1. CAPACITY
LOAD
OUTPUT

2. CAPACITY 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
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3. CAPACITY Introduction location aggregate planning, and scheduling
are 3 essential factors in the decision making of selecting capacity, independent if it is:
short term
intermediate, or
long term capacity.
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4. CAPACITY Short term Intermediate Long term Activities
Location decisions
Aggregate Planning
Scheduling
Time horizon (months) 6 12 18 24
Short term
Intermediate
Long term
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5. CAPACITY Capacity Planning
Capacity is the upper limit or ceiling on the load that an operating unit can handle.
Capacity also includes
Equipment
Space
Employee skills
The basic questions in capacity handling are:
What kind of capacity is needed?
How much is needed?
When is it needed?
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6. CAPACITY Capacity Planning
Capacity is the upper limit or ceiling on the load that an operating unit can handle.
The load might be in terms of the number of physical units produced, e.g. bicycles assembled per hour or the number of services performed, e.g. computers upgraded per hour.
An operating unit can be a plant, department, machine, store or worker.
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7. CAPACITY Capacity Planning
Capacity is the upper limit or ceiling on the load that an operating unit can handle.
Capacity also includes
Equipment
Space
Employee skills
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8. Basic questions in capacity handling
What kind of capacity is needed?
How much is needed?
When is it needed?
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9. Importance of Capacity Decisions
Impacts ability to meet future demands
Affects operating costs
Major determinant of initial costs
Involves long-term commitment
Affects competitiveness, e.g. speed
Affects ease of management
Globalization adds complexity
Impacts long range planning
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10. Designing and Measuring 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.
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11. Designing and Measuring Capacity
Actual output
Efficiency =
Effective capacity
Utilization =
Design capacity
Both measures expressed as percentages
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12. Efficiency/Utilization Example
CAPACITY
Efficiency/Utilization Example
Design capacity = trucks/day
Effective capacity = 40 trucks/day
Actual output = units/day
Actual output = units/day
Efficiency = = 90%
Effective capacity units/ day
Utilization = Actual output = units/day
= 72% Design capacity units/day
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13. Decisions that have an impact on Capacity
Facilities
Product and service factors
Process factors
Human factors
Policy factors
Operational factors
Supply chain factors
External factors
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14. Decisions that have an impact on Capacity
Facilities, e.g. size, provision for expansion
Product and service factors, e.g. limited menu vs, extensive menu
Process factors, e.g. if output-quality does not meet standards need for rework, etc
Human factors, e.g. variety of activities, training, skills, experience
Policy factors, e.g. overtime, 2nd or 3rd shift
Operational factors, e.g. inventory stocking decisions
Supply chain factors,e.g. warehousing, transportation
External factors, e.g. pollution standards, regulations
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15. Capacity Strategy Formulation
For long-term demand patterns and variability of demand
The growth rate
The cost of building and operating facilities
The rate and direction of technological innovation
The likely behavior of competitors
Availability of capital and other inputs
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16. Key Decisions of Capacity Planning
Amount of capacity needed
Capacity cushion (100% - Utilization)
Timing of changes
Need to maintain balance thruout the system
Extent of flexibility of facilities and workforce
Capacity cushion = extra demand intended to offset uncertainty
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17. Capacity Expansion Strategies
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18. Calculating Processing Requirements
CAPACITY
Calculating Processing Requirements
A company works one 8 hour shift, 250 days/year, and has the following figures:
Calculate the number of machines needed?

19. Calculating Processing Requirements
CAPACITY
Calculating Processing Requirements
A company works one 8 hour shift, 250 days/year, and has the following figures:
If annual capacity is 2000 hours [= 8 x 250], then we need:
5,800 hours/2,000 hours = 2.90 machines = 3 machines

20. CAPACITY Economies of Scale Economies of scale Diseconomies 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
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21. Production units have an optimal rate of output for minimal cost.
CAPACITY
Optimal Rate of Output
Figure 5.4
Production units have an optimal rate of output for minimal cost.
Minimum
cost
Average cost per unit
Rate of output
Minimum average cost per unit

22. CAPACITY Average cost per unit Output rate Average cost per unit
Optimum operating level
Average cost per unit
Minimum
cost
Economies of scale
(Under - utilization)
Dis-economies of scale
(Over - utilization)
Output rate
125,000 PC
Average cost per unit
250,000 PC
375,000 PC
Economies of scale
Dis-economies of scaleς
Output rate
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23. CAPACITY Bottleneck Operation Bottleneck
Output
10/hr
Operation 3
Operation 4
20/hr
Operation 2
30/hr
Operation 1
Input
Maximum output rate limited by bottleneck
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24. 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
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25. END

26. Techniques for Evaluating Capacity Alternatives
Cost-volume analysis
Break-even point
Financial analysis
Cash flow
Present value
Decision theory
Waiting-line analysis
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27. Cost-Volume Relationships
CAPACITY
Cost-Volume Relationships
Amount ($)
Q (volume in units)
Total revenue
Amount ($)
Total cost = VC + FC
Total variable cost (VC)
Fixed cost (FC)
Q (volume in units)
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28. Break-Even Problem with Step Fixed Costs
CAPACITY
Break-Even Problem with Step Fixed Costs
Quantity
FC + VC = TC
Step fixed costs and variable costs.
1 machine
2 machines
3 machines
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29. Assumptions of Cost-Volume Analysis
CAPACITY
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
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30. CAPACITY 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.
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31. CAPACITY Decision Theory
Helpful tool for financial comparison of alternatives under conditions of risk or uncertainty
Suited to capacity decisions
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32. CAPACITY
EXAMPLES
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