1 Capacity Planning Capacity Planning Definition of Capacity Definition of Capacity “ Capacity is the limiting capability of a Capacity is the limiting capability of a productive unit to produce within a stated time productive unit to produce within a stated time period , normally expressed in terms of output period , normally expressed in terms of output units per unit of time units per unit of time. . ” Capacity needs include • Equipment • Space • Employee skills Determinants of Effective Determinants of Effective Capacity Capacity Facilities Facilities Product and service factors Product and service factors Process factors Process factors Human factors Human factors Policy factors Policy factors Supply chain factors Supply chain factors External factors External factors
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Capacity PlanningCapacity Planning
Definition of CapacityDefinition of Capacity ““ Capacity is the limiting capability of aCapacity is the limiting capability of a
productive unit to produce within a stated timeproductive unit to produce within a stated time
period , normally expressed in terms of output period , normally expressed in terms of output
units per unit of timeunits per unit of time. . ””
Capacity needs include• Equipment
• Space
• Employee skills
Determinants of Effective Determinants of Effective CapacityCapacity
FacilitiesFacilities
Product and service factorsProduct and service factors
GoalGoal To achieve a match between the longTo achieve a match between the long--term term
supply capabilities of an organization and the supply capabilities of an organization and the predicted level of longpredicted level of long--run demandrun demand•• OvercapacityOvercapacity operating costs that are too highoperating costs that are too high
•• UndercapacityUndercapacity strained resources and possible strained resources and possible loss of customersloss of customers
What kindWhat kind of capacity is needed?of capacity is needed?
How much How much capacity is needed to match demand?capacity is needed to match demand?
WhenWhen is it needed?is it needed?
Related Questions:Related Questions:
How much will it cost?How much will it cost?
What are the potential benefits and risks?What are the potential benefits and risks?
Are there sustainability issues?Are there sustainability issues?
Should capacity be changed all at once, or through Should capacity be changed all at once, or through several smaller changesseveral smaller changes
Can the supply chain handle the necessary changes?Can the supply chain handle the necessary changes?
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Capacity Decisions Are Capacity Decisions Are StrategicStrategic
Capacity decisionsCapacity decisions impact the ability of the organization to meet future impact the ability of the organization to meet future
demandsdemands
affect operating costsaffect operating costs
are a major determinant of initial costare a major determinant of initial cost
often involve longoften involve long--term commitment of resourcesterm commitment of resources
can affect competitivenesscan affect competitiveness
affect the ease of managementaffect the ease of management
are more important and complex due to globalizationare more important and complex due to globalization
need to be planned for in advance due to their need to be planned for in advance due to their consumption of financial and other resourcesconsumption of financial and other resources
CapacityCapacity
Design capacityDesign capacitymaximum output rate or service capacity an operation, maximum output rate or service capacity an operation,
process, or facility is designed forprocess, or facility is designed for
Effective capacityEffective capacity Design capacity minus allowances such as personal Design capacity minus allowances such as personal
time, maintenance, and scraptime, maintenance, and scrap
Actual outputActual output rate of output actually achievedrate of output actually achieved----cannot cannot
Available seatAvailable seat--performanceperformanceMovie theaterMovie theater
Available bedAvailable bed--daysdaysHospitalHospital
Available seat miles (ASMs)Available seat miles (ASMs)AirlineAirline
Megawatts of electricityMegawatts of electricityNuclear power plantNuclear power plant
Cases of beerCases of beerBeer PlantBeer Plant
Tons of steelTons of steelSteel PlantSteel Plant
Number of autosNumber of autosAuto plantAuto plant
Capacity MeasureCapacity MeasureType of OrganizationsType of Organizations
* When output units are more diverse , it is common to use a measure of the availability of the limiting resource as the capacity measure.
Determinants of Effective Determinants of Effective CapacityCapacity
FacilitiesFacilities
Product and service factorsProduct and service factors
Process factorsProcess factors
Human factorsHuman factors
Policy factorsPolicy factors
Supply chain factorsSupply chain factors
External factorsExternal factors
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Capacity StrategiesCapacity Strategies
LeadingLeading Build capacity in anticipation of future demand Build capacity in anticipation of future demand
increasesincreases
FollowingFollowing Build capacity when demand exceeds current capacityBuild capacity when demand exceeds current capacity
TrackingTracking Similar to the following strategy, but adds capacity in Similar to the following strategy, but adds capacity in
relatively small increments to keep pace with relatively small increments to keep pace with increasing demandincreasing demand
Strategy FormulationStrategy Formulation
Strategies are typically based on Strategies are typically based on assumptions and predictions about:assumptions and predictions about: LongLong--term demand patternsterm demand patterns
Technological changeTechnological change
Competitor behaviorCompetitor behavior
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Capacity CushionCapacity Cushion
Capacity CushionCapacity Cushion Extra capacity used to offset demand Extra capacity used to offset demand
Capacity cushion strategyCapacity cushion strategy•• Organizations that have greater demand Organizations that have greater demand
uncertainty typically have greater capacity uncertainty typically have greater capacity cushioncushion
•• Organizations that have standard products and Organizations that have standard products and services generally have greater capacity cushionservices generally have greater capacity cushion
Steps in Capacity PlanningSteps in Capacity Planning
Calculating processing requirements Calculating processing requirements requires reasonably accurate demand requires reasonably accurate demand forecasts, standard processing times, and forecasts, standard processing times, and available work timeavailable work time
horizon planning theduring available timeprocessing
horizon planning theduring product for demand
product for timeprocessing standard
machines required ofnumber
where
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Service Capacity PlanningService Capacity Planning
Service capacity planning can present a Service capacity planning can present a number of challenges related to:number of challenges related to: The need to be near customersThe need to be near customers
•• Convenience Convenience
The inability to store servicesThe inability to store services•• Cannot store services for consumption laterCannot store services for consumption later
The degree of demand volatilityThe degree of demand volatility•• Volume and timing of demandVolume and timing of demand
•• Time required to service individual customersTime required to service individual customers
Strategies used to offset capacity Strategies used to offset capacity limitations and that are intended to achieve limitations and that are intended to achieve a closer match between supply and a closer match between supply and demanddemand PricingPricing
PromotionsPromotions
DiscountsDiscounts
Other tactics to shift demand from peak Other tactics to shift demand from peak periods into slow periodsperiods into slow periods
InIn--House or Outsource?House or Outsource?
Once capacity requirements are determined, the Once capacity requirements are determined, the organization must decide whether to produce a good organization must decide whether to produce a good or service itself or outsourceor service itself or outsource
Factors to consider:Factors to consider: Available capacityAvailable capacity
Generation of Alternative Capacity PlansGeneration of Alternative Capacity Plans Large or small Capacity IncrementsLarge or small Capacity Increments
Noted: Noted: Whether smaller or larger increments of capacity Whether smaller or larger increments of capacity will be more economical depends on the balance of will be more economical depends on the balance of incremental capital and the operating costs of a incremental capital and the operating costs of a particular organization and on whether or not particular organization and on whether or not economies of scale exist. economies of scale exist.
Alternative sources of CapacityAlternative sources of Capacity
Noted: Noted: The cost effects of using alternative sources of The cost effects of using alternative sources of capacity are the tradecapacity are the trade--off of some of the costs off of some of the costs carrying slack capacity against the costs of overtime carrying slack capacity against the costs of overtime and multiple shifts, productivity losses resulting from and multiple shifts, productivity losses resulting from pushing capacity beyond normal limits, and the extra pushing capacity beyond normal limits, and the extra costs of subcontracting units of output.costs of subcontracting units of output.
1987 1989 1991 19951993 1997 1999
10000
12000
14000
16000
18000
20000
22000
1987 (current) capacity
2000 unit every 2 years
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1987 1989 1991 19951993 1997 1999
10000
12000
14000
16000
18000
20000
22000
1987 (current) capacity
4000 unit every 4 years
1987 1989 1991 19951993 1997 1999
10000
12000
14000
16000
18000
20000
22000
1987 (current) capacity
Planned use of alternative sources of capacity
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Economies of ScaleEconomies of Scale
Monthly production, units
Cos
t per
uni
t A B C
Economic Evaluation of Capacity PlansEconomic Evaluation of Capacity Plans Mature Products with Stable Demand GrowthMature Products with Stable Demand Growth
ExampleExample1.Capacity added January 1, 1987, and January 1, 1989, in increm1.Capacity added January 1, 1987, and January 1, 1989, in increments of ents of
2000 units.2000 units.
2.Capacity of 4000 units added January 1, 1987.2.Capacity of 4000 units added January 1, 1987.
3.Capacity added July 1, 1987, and July 1, 1989, in increments o3.Capacity added July 1, 1987, and July 1, 1989, in increments of 2000 f 2000 units, depending on overtime and multiple shifts to meet requireunits, depending on overtime and multiple shifts to meet requirements ments during the first six months of 1987 and 1989.during the first six months of 1987 and 1989.
4.Capacity of 4000 units added January 1, 1988, depending on ove4.Capacity of 4000 units added January 1, 1988, depending on overtime rtime and multiple shifts to meet requirements during 1987.and multiple shifts to meet requirements during 1987.
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Original Original Invesment Invesment Requirements and Requirements and Operating CostOperating Cost
Plant Size, Units per Year
Original invesment Operating Costs per unit
Operating Costs per Unit When Using Alternative Sources of Capacity
2000 $1,000,000 $ 10 $ 11 4000 1,8000,000 9 10
i = annual interest rate in decimals = 0.15
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The present value for the four alternative areThe present value for the four alternative are1.1. $$ 1,812,0701,812,070
2.2. $$ 1,850,4631,850,463
3.3. $1,697,665$1,697,665
4.4. $1,617,398$1,617,398
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New Products and Risky SituationsNew Products and Risky Situations
An ExampleAn ExampleSuppose that we are planning future capacity for a product that Suppose that we are planning future capacity for a product that is in the is in the
rapid development phase. Present annual capacity is 20,000 unitsrapid development phase. Present annual capacity is 20,000 units. New . New competition is becoming very aggressive ,but the enterprise expecompetition is becoming very aggressive ,but the enterprise expects retain its cts retain its market share. The sales department feels that market shares shoumarket share. The sales department feels that market shares should be increased ld be increased with aggressive promotion. Estimates of the total market vary, wwith aggressive promotion. Estimates of the total market vary, with some feeling ith some feeling that growth might be explosive in the next four to five years. Othat growth might be explosive in the next four to five years. On the other hand, n the other hand, there is the additional uncertainty concerning continuing technothere is the additional uncertainty concerning continuing technological innovation logical innovation that could stunt the growth of the current line. Thus, expected,that could stunt the growth of the current line. Thus, expected, optimistic, and optimistic, and pessimistic market prediction are made and assigned probabilitiepessimistic market prediction are made and assigned probabilities that each might s that each might occur. The predictions are converted to capacity requirements peoccur. The predictions are converted to capacity requirements per year as follows:r year as follows:
Strategies.Strategies. Three alternative strategies are Three alternative strategies are developed,eachdeveloped,each designed with the three market designed with the three market assumptions in assumptions in mind.Themind.The variable cost of production variable cost of production are the same as for the present capacity because no are the same as for the present capacity because no new process technology is involved. The three new process technology is involved. The three alternative are.alternative are.
1.1. Install new capacity in 1989,1990 and 1991 in Install new capacity in 1989,1990 and 1991 in increments of 15,000 units.increments of 15,000 units.
2.2. Install new capacity in 1989, 1990, and 1991 in Install new capacity in 1989, 1990, and 1991 in increments of 5,000 unitsincrements of 5,000 units
3.3. Make no capacity additions.Make no capacity additions.