Adeyl Khan, Faculty, BBA, NSU Ceiling on the amount of load Capacity at NSU.

Adeyl Khan, Faculty, BBA, NSU

Chapter 5Capacity Planning

For Products and ServicesCeiling on the amount of load

Capacity at NSU


Capacity Planning

Capacity is the upper limit or ceiling on the load that an operating unit can handle.

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• 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:


Importance of Capacity Decisions

Impacts ability to meet future demandsAffects operating costsMajor determinant of initial costsInvolves long-term commitmentAffects competitivenessAffects ease of managementGlobalization adds complexityImpacts long range planning

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Read moreFind Examples

…


Capacity

Design capacity 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.

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Efficiency and Utilization

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Actual outputEfficiency =

Effective capacity

Actual outputUtilization =

Design capacity

Both measures expressed as percentages


Efficiency/Utilization Example

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Design capacity = 50 trucks/day

Effective capacity = 40 trucks/day

Actual output = 36 units/day


Efficiency = ----------------------------------- = 90%

Effective capacity = 40 units/ day


Utilization = ----------------------------------- = 72%

Design capacity = 50 units/day


Determinants of Effective Capacity

FacilitiesProduct and service factorsProcess factorsHuman factorsPolicy factorsOperational factorsSupply chain factorsExternal factors

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Strategy Formulation

Capacity strategy for long-term demandDemand patternsGrowth rate and variabilityFacilities

Cost of building and operatingTechnological changes

Rate and direction of technology changesBehavior of competitorsAvailability of capital and other inputs

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Key Decisions of Capacity Planning

Amount of capacity needed Capacity cushion (100% - Utilization)

Timing of changesNeed to maintain balanceExtent of flexibility of facilities

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Capacity cushion – extra demand intended to offset uncertainty

Adeyl Khan, Faculty, BBA, NSU10


Steps for Capacity Planning

Estimate future capacity requirementsEvaluate existing capacityIdentify alternativesConduct financial analysisAssess key qualitative issuesSelect one alternativeImplement alternative chosenMonitor results

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Forecasting Capacity Requirements

Long-term vs. short-term capacity needsLong-term relates to overall level of capacity such as facility size, trends, and cyclesShort-term relates to variations from seasonal, random, and irregular fluctuations in demand

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Calculating Processing Requirements

ProductAnnual

Demand

Standard processing time

per unit (hr.)Processing time

needed (hr.)

#1#2#3

400300700

5.0 8.0 2.0

2,000 2,400 1,400 5,800

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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

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In-House or Outsourcing

Available capacityExpertiseQuality considerationsNature of demandCostRisk

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Outsource: obtain a good or service from an external provider


Developing Capacity Alternatives

Design flexibility into systemsTake stage of life cycle into account

Take a “big picture” approach to capacity changesPrepare to deal with capacity “chunks”Attempt to smooth out capacity requirementsIdentify the optimal operating level

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Bottleneck Operation

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Machine #2

BottleneckOperation

Machine #1

Machine #3

Machine #4

10/hr

10/hr

10/hr

10/hr

30/hr

Bottleneck operation: An operationin a sequence of operations whosecapacity is lower than that of theother operations


Machine Type

40

40

40

40

120

120

50

50

50

50

50

700

700

700

30

30

30200

E FBA C D

Output


Bottleneck Operation

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Operation 120/hr.

Operation 210/hr.

Operation 315/hr.

__/hr.

Bottleneck ?

Maximum output ratelimited by bottleneck


Economies of Scale

Economies 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

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Optimal Rate of Output

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Minimumcost

Ave

rag

e c

ost

pe

r u

nit

0 Rate of output

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

Figure 5.4

Minimum average cost per unit


Economies of Scale

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

Ave

rag

e c

ost

pe

r u

nit

0

Smallplant Medium

plant Largeplant

Output rateFigure 5.5100 250 400


Evaluating Alternatives

Cost-volume analysis Break-even point

Financial analysis Cash flow Present value

Decision theoryWaiting-line analysis

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Cost-Volume Relationships

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Am

ou

nt

($)

0Q (volume in units)

Total cost = VC + FC

Total variable cost (V

C)

Fixed cost (FC)

Figure 5.6

Am

ou

nt

($)

Q (volume in units)

0

Tota

l revenue


Cost-Volume Relationships

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Am

ou

nt

($)

Q (volume in units)0 BEP units

Profit

Tota

l rev

enue

Total cost

Figure 5.6c


BEP Problem with Step Fixed Costs

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Quantity

FC + VC = TC

FC + VC = TC

FC + VC =

TC

Step fixed costs and variable costs.

1 machine

2 machines

3 machines

Figure 5.7a 100 200 300


BEP Problem with Step Fixed Costs

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$

TC

TC

TCBEP2

BEP3

TR

Quantity

1

2

3

Multiple break-even pointsFigure 5.7b


Assumptions of Cost-Volume Analysis

One product is involvedEverything produced can be soldVariable cost per unit is the same

regardless of volumeFixed costs do not change with volumeRevenue per unit constant with volumeRevenue per unit exceeds variable cost per

unit

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Simple Solution to

our Capacity Problem?


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.

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Decision Theory

Helpful tool for financial comparison of alternatives under conditions of risk or uncertaintySuited to capacity decisionsSee Chapter 5 Supplement

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Waiting-Line Analysis

Useful for designing or modifying service systemsWaiting-lines occur across a wide variety of service systemsWaiting-lines are caused by bottlenecks in the processHelps 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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Chapter 5Example 4Purchase 1, 2 or 3 machines

Variable cost 10/unit Revenue 40/piece

BEP for each range?Demand 580-660, how many to buy?

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No. of Machines

Total Annual Fixed Cost

Corresponding range of output

1 9600 0-300

2 15000 301-600

3 20000 601-900


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) = 666.67 unit

Answer part B Demand 580-660, how many to buy?

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No. of Machines

Total Annual Fixed Cost

Corresponding range of output

1 9600 0-300

2 15000 301-600

3 20000 601-900

Adeyl Khan, Faculty, BBA, NSU34


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

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Adeyl Khan, Faculty, BBA, NSU Ceiling on the amount of load Capacity at NSU.

Documents

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