Variable cost 10/unit Revenue 40/piece BEP for each range? Demand 580-660, how many to buy? 32 No. of Machines Total Annual Fixed Cost Corresponding range of output 196000-300 215000301-600 320000601-900

33 Adeyl Khan, Faculty, BBA, NSU Q BEP = FC/(R-v) Q BEP = $9600/($40/unit -$10/unit) = 320 unit Q BEP = $15000/($40/unit -$10/unit) = 500 unit Q BEP = $20000/($40/unit -$10/unit) = 666.67 unit Answer part B Demand 580-660, how many to buy? 33 No. of Machines Total Annual Fixed Cost Corresponding range of output 196000-300 215000301-600 320000601-900

34 Adeyl Khan, Faculty, BBA, NSU 34

35 Adeyl Khan, Faculty, BBA, NSU 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 5-35


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