Capacity Planning For Products and Services 5 Capacity Planning For Products and Services

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

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?

Importance of Capacity Decisions Impacts ability to meet future demands Affects operating costs Major determinant of initial costs Involves long-term commitment Affects competitiveness Affects ease of management Globalization adds complexity Impacts long range planning

Capacity Design capacity … Effective capacity Actual output

Efficiency and Utilization Actual output Efficiency = Effective capacity Utilization = Design capacity Both measures expressed as percentages

Efficiency/Utilization Example Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 trucks/day Actual output = units/day Efficiency = = Effective capacity units/ day Utilization = Actual output = units/day = Design capacity units/day

Determinants of Effective Capacity Facilities Product and service factors Process factors Human factors Policy factors Operational factors Supply chain factors External factors

Strategy Formulation Capacity strategy for long-term demand Demand patterns Growth rate and variability Facilities Cost of building and operating Technological changes Rate and direction of technology changes Behavior of competitors Availability of capital and other inputs

Key Decisions of Capacity Planning Amount of capacity needed Capacity cushion (100% - Utilization) Timing of changes Need to maintain balance Extent of flexibility of facilities Capacity cushion – extra demand intended to offset uncertainty

Forecasting Capacity Requirements Long-term vs. short-term capacity needs Long-term relates to overall level of capacity such as facility size, trends, and cycles Short-term relates to variations from seasonal, random, and irregular fluctuations in demand

Calculating Processing Requirements If annual capacity is 2000 hours, then how many machines do we need to handle the required volume of …. ?

Planning Service Capacity Need to be near customers Capacity and location are closely tied Inability to store services Capacity must be matched with timing of demand Degree of volatility of demand Peak demand periods

In-House or Outsourcing Outsource: obtain a good or service from an external provider Available capacity Expertise Quality considerations Nature of demand Cost Risk

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

Bottleneck Operation Machine #1 Machine #2 Bottleneck Operation Figure 5.2 Bottleneck operation: An operation in a sequence of operations whose capacity is lower than that of the other operations Bottleneck Operation Machine #1 Machine #3 Machine #4 10/hr 30/hr Machine #2

Bottleneck Operation Operation 1 20/hr. Operation 2 10/hr. ? Which operation is the Bottleneck operation? Maximum output rate limited by bottleneck

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

Production units have an optimal rate of output for minimal cost. 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

Economies of Scale Figure 5.5 Small Medium plant Large plant Minimum cost & optimal operating rate are functions of size of production unit. Small plant Average cost per unit Medium plant Large plant Output rate

Evaluating Alternatives Cost-volume analysis Break-even point Financial analysis Cash flow Present value Decision theory Waiting-line analysis

Cost-Volume Relationships Figure 5.6a Amount ($) Q (volume in units) Total cost = VC + FC Total variable cost (VC) Fixed cost (FC)

Cost-Volume Relationships Figure 5.6b Amount ($) Q (volume in units) Total revenue

Cost-Volume Relationships Figure 5.6c Amount ($) Q (volume in units) BEP units Profit Total revenue Total cost

Break-Even Problem with Step Fixed Costs Figure 5.7a Quantity FC + VC = TC Step fixed costs and variable costs. 1 machine 2 machines 3 machines

Break-Even Problem with Step Fixed Costs Figure 5.7b $ FC1 FC2 FC3 BEP 2 3 TP Quantity 1 Multiple break-even points TP = (P – VC) Q

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

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.

Waiting-Line Analysis Useful for designing or modifying service systems Waiting-lines occur across a wide variety of service systems Waiting-lines are caused by bottlenecks in the process Helps managers plan capacity level that will be cost-effective by balancing the cost of having customers wait in line with the cost of additional capacity