CAPACITY LOAD OUTPUT

CAPACITY 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 5-2

CAPACITY Introduction location aggregate planning, and scheduling are 3 essential factors in the decision making of selecting capacity, independent if it is: short term intermediate, or long term capacity. 5-3

CAPACITY Short term Intermediate Long term Activities Location decisions Aggregate Planning Scheduling Time horizon (months) 6 12 18 24 Short term Intermediate Long term 5-4

CAPACITY 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? 5-5

CAPACITY Capacity Planning Capacity is the upper limit or ceiling on the load that an operating unit can handle. The load might be in terms of the number of physical units produced, e.g. bicycles assembled per hour or the number of services performed, e.g. computers upgraded per hour. An operating unit can be a plant, department, machine, store or worker. 5-6

CAPACITY 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 5-7

Basic questions in capacity handling What kind of capacity is needed? How much is needed? When is it needed? 5-8

Importance of Capacity Decisions Impacts ability to meet future demands Affects operating costs Major determinant of initial costs Involves long-term commitment Affects competitiveness, e.g. speed Affects ease of management Globalization adds complexity Impacts long range planning 5-9

Designing and Measuring 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. 5-10

Designing and Measuring Capacity Actual output Efficiency = Effective capacity Utilization = Design capacity Both measures expressed as percentages 5-11

Efficiency/Utilization Example CAPACITY 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 Utilization = Actual output = 36 units/day = 72% Design capacity 50 units/day 5-12

Decisions that have an impact on Capacity Facilities Product and service factors Process factors Human factors Policy factors Operational factors Supply chain factors External factors 5-13

Decisions that have an impact on Capacity Facilities, e.g. size, provision for expansion Product and service factors, e.g. limited menu vs, extensive menu Process factors, e.g. if output-quality does not meet standards need for rework, etc Human factors, e.g. variety of activities, training, skills, experience Policy factors, e.g. overtime, 2nd or 3rd shift Operational factors, e.g. inventory stocking decisions Supply chain factors,e.g. warehousing, transportation External factors, e.g. pollution standards, regulations 5-14

Capacity Strategy Formulation For long-term demand patterns and variability of demand The growth rate The cost of building and operating facilities The rate and direction of technological innovation The likely behavior of competitors Availability of capital and other inputs 5-15

Key Decisions of Capacity Planning Amount of capacity needed Capacity cushion (100% - Utilization) Timing of changes Need to maintain balance thruout the system Extent of flexibility of facilities and workforce Capacity cushion = extra demand intended to offset uncertainty 5-16

Capacity Expansion Strategies 5-17

Calculating Processing Requirements CAPACITY Calculating Processing Requirements A company works one 8 hour shift, 250 days/year, and has the following figures: Calculate the number of machines needed?

Calculating Processing Requirements CAPACITY Calculating Processing Requirements A company works one 8 hour shift, 250 days/year, and has the following figures: If annual capacity is 2000 hours [= 8 x 250], then we need: 5,800 hours/2,000 hours = 2.90 machines = 3 machines

CAPACITY 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 5-20

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

CAPACITY Average cost per unit Output rate Average cost per unit Optimum operating level Average cost per unit Minimum cost Economies of scale (Under - utilization) Dis-economies of scale (Over - utilization) Output rate 125,000 PC Average cost per unit 250,000 PC 375,000 PC Economies of scale Dis-economies of scaleς Output rate 5-22

CAPACITY Bottleneck Operation Bottleneck Output 10/hr Operation 3 Operation 4 20/hr Operation 2 30/hr Operation 1 Input Maximum output rate limited by bottleneck 5-23

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 5-24

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Techniques for Evaluating Capacity Alternatives Cost-volume analysis Break-even point Financial analysis Cash flow Present value Decision theory Waiting-line analysis 5-26

Cost-Volume Relationships CAPACITY 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) 5-27

Break-Even Problem with Step Fixed Costs CAPACITY Break-Even Problem with Step Fixed Costs Quantity FC + VC = TC Step fixed costs and variable costs. 1 machine 2 machines 3 machines 5-28

Assumptions of Cost-Volume Analysis CAPACITY 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 5-29

CAPACITY 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. 5-30

CAPACITY Decision Theory Helpful tool for financial comparison of alternatives under conditions of risk or uncertainty Suited to capacity decisions 5-31

CAPACITY EXAMPLES 5-32