1. Chapter 5 Capacity Planning For Products and Services
Ceiling on the amount of load
Capacity at NSU

2. Capacity Planning
Capacity is the upper limit or ceiling on the load that an operating unit can handle.
Equipment
Space
Employee skills
Capacity also includes
What kind of capacity is needed?
How much is needed?
When is it needed?
The basic questions in capacity handling are:

3. 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
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4. Capacity Design capacity Effective capacity Actual output
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.

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

6. Efficiency/Utilization 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
Actual output = 36 units/day
Utilization =
= 72%
Design capacity = 50 units/day

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

8. 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

9. 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

11. 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

12. 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

13. Calculating Processing Requirements
Product
Annual Demand
Standard processing time per unit (hr.)
Processing time needed (hr.) #1 #2 #3
400
300
700
5.0
8.0
2.0
2,000
2,400
1,400
5,800
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

14. 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

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

16. 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

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

18. Machine Type A B C D E F
Output 40 50 30 40
120 50
700
200 30 50
700 40 50
700 30 40
120 50

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

20. 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

21. Production units have an optimal rate of output for minimal cost.
Minimum average cost per unit
Average cost per unit
Minimum
cost
Rate of output
Figure 5.4

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

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

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

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

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

27. BEP Problem with Step Fixed Costs$
BEP 3 TC
BEP 2 TC 3 TC 2 TR 1
Quantity
Multiple break-even points
Figure 5.7b

28. Assumptions of Cost-Volume Analysis
Simple Solution to our Capacity Problem?
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

29. 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.

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

31. 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

32. Chapter 5 Example 4 Purchase 1, 2 or 3 machines BEP for each range?
Variable cost 10/unit
Revenue 40/piece
BEP for each range?
Demand , how many to buy?
No. of
Machines
Total Annual Fixed Cost
Corresponding range of output 1
9600
0-300 2
15000 3
20000

33. QBEP = $9600/($40/unit -$10/unit) = 320 unit
QBEP = FC/(R-v)
QBEP = $9600/($40/unit -$10/unit) = 320 unit
QBEP = $15000/($40/unit -$10/unit) = 500 unit
QBEP = $20000/($40/unit -$10/unit) = unit
Answer part B
Demand , how many to buy?
No. of
Machines
Total Annual Fixed Cost
Corresponding range of output 1
9600
0-300 2
15000 3
20000

35. 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