Chapter 5 Lecture 8 Capacity Planning FOR Products and Services

SYSTEMDESIGN CAPACITY PRODUCT AND SERVICE PLANNING ACQUISITION AND PLACEMENT OF EQUIPMENT ARRANGEMENT OF DEPARTMENTS LOCATION

Reasons of capacity planning

forecasting How much is needed? What kind of capacity is needed? When is it needed? The basic questions in capacity planning

When capacity planning ? It is made infrequently and in others, it is made regularly depends on the following factors :  Equipment and product design The stability of demand The rate of technological change  Competitive factors  Others factors The type of product and services Whether styles changes are important

Capacity terminology  Design capacity is the maximum theoretical output of a system  Design capacity ( Max. Capacity ) is the maximum theoretical output of a system  Normally expressed as a rate  Under ideal conditions  Effective capacity is the capacity a firm expects to achieve given current operating constraints  Effective capacity ( Best Operating Level ) is the capacity a firm expects to achieve given current operating constraints  Often lower than design capacity  Under ideal conditions  Actual output is rate of output actually achieved  Actual output ( Capacity Used ) is rate of output actually achieved  Cannot exceed effective capacity.

Utilization is the percent of design capacity achieved Efficiency is the percent of effective capacity achieved Utilization = Actual Output/Design Capacity Efficiency = Actual Output/Effective Capacity Utilization and Efficiency Both measures expressed as percentages

Efficiency/Utilization Actual output 36 units/day Efficiency = = = 90% Effective capacity 40 units/ day Actual output 36 units/day Utilization = = = 72% Design capacity 50 units/day Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 units/day Ex.

Efficiency vs Utilization

Utilization Example  Best operating level = 120 units/week  Actual output = 83 units/week  Utilization = ?.692 units/wk 120 units/wk 83 = level operatingBest usedCapacity nUtilizatio 

Underutilization Best Operating Level Average unit cost of output Volume Over-utilization Best Operating Level

Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, Shifts/day = 3, Hours/shift = 8 Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls/week = 201,600 rolls/week Measuring capacity Ex. Utilization = 148,000/201,600 = 73.4% Efficiency = 148,000/175,000 = 84.6%

Examples of Capacity Measures

 Facilities (size, location, layout, heating, lighting, ventilations)  Product and service factors (similarity of products)  Process factors (productivity, quality)  Human factors (training, skills, experience, motivations, absentation, turnover)  Policy factors (overtime system, no. of shifts)  Operational factors (scheduling problems, purchasing requirements, inventory shortages)  Supply chain factors (warehousing, transportation, distribution)  External factors (product standards, government agencies, pollution standard) Determinants of Effective Capacity

Estimate future capacity requirements Evaluate existing capacity Identify alternatives Conduct financial analysis for each alt. Assess key qualitative issues for each alt. Select one alternative Implement alternative chosen Monitor results Steps for Capacity Planning

Calculating Processing Requirements Determine type of products or services Forecast for the Demand Determine the process requirements The standard processing time / unit of product The number of workdays / year The number shifts that will be used

Calculating Processing Requirements A dept. works 8-hour shift, 250 days/year annual capacity is 250*8 = 2000 hours, number of machines required = 5,800 hours/2,000 hours = 2.90 machines then we need three machines to handle the required volume

In-House or Outsourcing 1.Available capacity (equip.,skills,time) 2.Expertise 3.Quality considerations (labs, inspect.) 4.Nature of demand (high, steady) 5.Cost (fixed, savings) 6.Risk Outsource: obtain a good or service completely or partially from an external provider Make or Buy ?

A firm’s manager must decide whether to make or buy a certain item used in the production of vending machines, making the item would involve annual lease costs of $ Cost and volume estimates are as follows: Should the firm make or buy ? If the volume changed, at what volume would the manager be indifferent between making and buying ? BuyMake None$150000Annual fixed cost $80$60Variable cost/unit Annual volume (units) EX. Make or Buy ?

Total cost = Fixed cost + (Volume * Variable cost) in case of make = $ (12000*60) = $ in case of buy = 0 + (12000*80) = $ TCost (make) < TCost (buy) So the solution is “Make” Tcost(make) = Tcost(buy) $ Q*60 = 0 + Q*80 Q = 7500 unit Sol. Make or Buy ? Q

Bottleneck Operation Bottleneck operation: An operation in a sequence of operations whose capacity is lower than that of the other operations

Bottleneck Operation Machine #2 Bottleneck Operation Bottleneck Operation Machine #1 Machine #3 Machine #4 10/hr 30/hr

Bottleneck Operation Operation 1 20/hr. Operation 2 10/hr. Operation 3 15/hr. 10/hr. Bottleneck Maximum output rate limited by bottleneck

Economies of Scale 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