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CAPACITY LOAD OUTPUT

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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 5-2 CAPACITY

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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. Introduction 5-3 CAPACITY

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Activities 6 Time horizon (months) Location decisions Aggregate Planning Scheduling Short term Intermediate Long term 5-4 CAPACITY

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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? 5-5 CAPACITY

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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. 5-6 CAPACITY

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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 5-7 CAPACITY

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Basic questions in capacity handling What kind of capacity is needed? How much is needed? When is it needed? 5-8 CAPACITY

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1. Impacts ability to meet future demands 2. Affects operating costs 3. Major determinant of initial costs 4. Involves long-term commitment 5. Affects competitiveness, e.g. speed 6. Affects ease of management 7. Globalization adds complexity 8. Impacts long range planning Importance of Capacity Decisions 5-9 CAPACITY

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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 CAPACITY

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Actual output Efficiency = Effective capacity Actual output Utilization = Design capacity Both measures expressed as percentages Designing and Measuring Capacity 5-11 CAPACITY

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Actual output = 36 units/day Efficiency = = 90% Effective capacity 40 units/ day Utilization = Actual output = 36 units/day = 72% Design capacity 50 units/day Efficiency/Utilization Example Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 units/day 5-12 CAPACITY

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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 5-13 CAPACITY

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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, 2 nd or 3 rd shift Operational factors, e.g. inventory stocking decisions Supply chain factors,e.g. warehousing, transportation External factors, e.g. pollution standards, regulations 5-14 CAPACITY

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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 5-15 CAPACITY

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Key Decisions of Capacity Planning 1. Amount of capacity needed Capacity cushion (100% - Utilization) 2. Timing of changes 3. Need to maintain balance thruout the system 4. Extent of flexibility of facilities and workforce Capacity cushion = extra demand intended to offset uncertainty 5-16 CAPACITY

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Capacity Expansion Strategies 5-17 CAPACITY

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Calculating Processing Requirements Calculate the number of machines needed? A company works one 8 hour shift, 250 days/year, and has the following figures: 5-18 CAPACITY

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

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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 CAPACITY

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5-21 Optimal Rate of Output 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 CAPACITY

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Economies of scaleDis-economies of scaleς 250,000 PC 125,000 PC 375,000 PC Average cost per unit Output rate Economies of scale (Under - utilization) Dis-economies of scale (Over - utilization) Optimum operating level Minimum cost Average cost per unit Output rate 5-22 CAPACITY

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Output 10/hr Operation 3 10/hr Operation 4 20/hr Operation 2 30/hr Operation 1 20/hr Input Bottleneck Operation Bottleneck Maximum output rate limited by bottleneck 5-23 CAPACITY

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Stevenson, p , it can include slides 22 - here Developing Capacity Alternatives 1. Design flexibility into systems 2. Take stage of life cycle into account 3. Take a “big picture” approach to capacity changes 4. Prepare to deal with capacity “chunks” 5. Attempt to smooth out capacity requirements 6. Identify the optimal operating level 5-24 CAPACITY

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Techniques for Evaluating Capacity Alternatives Cost-volume analysis –Break-even point Financial analysis –Cash flow –Present value Decision theory Waiting-line analysis 5-26 CAPACITY

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Cost-Volume Relationships Amount ($) 0 Q (volume in units) Total cost = VC + FC Total variable cost (VC) Fixed cost (FC) Amount ($) Q (volume in units) 0 Total revenue 5-27 CAPACITY

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Break-Even Problem with Step Fixed Costs Quantity FC + VC = TC Step fixed costs and variable costs. 1 machine 2 machines 3 machines 5-28 CAPACITY

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1. One product is involved 2. Everything produced can be sold 3. Variable cost per unit is the same regardless of volume 4. Fixed costs do not change with volume 5. Revenue per unit constant with volume 6. Revenue per unit exceeds variable cost per unit Assumptions of Cost-Volume Analysis 5-29 CAPACITY

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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 CAPACITY

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Decision Theory Helpful tool for financial comparison of alternatives under conditions of risk or uncertainty Suited to capacity decisions 5-31 CAPACITY

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EXAMPLES 5-32 CAPACITY

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