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Strategic Capacity Planning for Products and Services

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Presentation on theme: "Strategic Capacity Planning for Products and Services"— Presentation transcript:

1 Strategic Capacity Planning for Products and Services
Chapter 5

2 Learning Objectives: You should be able to:
Summarize 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 Instructor Slides

3 Capacity Planning Capacity
The upper limit or ceiling on the load that an operating unit can handle (rate of output) Dollar amounts are not good measure (why?) Capacity needs include: Equipment Space Employee skills 5-3

4 Strategic Capacity Planning
Goal: To achieve a match between the long-term supply capabilities and the predicted level of long-term demand Overcapacity operating costs that are too high Undercapacity strained resources and possible loss of customers 5-4

5 Capacity Planning Questions
Key Questions: What kind of capacity is needed? How much is needed to match demand? When is it needed? Related Questions: How much will it cost? What are the potential benefits and risks? Are there sustainability issues that need to be addressed? Should capacity be changed all at once, or through several smaller changes? Can the supply chain handle the necessary changes? 5-5

6 Capacity Decisions Are Strategic
impact the ability of the organization to meet future demands affect operating costs are a major determinant of initial cost often involve long-term commitment of resources can affect competitiveness (influence delivery speed) affect the ease of management have become more important and complex due to globalization need to be planned for in advance due to their consumption of financial and other resources 5-6

7 Capacity Design capacity Effective capacity Actual output
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, scrap etc. Actual output Rate of output actually achieved—cannot exceed effective capacity. 5-7

8 Measuring System Effectiveness
Efficiency Measured as percentages Utilization 5-8

9 Example– Efficiency and Utilization
Design Capacity = 50 trucks per day Effective Capacity = 40 trucks per day Actual Output = 36 trucks per day 5-9

10 Determinants of Effective Capacity
Facilities Size, expansions, layout, transportation costs, distance to market, labor supply, energy sources Product and service factors Uniformity of output, product/service mix Process factors Productivity, quality, setup-time Human factors Tasks, variety of activities, training, skills, learning, experience, motivation, labor turnover 5-10

11 Determinants of Effective Capacity
Policy factors Overtime, second/third shifts Operational factors Scheduling, inventory, purchasing, materials, quality assurance/control, breakdowns, maintenance Supply chain factors Impact of capacity change on suppliers, warehousing, transportation, distributors External factors Product standards, minimum quality, safety, environment, regulations, unions 5-11

12 Capacity Strategies Three primary capacity strategies: Leading:
build capacity in anticipation of future demand increase (when capacity increase has long lead time). Following: build capacity when demand exceed current capacity. Tracking: similar to Following but in relatively small increments. 5-12

13 Capacity Cushion Capacity Cushion
Extra capacity used to offset demand uncertainty Capacity cushion = Capacity – expected demand Capacity cushion strategy Organizations that have greater demand uncertainty typically use greater capacity cushion Organizations that have standard products and services generally use smaller capacity cushion 5-13

14 Calculating Processing Requirements
Calculating processing requirements requires: reasonably accurate demand forecasts, standard processing times available work time 5-14

15 Calculating Processing Requirements
If annual capacity is 2,000 hours, then # machines required = 5,800 hours/2,000 hours = >3 machines

16 Service Capacity Planning
Service capacity planning can present a number of challenges related to: The need to be near customers Convenience The inability to store services Cannot store services for consumption later The degree of demand volatility Volume and timing of demand Time required to service individual customers 5-16

17 Demand Management Strategies
Strategies used to offset capacity limitations and that are intended to achieve a closer match between supply and demand Pricing Promotions Discounts Other tactics to shift demand from peak periods into slow periods 5-17

18 Evaluating Alternatives
Techniques for Evaluating Alternatives Cost-volume analysis Break-even point Financial analysis Cash flow Present value Decision theory Comparison of alternatives under risk and uncertainty. Waiting-line analysis Balance waiting cost and increased capacity cost Simulation Evaluate “what-if” scenarios 5-18

19 Cost-Volume Analysis Assumptions
Cost-volume analysis is a viable tool for comparing capacity alternatives if certain assumptions are satisfied: One product is involved Everything produced can be sold The variable cost per unit is the same regardless of volume Fixed costs do not change with volume changes (or they are step changes) The revenue per unit is the same regardless of volume Revenue per unit exceeds variable cost per unit 5-19

20 Cost-Volume Analysis Cost-volume analysis
Focuses on the relationship between cost, revenue, and volume of output Fixed Costs (FC) (tend to) remain constant regardless of output volume Variable Costs (VC) vary directly with volume of output VC = Quantity(Q) x variable cost per unit (v) Total Cost TC = FC + VC Total Revenue (TR) TR = revenue per unit (R) x Q 5-20

21 Break-Even Point (BEP)
The volume of output at which total cost and total revenue are equal Profit (P) = TR – TC = R x Q – (FC +v x Q) = Q(R – v) – FC 0 = QBEP(R – v) – FC 5-21

22 Cost-Volume Relationships

23 Indifference Point (Profit) Two (multiple) Alternatives
The quantity at which a decision maker would be indifferent between two competing alternatives Choose A Choose B

24 Example - Indifference Point (Cost)
A manufacturer has 3 options: Use process A with FC=$80,000 and VC=$75/unit Use process B with FC=$200,000 and VC=$15/unit Purchase for $200/units 80,000+75Q=200Q QPA=640 units 80,000+75Q=200,000+15Q QAB=2,000 units Choose lowest cost: 0-640 units : Purchase 640-2,000 units: Process A Above 2,000 units: Process B

25 Production units have an optimal rate of output for minimal cost.
Minimum cost Average cost per unit Rate of output Diseconomies of Scale If the output rate is more than the optimal level, increasing the output rate results in increasing average per unit costs Economies of Scale If output rate is less than the optimal level, increasing the output rate results in decreasing average per unit costs Minimum average cost per unit

26 Economies of Scale Economies of Scale
If output rate is less than the optimal level, increasing the output rate results in decreasing average per unit costs Reasons for economies of scale: Fixed costs are spread over a larger number of units Processing costs decrease due to standardization 5-26

27 Diseconomies of Scale Diseconomies of Scale
If the output rate is more than the optimal level, increasing the output rate results in increasing average per unit costs Reasons for diseconomies of scale congestion (transportation) Complexity Inflexibility Additional levels of bureaucracy 5-27

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