0 Long-Range Capacity Planning. 1 The Hierarchy of Production Decisions The logical sequence of operations in factory planning corresponds to the sequence.

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Long-RangeLong-RangeCapacity PlanningCapacity Planning

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The Hierarchy of Production DecisionsThe Hierarchy of Production DecisionsThe Hierarchy of Production DecisionsThe Hierarchy of Production Decisions

The logical sequence of operations in factory planning The logical sequence of operations in factory planning corresponds to the sequenccorresponds to the sequencee of chapters in of chapters in aa text-text-bookbook with title «Production and Operations Management»with title «Production and Operations Management»..

All planning starts with the demand forecast. All planning starts with the demand forecast. Demand forecasts are the basis for the top level Demand forecasts are the basis for the top level long_range capacity, long_range capacity,

and medium term and medium term aggregate planning. aggregate planning. The Master Production Schedule (MPS) is the result of disaggregating The Master Production Schedule (MPS) is the result of disaggregating

aggregate plans down to the individual item level. aggregate plans down to the individual item level. Based on the MPS, MRP is used to determine the size and timing of Based on the MPS, MRP is used to determine the size and timing of

component and subassembly production.component and subassembly production. Detailed shop floor schedules are required to meet production plans Detailed shop floor schedules are required to meet production plans

resulting from the MRP. resulting from the MRP.

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Hierarchy of Hierarchy of Production DecisionsProduction Decisions

Hierarchy of Hierarchy of Production DecisionsProduction Decisions

Long-range Capacity PlanningLong-range Capacity Planning

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Capacity DefinitionsCapacity DefinitionsCapacity DefinitionsCapacity Definitions

CapacityCapacity is a statement of the rate of producing is a statement of the rate of producing output and is generally measured as the output of the output and is generally measured as the output of the process per unit period of time. process per unit period of time. Capacity essentially Capacity essentially limits the rate of output possible.limits the rate of output possible.

The The LoadLoad represents the work released and planned represents the work released and planned for the process for a given period of time.for the process for a given period of time.

Think the Think the loadload being the amount of water in a tank being the amount of water in a tank and the and the capacitycapacity being the rate at which the water can being the rate at which the water can be drained from the tank.be drained from the tank.

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Capacity PlanningCapacity PlanningCapacity PlanningCapacity Planning

Capacity planning Capacity planning is the process of reconciling the is the process of reconciling the difference between the difference between the capacity available capacity available for the for the process and the process and the capacity required capacity required to satisfy the to satisfy the customer order which represents the load.customer order which represents the load.

In capacity planning, it is important to adjust the In capacity planning, it is important to adjust the capacity to meet the load in order to maintain a high capacity to meet the load in order to maintain a high level of customer service.level of customer service.

Critical elements of capacity to be planned include Critical elements of capacity to be planned include labor, machine hours, facilities and warehouse labor, machine hours, facilities and warehouse spacespace..

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Capacity PlanningCapacity PlanningCapacity PlanningCapacity Planning

AA major function of capacity planning is to match major function of capacity planning is to match the capacity of the machine or facility with the the capacity of the machine or facility with the demand for the products of the firm.demand for the products of the firm.

Capacity planning can be classified into three Capacity planning can be classified into three planning horizons:planning horizons:

1.1. Long rangeLong range

2.2. Medium rangeMedium range

3.3. Short rangeShort range

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Long-Term Capacity PlanningLong-Term Capacity PlanningLong-Term Capacity PlanningLong-Term Capacity Planning

- TThe long range planning he long range planning generally considers generally considers planning horizons of one year or longer. A time planning horizons of one year or longer. A time period of one year or longer is needed to provide period of one year or longer is needed to provide sufficient time sufficient time to build a new facility, to expand the to build a new facility, to expand the existing facility existing facility or to move to a new facility due to or to move to a new facility due to forecasted changes in demand.forecasted changes in demand.

- We determine long-term capacity needs by forecasting We determine long-term capacity needs by forecasting demand over a time horizon and then converting those demand over a time horizon and then converting those forecasts into capacity requirementsforecasts into capacity requirements

- Long-term considerations Long-term considerations relate to overall level of capacity, relate to overall level of capacity, such as facility size (affected by such as facility size (affected by trends and cyclestrends and cycles))

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Medium-term capacity PlanningMedium-term capacity PlanningMedium-term capacity PlanningMedium-term capacity Planning

Medium range capacity planning Medium range capacity planning horizon ranges horizon ranges approximately from one month to six months. approximately from one month to six months.

At this level of planning, decisions or activities At this level of planning, decisions or activities include include acquisition of a major piece of machinery acquisition of a major piece of machinery and subcontractingand subcontracting..

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Short-term Capacity PlanningShort-term Capacity PlanningShort-term Capacity PlanningShort-term Capacity Planning

- Short range planning Short range planning horizon covers horizon covers capacity planning activities on a daily or capacity planning activities on a daily or a weekly basis and are generated as a a weekly basis and are generated as a result of disaggregation of the long or result of disaggregation of the long or medium range capacity plans. These medium range capacity plans. These activities include activities include machine loading and machine loading and detailed production schedulingdetailed production scheduling. .

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Short-term Capacity PlanningShort-term Capacity PlanningShort-term Capacity PlanningShort-term Capacity Planning

- Short-termShort-term considerations relate to probable considerations relate to probable variations in capacity requirements created by variations in capacity requirements created by such things as ssuch things as seasonal, random, and easonal, random, and irregular fluctuations in demandirregular fluctuations in demand

- When When time intervals are too short time intervals are too short to have a to have a seasonal variations in demand, a probability seasonal variations in demand, a probability distribution such as distribution such as Normal, Uniform, Normal, Uniform, Poisson can be used to forecast the demandPoisson can be used to forecast the demand ..

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Questions to be answered in Long-Range Capacity Questions to be answered in Long-Range Capacity PlanningPlanning


How muchHow much long-range production capacity is needed? long-range production capacity is needed?

- adding too much capacity means the capacity will - adding too much capacity means the capacity will be underutilized.be underutilized.

- adding too little capacity means that the comapany - adding too little capacity means that the comapany will soon be faced with the problem of increasing will soon be faced with the problem of increasing capacity again.capacity again.

WhenWhen additional capacity is needed? additional capacity is needed?

- It is important to pay attention to changing - It is important to pay attention to changing patterns of demand.patterns of demand.

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Where Where the production facilities should be located? the production facilities should be located?

- Consideration of the logistics of material flows - Consideration of the logistics of material flows suggests that new facilities be located near suppliers suggests that new facilities be located near suppliers of raw materials and market outlets.of raw materials and market outlets.

HowHow the production facilities are arranged? the production facilities are arranged?

Facility layout decisions affect the production rates.Facility layout decisions affect the production rates.

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Importance of Capacity DecisionsImportance of Capacity DecisionsImportance of Capacity DecisionsImportance of Capacity Decisions

Capacity limits the rate of output possible.Capacity limits the rate of output possible.

Poor capacity decisions which result in over and Poor capacity decisions which result in over and under capacity under capacity increase the operating costsincrease the operating costs..

Capacity decisons often Capacity decisons often require long-term require long-term commitmentcommitment of resources so that once they are of resources so that once they are implemented, it may be difficult to modify those implemented, it may be difficult to modify those decisions without incurring major costs.decisions without incurring major costs.

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Capacity decisons Capacity decisons are m are major determinant ajor determinant of initial of initial costscosts..

Capacity decisons aCapacity decisons affect ffect competitivenesscompetitiveness. Companies . Companies having appropriate capacity can deliver the products having appropriate capacity can deliver the products faster than competitors faster than competitors (delivery speed).(delivery speed).


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Capacity decisions are important to all Capacity decisions are important to all departments of the organization; departments of the organization;

AAn accountant n accountant would be interested in would be interested in collecting cost accounting information in collecting cost accounting information in order to ensure that correct capacity order to ensure that correct capacity expansion decision is reached. expansion decision is reached.

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Similarly Similarly a financial manager a financial manager would be interested in performing the would be interested in performing the financial analysis of whether the financial analysis of whether the investment decision is justified for a investment decision is justified for a plant or capacity increase.plant or capacity increase.

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An Information Technology Manager An Information Technology Manager would end up preparing data bases that would end up preparing data bases that would aid the organization to decide would aid the organization to decide about the capacity and last but not the about the capacity and last but not the least least an operations manager an operations manager would would select strategies that would help the select strategies that would help the organization organization achieve the optimum achieve the optimum capacity levels capacity levels to meet the to meet the customercustomer demand.demand.

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Steps in the Capacity Planning ProcessSteps in the Capacity Planning ProcessSteps in the Capacity Planning ProcessSteps in the Capacity Planning Process

1. 1. Estimate the capacity of the present facilities.Estimate the capacity of the present facilities.

2. 2. Forecast the long-range future capacity needsForecast the long-range future capacity needs by taking into by taking into consideration demand patterns(i.e., trends, cycles)consideration demand patterns(i.e., trends, cycles)..

3. 3. Identify and analyze Identify and analyze ways of changing long-range capacityways of changing long-range capacity

For Capacity ExpansionFor Capacity Expansion: : SubcontractSubcontract, , Acquire Acquire other other companies, companies, Develop new sitesDevelop new sites, buy new equipment, , buy new equipment, Expand current sitesExpand current sites, , Reactivate standby facilitiesReactivate standby facilities

For Capacity ReductionFor Capacity Reduction: : Sell off existing facilitiesSell off existing facilities, Sell , Sell inventories and Lay off employeesinventories and Lay off employees

4. 4. Select from among the alternative sources of capacitySelect from among the alternative sources of capacity changing planschanging plans..

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Measurements of CapacityMeasurements of CapacityMeasurements of CapacityMeasurements of Capacity

Output rate capacity - for a single product or a - for a single product or a few homogeneous productsfew homogeneous products (TV sets per (TV sets per month, number of cars per shift)month, number of cars per shift)

Aggregate capacityAggregate capacity - using a common unit of - using a common unit of outputoutput if many different products are produced if many different products are produced ( sales dollars per month, tons of steel per day)( sales dollars per month, tons of steel per day)

Input rate capacity Input rate capacity - for service operations- for service operations (hospitals use available beds per month, (hospitals use available beds per month, airlines use available seats per day)airlines use available seats per day)

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Design Capacity: Design Capacity: Maximum output that can possibly be Maximum output that can possibly be attained under ideal conditionsattained under ideal conditions

Effective CapacityEffective Capacity: : It is usually less than design capacity (it It is usually less than design capacity (it can not exceed design capacity) due to the realities of can not exceed design capacity) due to the realities of changing product mix, scheduling difficulties, periodic changing product mix, scheduling difficulties, periodic machine maintenance, lunch and coffee breaksmachine maintenance, lunch and coffee breaks

Actual outputActual output: : The rate of output actually achieved. It can not The rate of output actually achieved. It can not exceed effective capacity and is often less than effective exceed effective capacity and is often less than effective capacity due to breakdowns, absenteesim, defective output, capacity due to breakdowns, absenteesim, defective output, shortages of materials and so on. (These problems are outside shortages of materials and so on. (These problems are outside the control of the operations managers)the control of the operations managers)

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These different measures of capacity are These different measures of capacity are useful in defining two measures of useful in defining two measures of system effectiveness:system effectiveness:

---- efficiency---- efficiency

---- utilization---- utilization

Efficiency=Actual Output / Effective Cap.Efficiency=Actual Output / Effective Cap.

Utilization=Actual Output / Design Cap.Utilization=Actual Output / Design Cap.

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It is common for managers to focus It is common for managers to focus exclusively on efficiency, but often this exclusively on efficiency, but often this might be misleading. This happens when might be misleading. This happens when effective capacity is low compared with effective capacity is low compared with design capacity. In those cases, high design capacity. In those cases, high efficiency would seem to indicate efficiency would seem to indicate effective use of resources when it does effective use of resources when it does not. The following example illustrates not. The following example illustrates this point.this point.

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EXAMPLEEXAMPLEEXAMPLEEXAMPLE

Given the information below, compute the efficiency and Given the information below, compute the efficiency and utilization of the vehicle repair department:utilization of the vehicle repair department:

Design capacity = 50 trucks/dayDesign capacity = 50 trucks/day

Effective capacity= 40 trucks/dayEffective capacity= 40 trucks/day

Actual output = 36 trucks/dayActual output = 36 trucks/day

Efficiency= 36/40=90% Utilization= 36/50=72%Efficiency= 36/40=90% Utilization= 36/50=72%

When effective capacity is low compared with design capacity, When effective capacity is low compared with design capacity, to focus exclusively on efficiency can be misleading. And you to focus exclusively on efficiency can be misleading. And you should note that increasing utilization depends on being able should note that increasing utilization depends on being able to increase effective capacity. This requires a knowledge of to increase effective capacity. This requires a knowledge of what is constraing effective capacity.what is constraing effective capacity.

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Determinants of Effective CapacityDeterminants of Effective CapacityDeterminants of Effective CapacityDeterminants of Effective Capacity

A)A) FacilitiesFacilities - Location (transportation cost, distance, labor - Location (transportation cost, distance, labor

supply)supply) - Design (room for expansion)- Design (room for expansion) - Layout (material transfer, line balance)- Layout (material transfer, line balance)

B)B) Product/serviceProduct/service - Design (similar products- Design (similar products standardization) standardization)

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C)C) ProcessProcess - Quantitiy capabilities (productivity, using - Quantitiy capabilities (productivity, using

automated machines)automated machines) - Quality capabilities (the more time spent for - Quality capabilities (the more time spent for

inspection and rework the less capacity)inspection and rework the less capacity)

D)D) Human FactorsHuman Factors - job content- job content - training and experience- training and experience - motivation- motivation - absenteeism and labor turnover- absenteeism and labor turnover

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E)E) Operational FactorsOperational Factors

- scheduling- scheduling

- materials management- materials management

- quality assurance- quality assurance

- maintenance policies- maintenance policies

- equipment breakdowns- equipment breakdowns

F)F) External FactorsExternal Factors

- Pollution control standards- Pollution control standards

- Unions (limit the number of working hours)- Unions (limit the number of working hours)

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Factors which influence the frequency of capacity Factors which influence the frequency of capacity decisionsdecisions

Factors which influence the frequency of capacity Factors which influence the frequency of capacity decisionsdecisions

Stability of demandStability of demand

The rate of technological change in equipmentThe rate of technological change in equipment

The rate of technological change in product designThe rate of technological change in product design

The rate of technological change in competitive The rate of technological change in competitive factorsfactors

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A Strategy For Demand Management:A Strategy For Demand Management:Capacity CushionCapacity Cushion

A Strategy For Demand Management:A Strategy For Demand Management:Capacity CushionCapacity Cushion

CCapacity cushionapacity cushion is an additional amount of capacity is an additional amount of capacity added onto the expected demandadded onto the expected demand.. Capacity cushion Capacity cushion Helps to meet excess Helps to meet excess demand during peak demand demand during peak demand

seasonsseasons Lowers Lowers production costsproduction costs Provides Provides product and volume flexibilityproduct and volume flexibility IImprovmproveses quality of products and services quality of products and services

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Developing Capacity AlternativesDeveloping Capacity AlternativesDeveloping Capacity AlternativesDeveloping Capacity Alternatives

1.1. Design flexibility into systemsDesign flexibility into systems by taking into by taking into consideration of water lines, power hookups, waste consideration of water lines, power hookups, waste disposal lines for future expansiondisposal lines for future expansion

2.2. Take a “big picture” approach to capacity changesTake a “big picture” approach to capacity changes (increasing number of rooms will lead to increasing (increasing number of rooms will lead to increasing demand for parking)demand for parking)

3.3. Prepare to deal with capacity “chunks.” Capacity Prepare to deal with capacity “chunks.” Capacity increases are often acquired in fairly large chunks increases are often acquired in fairly large chunks rather than smooth increments, making it difficult to rather than smooth increments, making it difficult to achieve a match between desired capacity and achieve a match between desired capacity and feasible capacity.feasible capacity.

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4. 4. Attempt to smooth out capacity requirementsAttempt to smooth out capacity requirements4. 4. Attempt to smooth out capacity requirementsAttempt to smooth out capacity requirements

Unevenness in capacity requirements also can create cerUnevenness in capacity requirements also can create certtain problems. ain problems.

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5. 5. Take stage of life cycle into accountTake stage of life cycle into account5. 5. Take stage of life cycle into accountTake stage of life cycle into account

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6. 6. Identify the optimal operating levelIdentify the optimal operating level6. 6. Identify the optimal operating levelIdentify the optimal operating level

Average UnitAverage UnitCost of Output ($)Cost of Output ($)

Annual Volume (units)Annual Volume (units)

Best Operating LevelBest Operating Level

EconomiesEconomiesof Scaleof Scale

DiseconomiesDiseconomiesof Scaleof Scale

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Economies of ScaleEconomies of ScaleEconomies of ScaleEconomies of Scale

Best operating levelBest operating level - least average unit cost - least average unit cost Economies of scaleEconomies of scale - If the output rate is less than the - If the output rate is less than the

optimal level, increasing output rate results in optimal level, increasing output rate results in decreasing average unit costsdecreasing average unit costs. Declining costs up to . Declining costs up to the best operating level result from fixed costs, labor the best operating level result from fixed costs, labor cost being spread over more unitscost being spread over more units

AAverage cost per unit decreases as the volume verage cost per unit decreases as the volume increasesincreases. .

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Diseconomies of scaleDiseconomies of scaleDiseconomies of scaleDiseconomies of scale

Diseconomies of scaleDiseconomies of scale – –

If the output rate is more than the optimal level, If the output rate is more than the optimal level, increasing the output rate results in increasing increasing the output rate results in increasing average unit costsaverage unit costs..

AAverage cost per unit increases as the volume verage cost per unit increases as the volume increasesincreases due to scheduling problems, quality due to scheduling problems, quality problems, reduced morale, increased use of overtimeproblems, reduced morale, increased use of overtime

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Expanding capacity all at once or incrementallyExpanding capacity all at once or incrementallyExpanding capacity all at once or incrementallyExpanding capacity all at once or incrementally

Another important issue in capacity Another important issue in capacity planning is:planning is:

Choosing between expanding capacity all Choosing between expanding capacity all at once (better for mature products having at once (better for mature products having stable and predictable demand) or stable and predictable demand) or incrementally (better for new products)incrementally (better for new products)

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Larger Plants Tend to Have Larger Plants Tend to Have Higher Optimal Output RatesHigher Optimal Output RatesLarger Plants Tend to Have Larger Plants Tend to Have Higher Optimal Output RatesHigher Optimal Output Rates

Minimum cost & optimal operating rate are functions of size of production unit.

Ave

rage

cos

t p

er u

nit

0

Smallplant Medium

plant Largeplant

Output rate

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Planning Service CapacityPlanning Service CapacityPlanning Service CapacityPlanning Service Capacity

Three important factors in planning servive capacity Three important factors in planning servive capacity are:are:

Inability to store servicesInability to store services Need to be near customersNeed to be near customers

Capacity and location are closely tiedCapacity and location are closely tied Capacity must be matched with timing of demand Capacity must be matched with timing of demand

Degree of volatility of demandDegree of volatility of demand Peak demand periods Peak demand periods

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Analyzing Capacity-Planning DecisionsAnalyzing Capacity-Planning DecisionsAnalyzing Capacity-Planning DecisionsAnalyzing Capacity-Planning Decisions

Decision Tree AnalysisDecision Tree Analysis Cost-VolumeCost-Volume Analysis Analysis Present-Value AnalysisPresent-Value Analysis Computer SimulationComputer Simulation Waiting Line AnalysisWaiting Line Analysis Linear ProgrammingLinear Programming

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Decision Tree AnalysisDecision Tree AnalysisDecision Tree AnalysisDecision Tree Analysis

Structures complex, multiphase decisionsStructures complex, multiphase decisions Allows objective evaluation of alternativesAllows objective evaluation of alternatives Incorporates uncertaintyIncorporates uncertainty Develops expected valuesDevelops expected values

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Good Eats Café is about to build a new Good Eats Café is about to build a new restaurant. An architect has developed three restaurant. An architect has developed three building designs, each with a different seating building designs, each with a different seating capacity. Good Eats estimates that the average capacity. Good Eats estimates that the average number of customers per hour will be 80, 100, or number of customers per hour will be 80, 100, or 120 with respective probabilities of 0.4, 0.2, and 120 with respective probabilities of 0.4, 0.2, and 0.4. The payoff table showing the profits for the 0.4. The payoff table showing the profits for the three designs is on the next slide. three designs is on the next slide.

Example: Decision Tree AnalysisExample: Decision Tree AnalysisExample: Decision Tree AnalysisExample: Decision Tree Analysis

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Payoff TablePayoff Table

Average Number of Customers Per HourAverage Number of Customers Per Hour

cc11 = 80 = 80 cc22 = 100 = 100 cc33 = 120 = 120

Design A $10,000 $15,000 $14,000Design A $10,000 $15,000 $14,000

Design B $ 8,000 $18,000 $12,000Design B $ 8,000 $18,000 $12,000

Design C $ 6,000 $16,000 $21,000Design C $ 6,000 $16,000 $21,000


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Expected Value Approach

Calculate the expected value for each decision. The decision tree on the next slide can assist in this calculation. Here d1, d2, d3 represent the decision alternatives of designs A, B, C, and c1, c2, c3 represent the different average customer volumes (80, 100, and 120) that might occur.


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Decision Tree

1111

.2.2

.4.4

.4.4

.4.4

.2.2

.4.4

.4.4

.2.2

.4.4

dd11

dd22

dd33

cc11

cc11

cc11

cc22

cc33

cc22

cc22

cc33

cc33

PayoffsPayoffs

10,00010,000

15,00015,000

14,00014,000

8,0008,000

18,00018,000

12,00012,000

6,0006,000

16,00016,000

21,00021,000

2222

3333

4444


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Expected Value For Each DecisionExpected Value For Each Decision

Choose the design with largest EV -- Design C.Choose the design with largest EV -- Design C.

3333

4444

dd11

dd22

dd33

EV = .4(10,000) + .2(15,000) + .4(14,000)EV = .4(10,000) + .2(15,000) + .4(14,000) = $12,600= $12,600

EV = .4(8,000) + .2(18,000) + .4(12,000)EV = .4(8,000) + .2(18,000) + .4(12,000) = $11,600= $11,600

EV = .4(6,000) + .2(16,000) + .4(21,000)EV = .4(6,000) + .2(16,000) + .4(21,000) = = $14,000$14,000

Design ADesign A

Design BDesign B

Design CDesign C

2222

1 1 1 1


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Assumptions of Cost-Volume AnalysisAssumptions of Cost-Volume AnalysisAssumptions of Cost-Volume AnalysisAssumptions of Cost-Volume Analysis

1.1. One product is involvedOne product is involved

2.2. Everything produced can be soldEverything produced can be sold

3.3. Variable cost per unit is the same regardless of Variable cost per unit is the same regardless of volumevolume

4.4. Fixed costs do not change with volumeFixed costs do not change with volume

5.5. Revenue per unit Revenue per unit is is constant constant

6.6. Revenue per unit exceeds variable cost per unitRevenue per unit exceeds variable cost per unit

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Example 1: Cost-Volume AnalysisExample 1: Cost-Volume AnalysisExample 1: Cost-Volume AnalysisExample 1: Cost-Volume Analysis

The owner of Old-Fashioned Berry Pies, S. Simon, is The owner of Old-Fashioned Berry Pies, S. Simon, is contemplating adding a new line of pies, which will contemplating adding a new line of pies, which will require leasing new equipment for a monthly require leasing new equipment for a monthly payment of $6000. Variable cost would be $2 per pie payment of $6000. Variable cost would be $2 per pie and pies would retail $7 each.and pies would retail $7 each.

a) How many pies must be sold in order to break a) How many pies must be sold in order to break even?even?

b) What would the profit(loss) be if 1000 pies are b) What would the profit(loss) be if 1000 pies are made and sold in a month?made and sold in a month?

c) How many pies must be sold to realize a profit of c) How many pies must be sold to realize a profit of $4000?$4000?

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Example 1Example 1Example 1Example 1

a)a) Q = FC/(p-v)=6000/(7-2)=1200 pies/monthQ = FC/(p-v)=6000/(7-2)=1200 pies/month

b)b) Profit(or Loss)=7*1000-(6000+2*1000)Profit(or Loss)=7*1000-(6000+2*1000)

= -$1000 (Loss)= -$1000 (Loss)

c)c) 4000 = 7Q – (6000+2Q)4000 = 7Q – (6000+2Q)

Q=2000 piesQ=2000 pies

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Example 2: Cost-Volume AnalysisExample 2: Cost-Volume AnalysisExample 2: Cost-Volume AnalysisExample 2: Cost-Volume Analysis

A manager has the option of purchasing one, two, or A manager has the option of purchasing one, two, or three machines.three machines.

# of mach. Tot. Annual FC Correspond. Output# of mach. Tot. Annual FC Correspond. Output

1 $9600 0 – 3001 $9600 0 – 300

2 15000 301 - 6002 15000 301 - 600

3 20000 601 – 9003 20000 601 – 900

Variable cost is $10, revenue is $40 per unit.Variable cost is $10, revenue is $40 per unit.

a)a) Determine the break-even poinf for each range.Determine the break-even poinf for each range.

b)b) If projected demand is between 580 and 660 units, If projected demand is between 580 and 660 units, how many machines should the manager purchase?how many machines should the manager purchase?

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Example 2Example 2Example 2Example 2

a) For one machine Q = 9600/(40-10)= 320 unitsa) For one machine Q = 9600/(40-10)= 320 units

For two machines Q= 15000/(40-10)= 500 unitsFor two machines Q= 15000/(40-10)= 500 units

For three machines Q=20000/(40-10)=666.67 unitsFor three machines Q=20000/(40-10)=666.67 units

b) Manager should choose two machines. Because b) Manager should choose two machines. Because even if demand is at low end of the range (i.e., 580), even if demand is at low end of the range (i.e., 580), it would be above the break-even point and thus yield it would be above the break-even point and thus yield a profit. If three machines are purchased, even at the a profit. If three machines are purchased, even at the top end of projected demand (i.e., 660), the volume top end of projected demand (i.e., 660), the volume would still be less than the break-even point for that would still be less than the break-even point for that range, so there would be no profit.range, so there would be no profit.

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A Capacity Planning Strategy:A Capacity Planning Strategy:Make or BuyMake or Buy

A Capacity Planning Strategy:A Capacity Planning Strategy:Make or BuyMake or Buy

Once capacity requirements have been determined, the Once capacity requirements have been determined, the company must decide whether to produce the product company must decide whether to produce the product or buy (outsource) it from another company.or buy (outsource) it from another company.

The company can purchase the product from an The company can purchase the product from an outside source for c1 dollar per unit, but can produce outside source for c1 dollar per unit, but can produce internally for a lower unit price , c2<c1. However in internally for a lower unit price , c2<c1. However in order to produce the product internally, the company order to produce the product internally, the company invest $K to expand production capacity. invest $K to expand production capacity.

Which strategy should the company adopt?Which strategy should the company adopt?

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Make or Buy: Capacity Expansion ProblemMake or Buy: Capacity Expansion ProblemMake or Buy: Capacity Expansion ProblemMake or Buy: Capacity Expansion Problem

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The factors which affect make or buy decisions are:The factors which affect make or buy decisions are:The factors which affect make or buy decisions are:The factors which affect make or buy decisions are:

• Available capacityAvailable capacity• ExpertiseExpertise• Quality considerationsQuality considerations• Nature of demandNature of demand• CostCost• RiskRisk

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Make or Buy? Make or Buy? Make or Buy? Make or Buy?

Available capacity.Available capacity. If an organization has available the equipment, necessary skills, and If an organization has available the equipment, necessary skills, and time,time, it it

often makes sense to produce an item or perform a service in-house.often makes sense to produce an item or perform a service in-house.

Expertise. Expertise. If a firm lacks the expertise to do a job satisfactorily, buying might be a reasonable If a firm lacks the expertise to do a job satisfactorily, buying might be a reasonable alternative.alternative.

Quality considerations. Quality considerations. Firms that specialize can usually offer higher quality than an Firms that specialize can usually offer higher quality than an organization can attain itself. Conversely, unique quality requirements or the desire to closely organization can attain itself. Conversely, unique quality requirements or the desire to closely monitor quality may cause an organization to perform a job itself.monitor quality may cause an organization to perform a job itself.

The nature of demand.The nature of demand. When demand for an item is high and steady, the organization is often When demand for an item is high and steady, the organization is often better off doing the work itself. However, wide fluctuations in demand or small orders are better off doing the work itself. However, wide fluctuations in demand or small orders are usually better handled by specialists who are able to combine orders from multiple sources, usually better handled by specialists who are able to combine orders from multiple sources, which results in higher volume and tends to offset individual buyer fluctuations.which results in higher volume and tends to offset individual buyer fluctuations.

Cost. Cost. Cost savings might come from the item itself or from transportation cost savings. If there Cost savings might come from the item itself or from transportation cost savings. If there are fixed costs associated with making an item that cannot be reallocated if the service or are fixed costs associated with making an item that cannot be reallocated if the service or product is outsourced, that has to be recognized in the analysis. Conversely, outsourcing may product is outsourced, that has to be recognized in the analysis. Conversely, outsourcing may help a firm avoid incurring fixed costs.help a firm avoid incurring fixed costs.

Risk. Risk. Outsourcing may involve certain risks. One is loss of control over operations. Another is Outsourcing may involve certain risks. One is loss of control over operations. Another is the need to disclose proprietary information.the need to disclose proprietary information.

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ExampleExampleExampleExample

A large international computer manufacturer is designing a A large international computer manufacturer is designing a new model of personal computer and must decide whether to new model of personal computer and must decide whether to produce the keyboards internally or to purchase them from an produce the keyboards internally or to purchase them from an outside supplier. The supplier is willing to sell the keyboards outside supplier. The supplier is willing to sell the keyboards for $50 each, but the manufacturer estimates that his firm can for $50 each, but the manufacturer estimates that his firm can produce the keyboards for $35 each. Management estimates produce the keyboards for $35 each. Management estimates that expanding the current plant and purchasing the necessary that expanding the current plant and purchasing the necessary equipment to make the keyboards would cost $8 million. equipment to make the keyboards would cost $8 million. Should they undertake the expansion?Should they undertake the expansion?

The break-even quantity is:The break-even quantity is: X=8000 000/(50-35)= 533333X=8000 000/(50-35)= 533333 So the company would have to sell at least 533333 keyboards So the company would have to sell at least 533333 keyboards

in order to justify the $8 million investment required for in order to justify the $8 million investment required for expansion.expansion.

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Waiting-Line AnalysisWaiting-Line AnalysisWaiting-Line AnalysisWaiting-Line Analysis

Useful for designing or modifying service systemsUseful for designing or modifying service systems Waiting-lines occur across a wide variety of service Waiting-lines occur across a wide variety of service

systemssystems Waiting-lines are caused by bottlenecks in the Waiting-lines are caused by bottlenecks in the

processprocess Helps managers plan capacity level that will be cost-Helps managers plan capacity level that will be cost-

effective by balancing the cost of having customers effective by balancing the cost of having customers wait in line with the cost of additional capacitywait in line with the cost of additional capacity

0 Long-Range Capacity Planning. 1 The Hierarchy of Production Decisions The logical sequence of operations in factory planning corresponds to the sequence.

Documents

capacity planning activities

longterm capacity planning

capacity requirements

little capacity

capacity definitions

capacity available

capacity needs

additional capacity