5-1 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Capacity Planning Chapter 5 Capacity Planning

5-2 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Capacity Planning Capacity is the upper limit or ceiling on the load that an operating unit can handle. The basic questions in capacity handling are: –What kind of capacity is needed? –How much is needed? –When is it needed?

5-3 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Capacity Planning Impacts ability to meet future demands Affects operating costs Major determinant of initial costs Involves long-term commitment Affects competitiveness Affects ease of management Importance of Capacity Decisions

5-4 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Capacity Planning Capacity Design capacity –maximum obtainable output Effective capacity –Maximum capacity given product mix, scheduling difficulties, and other doses of reality. Actual output –rate of output actually achieved--cannot exceed effective capacity.

5-5 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Capacity Planning Efficiency and Utilization Actual output Efficiency = Effective capacity Actual output Utilization = Design capacity

5-6 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Capacity Planning Design capacity = 50 trucks/day Effective capacity = 40 trucks/day 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

5-7 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Capacity Planning Determinants of Effective Capacity Facilities Products or services Processes Human considerations Operations External forces

5-8 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Capacity Planning Some Possible Growth Patterns Volume Time Growth Decline Cyclical Stable Figure 5-1

5-9 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Capacity Planning Developing Capacity Alternatives Design flexibility into systems 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

5-10 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Capacity Planning Evaluating Alternatives Minimum cost Average cost per unit 0 Rate of output Production units have an optimal rate of output for minimal cost. Figure 5-3

5-11 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Capacity Planning Evaluating Alternatives 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 Figure 5-4

5-12 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Capacity Planning Need to be near customers –Capacity and location are closely tied Inability to store services –Capacity must me matched with timing of demand Degree of volatility of demand –Peak demand periods Planning Service Capacity

5-13 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Capacity Planning Calculating Processing Requirements

5-14 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Capacity Planning Cost-Volume Relationships Amount ($) 0 Q (volume in units) Total cost = VC + FC Total variable cost (VC) Fixed cost (FC) Figure 5-5a

5-15 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Capacity Planning Cost-Volume Relationships Amount ($) Q (volume in units) 0 Total revenue Figure 5-5b

5-16 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Capacity Planning Cost-Volume Relationships Amount ($) Q (volume in units) 0 BEP units Profit Total revenue Total cost Figure 5-5c

5-17 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Capacity Planning Break-Even Problem with Step Fixed Costs Quantity FC + VC = TC Step fixed costs and variable costs. 1 machine 2 machines 3 machines Figure 5-6a

5-18 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Capacity Planning Break-Even Problem with Step Fixed Costs $ TC BEP 2 3 TR Quantity Multiple break-even points Figure 5-6b

5-19 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Capacity Planning 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 Assumptions of Cost-Volume Analysis

5-20 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Capacity Planning 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.