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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

2 Learning Objectives: You should be able to: 1.Summarize the importance of capacity planning 2.Discuss ways of defining and measuring capacity 3.Describe the determinants of effective capacity 4.Discuss the major considerations related to developing capacity alternatives 5.Briefly describe approaches that are useful for evaluating capacity alternatives 2 Instructor Slides

3 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 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 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: 1.impact the ability of the organization to meet future demands 2.affect operating costs 3.are a major determinant of initial cost 4.often involve long-term commitment of resources 5.can affect competitiveness (influence delivery speed) 6.affect the ease of management 7.have become more important and complex due to globalization 8.need to be planned for in advance due to their consumption of financial and other resources 5-6

7 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, scrap etc. Actual output – Rate of output actually achievedcannot exceed effective capacity. 5-7

8 Efficiency Measured as percentages Utilization Measured as percentages 5-8

9 Design Capacity = 50 trucks per day Effective Capacity = 40 trucks per day Actual Output = 36 trucks per day 5-9

10 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 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 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 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 requires: – reasonably accurate demand forecasts, – standard processing times – available work time 5-14

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

16 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 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 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 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 – 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 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 = Q BEP (R – v) – FC 5-21

22 5-22

23 23 The quantity at which a decision maker would be indifferent between two competing alternatives Choo se B Choose A

24 24 A manufacturer has 3 options: 1.Use process A with FC=$80,000 and VC=$75/unit 2.Use process B with FC=$200,000 and VC=$15/unit 3.Purchase for $200/units 80,000+75Q=200,000+15Q Q AB =2,000 units 80,000+75Q=200Q Q PA =640 units Choose lowest cost: units : Purchase 640-2,000 units: Process A Above 2,000 units: Process B

25 Optimal Rate of Output 5-25 Minimum cost Average cost per unit 0 Rate of output Minimum average cost per unit Economies of Scale If output rate is less than the optimal level, increasing the output rate results in decreasing average per unit costs Diseconomies of Scale If the output rate is more than the optimal level, increasing the output rate results in increasing average per unit costs

26 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 – 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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