Capacity Planning Pertemuan 04 Mata kuliah : J0444 - Manajemen Operasional Tahun : 2010 Capacity Planning Pertemuan 04

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?

Capacity Planning Process Forecast Demand Develop Alternative Plans Quantitative Factors (e.g., Cost) Compute Rated Capacity Evaluate Capacity Plans Qualitative Factors (e.g., Skills) Compute Needed Capacity Select Best Capacity Plan Implement Best Plan

Types of Planning Over a Time Horizon Add Facilities Add long lead time equipment Schedule Jobs Schedule Personnel Allocate Machinery Sub-Contract Add Equipment Add Shifts Add Personnel Build or Use Inventory Long Range Planning Intermediate Range Planning Short Range Planning Modify Capacity Use Capacity * *Limited options exist

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

Definition and Measures of Capacity The “throughput,” or number of units a facility can hold, receive, store, or produce in a period of time. Utilization: Actual output as a percent of design capacity. Effective capacity: Capacity a firm can expect to receive given its product mix, methods of scheduling, maintenance, and standards of quality. Efficiency: Actual output as a percent of effective capacity.

Utilization Measure of planned or actual capacity usage of a facility, work center, or machine Actual Output Utilization = Design Capacity Planned hours to be used = Total hours available

Efficiency Measure of how well a facility or machine is performing when used Actual output Efficiency = Effective Capacity Actual output in units = Standard output in units Average actual time = Standard time

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

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

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

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 we need three machines to handle the required volume: 5,800 hours/2,000 hours = 2.90 machines

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

Implications of Capacity Changes Changes in: Sales Cash flow Quality Supply chain Human resources Maintenance

Special Requirements for Making Good Capacity Decisions Forecast demand accurately Understanding the technology and capacity increments Finding the optimal operating level (volume) Build for change

Attempts to have an average capacity, with an incremental expansion Approaches to Capacity Expansion Expected Demand Time in Years Demand New Capacity Capacity leads demand with an incremental expansion Capacity leads demand with a one-step expansion Capacity lags demand with an incremental expansion Attempts to have an average capacity, with an incremental expansion

Approaches to Capacity Expansion Expected Demand Time in Years Demand New Capacity Capacity leads demand with an incremental expansion

Approaches to Capacity Expansion Expected Demand Time in Years Demand New Capacity Capacity leads demand with a one-step expansion

Approaches to Capacity Expansion Expected Demand Time in Years Demand New Capacity Capacity lags demand with an incremental expansion

Attempts to have an average capacity, with an incremental expansion Approaches to Capacity Expansion Expected Demand Time in Years Demand New Capacity Attempts to have an average capacity, with an incremental expansion

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

Break-Even Analysis Fixed costs: costs that continue even if no units are produced: depreciation, taxes, debt, mortgage payments Variable costs: costs that vary with the volume of units produced: labor, materials, portion of utilities

Breakeven Chart Volume (units/period) Total revenue line Profit Breakeven point Total cost = Total revenue Profit Total cost line Cost in Dollars Variable cost Loss Fixed cost Volume (units/period)

Crossover Chart Process A: low volume, high variety Fixed cost - Process A Fixed cost - Process B Fixed cost - Process C Total cost - Process C Total cost - Process B Total cost - Process A Process A: low volume, high variety Process B: Repetitive Process C: High volume, low variety Process C Process B Process A Lowest cost process

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.

Net Present Value F = future value P = present value I = interest rate N = number of years

NPV in a More Convenient Form Present value of $1.00 Year 5% 6% 7% 8% 1 0.952 0.943 0.935 0.857 2 0.907 0.890 0.873 3 0.864 0.840 0.816 0.794 4 0.823 0.792 0.763 0.735 5 0.784 0.747 0.713 0.681 6 0.746 0.705 0.666 0.630 7 0.711 0.665 0.623 0.583 8 0.677 0.627 0.582 0.540 9 0.645 0.592 0.544 0.500

Present Value of an Annuity (S) Year 5% 6% 7% 8% 1 0.952 0.943 0.935 0.926 2 1.859 1.833 1.808 1.783 3 2.723 2.673 2.624 2.577 4 3.546 3.465 3.387 3.312 5 4.329 4.212 4.100 3.993 6 5.076 4.917 4.766 4.623 7 5.786 5.582 5.389 5.206 8 6.843 6.210 5.971 5.747 9 7.108 6.802 7.024 6.247 X = Factor from Table S = present value of a series of uniform annual receipts R = receipts that are received every year for the life of the investment

Decision Theory Helpful tool for financial comparison of alternatives under conditions of risk or uncertainty Suited to capacity decisions See Chapter 5 Supplement

Decision Tree and Capacity Decision -$90,000 $60,000 -10,000 $40,000 Market favorable (0.4) Market unfavorable (0.6) $100,000 -5,000 $0 -$14,000 $18,000 $13,000 Large Plant Medium Plant Small Plant Do nothing

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

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