1. CAPACITY PLANNING
FOR PRODUCTS AND SERVICES

2. FACILITY PLANNING Facility planning answers:
What kind of capacity is needed?
How much capacity is needed to match demand?
When more capacity is needed?
Where facilities should be located (location)
How facilities should be arranged (layout)

3. CAPACITY (DEFINITION OF)
The number of units a facility can hold, receive, store or produce in a period of time
It is the upper limit or ceiling on the load that an operating unit can handle. It includes
equipment,
space,
employee skills

4. STRATEGIC CAPACITY PLANNING
Goal
To achieve a match between the long-term supply capabilities of an organization and the predicted level of long-run demand
Overcapacity  operating costs that are too high
Undercapacity  strained resources and possible loss of customers

5. CAPACITY PLANNING QUESTIONS
Key Questions:
What kind of capacity is needed?
How much capacity is needed to match demand?
When is it needed?
Related Questions:
How much will it cost?
What are the potential benefits and risks?
Are there sustainability issues?
Should capacity be changed all at once, or through several smaller changes
Can the supply chain handle the necessary changes?

6. ISSUES TO BE CONSIDERED IN STRATEGY FORMULATION
Capacity strategy
Demand patterns
Growth rate and variability
Facilities
(Cost of the building and operating)
Technological changes
(Rate and direction of technology changes)
Behavior of competitors
Availability of capital and other inputs.

7. TYPES OF PLANNING OVER A TIME HORIZON
Add Facilities
Add long lead time equipment
Schedule Jobs
* Schedule Personnel
AllocateMachinery
Sub-Contract
Add Equipment
Add Shifts
Add Personnel
Build or Use Inventory
Long Range Planning
Intermediate Range Planning
Short Range Planning
Modify Capacity
Use Capacity *
*Limited options exist

8. IMPORTANCE OF CAPACITY DECISIONS
impact the ability of the organization to meet future demands
affect operating costs
affect lead time responsiveness
are a major determinant of initial costs
involve long-term commitment of resources
affect competitiveness
affect ease of management
are more important and complex due to globalization
need to be planned for in advance due to their consumption of financial and other resources

9. CAPACITY MEASURES Design capacity
Maximum output rate or service capacity an operation, process, or facility is designed for
Effective capacity
Capacity a firm can expect to attain given its product mix, methods of scheduling, maintenance and standards of quality. Design capacity minus allowances such as personal time, maintenance and scrap

10. CAPACITY RELATED CONCEPTS
Actual output
Rate of output actually achieved—cannot exceed effective capacity
Utilization
Actual output as a percent of design capacity
Efficiency
Actual output as a percent of effective capacity

11. EFFICIENCY
Measure of how well a facility or machine is performing when used
Actual output
Efficiency =
Effective Capacity
(expressed as a percentage)

12. UTILIZATION
Measure of actual capacity usage of a facility, work center, or machine
Actual Output
Utilization =
Design Capacity
(expressed as a percentage)

13. EXAMPLE- EFFICIENCY/UTILIZATION
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
Actual output = units/day
Efficiency = = 90%
Effective capacity units/ day
Utilization = Actual output = units/day
= 72% Design capacity units/day

14. DETERMINANTS OF EFFECTIVE CAPACITY
Facilities
Product and Service Factors
Process Factors
Human Factors
Policy Factors
Operational Factors
Supply Chain Factors
External Factors

15. STRATEGY FORMULATION
Strategies are typically based on assumptions and predictions about:
Long-term demand patterns
Technological change
Competitor behavior

16. SPECIAL REQUIREMENTS FOR MAKING GOOD CAPACITY DECISIONS
Forecasting the demand accurately
Understanding the technology and capacity increments
Finding the optimal operating level (volume)
Building for change

17. KEY DECISIONS IN CAPACITY PLANNING
Amount of capacity needed
Timing of changes (frequency of capacity additions)
Extent of flexibility of facilities
External sources of capacity
Need to maintain balance

18. AMOUNT OF CAPACITY NEEDED

19. STEPS OF CAPACITY PLANNING
Estimate future capacity requirements
Evaluate existing capacity and facilities and identify gaps
Identify alternatives for meeting requirements
Conduct financial analysis
Assess key qualitative issues
Select the best alternative for the long term
Implement the alternative chosen
Monitor results

20. FORECASTING CAPACITY REQUIREMENTS
Long-term considerations relate to overall level of capacity requirements
Short-term considerations relate to probable variations in capacity requirements

21. CALCULATING PROCESSING REQUIREMENTS
Forecast sales within each individual product line
Calculate equipment and labor requirements to meet the forecasts

22. CALCULATING PROCESSING REQUIREMENTS
Calculating processing requirements requires reasonably accurate demand forecasts, standard processing times, and available work time

23. CALCULATING PROCESSING REQUIREMENTS: EXAMPLE 1 (1 of 2)

24. CALCULATING PROCESSING REQUIREMENTS: EXAMPLE 1 (2 of 2)
If the department works one eight hour shift, 250 days a year, calculate the number of machines that would be needed to handle the required volume.
Solution:
5800/(250)(8) = (3 machines are needed)

25. CAPACITY CUSHION Capacity Cushion
Extra capacity used to offset demand uncertainty
Capacity cushion = 100% - Utilization
Capacity cushion strategy
Organizations that have greater demand uncertainty typically have greater capacity cushion
Organizations that have standard products and services generally have greater capacity cushion

26. SERVICE CAPACITY PLANNING
Service capacity planning can present a number of challenges related to:
The inability to store services
The need to be near customer
The degree of demand volatility

27. SERVICE CAPACITY PLANNING
Time: Inability to store services for later consumption. Capacity must be available to provide a service when it is needed (capacity must be matched with the timing of demand)
Location: Need to be near customers for convenience. Capacity and location are closely tied. Service goods must be at the customer demand point and capacity must be located near the customer
Volatility of Demand: (Much greater than in manufacturing)
Volume and timing of demand
Time required to service individual customers

28. CAPACITY UTILIZATION & SERVICE QUALITY
Best operating point is near 70% of capacity
From 70% to 100% of service capacity, what do you think happens to service quality?

29. TIMING AND SIZE OF CHANGES (FREQUENCY OF CAPACITY ADDITIONS)

30. CAPACITY EXPANSION Factors to be considered:
Volume and certainty of anticipated demand
Strategic objectives for growth
Costs of expansion and operation
Incremental or one-step expansion
Frequency of capacity additions

31. CAPACITY EXPANSION STRATEGIES (1 of 5)
Expected Demand
Time in Years
Demand
New Capacity
Capacity leads demand with an incremental expansion
Capacity leads demand with a one-step expansion
Capacity lags demand with an incremental expansion
Attempts to have an average capacity, with an incremental expansion

32. CAPACITY EXPANSION STRATEGIES (2 of 5)
Expected Demand
Time in Years
Demand
New Capacity
Capacity leads demand with an incremental expansion

33. CAPACITY EXPANSION STRATEGIES (3 of 5)
Expected Demand
Time in Years
Demand
New Capacity
Capacity leads demand with a one-step expansion

34. CAPACITY EXPANSION STRATEGIES (4 of 5)
Expected Demand
Time in Years
Demand
New Capacity
Capacity lags demand with an incremental expansion

35. CAPACITY EXPANSION STRATEGIES (5 of 5)
Expected Demand
Time in Years
Demand
New Capacity
Attempts to have an average capacity, with an incremental expansion

36. MAKE OR BUY? Available capacity Expertise Quality considerations
Nature of demand
Cost
Risk

37. OPTIMAL OPERATING LEVEL

38. OPTIMAL OPERATING LEVEL
Average cost per room
Best operating
level
Economies of scale
Diseconomies of scale
# Rooms

39. 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
Reasons for economies of scale:
Fixed costs are spread over a larger number of units
Construction costs increase at a decreasing rate as facility size increases
Processing costs decrease due to standardization

40. DISECONOMIES OF SCALE
Diseconomies of scale
If the output rate is more than the optimal level, increasing the output rate results in increasing average unit costs
Reasons for diseconomies of scale
Distribution costs increase due to traffic congestion and shipping from a centralized facility rather than multiple smaller facilities
Complexity increases costs
Inflexibility can be an issue
Additional levels of bureaucracy

41. ECONOMIES OF SCALE Small Medium plant Large plant
Minimum cost & optimal operating rate are
functions of size of production unit.
Small
plant
Medium
plant
Average cost per unit
Large
plant
Volume or output rate

42. ECONOMIES AND DISECONOMIES OF SCALE
100-unit
plant
200-unit
300-unit
400-unit
Volume
Average
unit cost
of output
Economies of Scale and the Experience Curve working
Diseconomies of Scale start working

43. THE EXPERIENCE CURVE Cost or price per unit
As plants produce more products, they gain experience in the best production methods and reduce their costs per unit
THE EXPERIENCE CURVE
Total accumulated production of units
Cost or
price
per unit
Yesterday
Today
Tomorrow

44. EXTERNAL SOURCES OF CAPACITY

45. IN-HOUSE OR OURSOURCE?
Once capacity requirements are determined, the organization must decide whether to produce a good or service itself or outsource
Factors to consider:
Available capacity
Expertise
Quality considerations
The nature of demand
Cost
Risks

46. NEED TO MAINTAIN BALANCE

47. CAPACITY PLANNING: BALANCE
Unbalanced stages of production
Units
per
month
Stage 1
Stage 2
Stage 3
6,000
7,000
5,000
Maintaining System Balance: Output of one stage is the exact input requirements for the next stage
Balanced stages of production
Units
per
month
Stage 1
Stage 2
Stage 3
6,000
6,000
6,000

48. 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
Bottleneck
Operation
Machine #1
Machine #3
Machine #4
10/hr
30/hr
Machine #2

49. BOTTLENECK OPERATION Operation 1 20/hr. Operation 2 10/hr.
Maximum output rate limited by bottleneck

50. CONSTRAINT MANAGEMENT
Something that limits the performance of a process or system in achieving its goals
Categories
Market
Resource
Material
Financial
Knowledge or competency
Policy

51. RESOLVING CONSTRAINT ISSUES
Identify the most pressing constraint
Change the operation to achieve maximum benefit, given the constraint
Make sure other portions of the process are supportive of the constraint
Explore and evaluate ways to overcome the constraint
Repeat the process until the constraint levels are at acceptable levels

52. STRATEGIES FOR MATCHING CAPACITY TO DEMAND

53. DEMAND MANAGEMENT STRATEGIES
Strategies used to offset capacity limitations and that are intended to achieve a closer match between supply and demand
Pricing
Promotions
Backorders
Offering complementary products
Discounts
Other tactics to shift demand from peak periods into slow periods

54. COMPLEMENTARY PRODUCTS
Sales (Units)
5,000
Total
4,000
Snow-mobiles
3,000
2,000
1,000
Jet Skis J M M J S N J M M J S N J
Time (Months)

55. CAPACITY MANAGEMENT STRATEGIES
Adjusting equipment and processes – which might include purchasing additional machinery or selling or leasing out existing equipment
Making staffing changes (increasing or decreasing the number of employees)
Improving methods to increase throughput
Redesigning the product to facilitate more throughput (for faster processing)

56. THINGS THAT CAN BE DONE TO ENHANCE CAPACITY MANAGEMENT
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
Choose a strategy if expansion is involved

57. CAPACITY FLEXIBILITY

58. CAPACITY FLEXIBILITY Flexible plants Flexible processes
Flexible workers

59. EVALUATING ALTERNATIVES
Alternatives should be evaluated from varying perspectives
ECONOMIC
Cost-volume analysis
Break-even point
Financial analysis
Cash flow
Present value
Decision theory
Waiting-line analysis
Simulation
NON-ECONOMIC
Public opinion

60. COST-VOLUME RELATIONSHIPS (1 OF 3)
Amount ($)
Q (volume in units)
Total cost = VC + FC
Total variable cost (VC)
Fixed cost (FC)

61. COST-VOLUME RELATIONSHIPS (2 OF 3)
Amount ($)
Q (volume in units)
Total revenue

62. COST-VOLUME RELATIONSHIPS (3 OF 3)
Amount ($)
Q (volume in units)
BEP units
Profit
Total revenue
Total cost

63. BREAK-EVEN POINT (BEP)
The volume of output at which total cost and total revenue are equal
Profit (P) = TR – TC = R x Q – (FC +v x Q)
= Q(R – v) – FC

64. COST-VOLUME RELATIONSHIPS

65. BREAK-EVEN PROBLEM WITH STEP FIXED COSTS (1 of 2)
Quantity
FC + VC = TC
Step fixed costs and variable costs.
1 machine
2 machines
3 machines

66. BREAK-EVEN PROBLEM WITH STEP FIXED COSTS (2 of 2)$ TC
BEP 2 3 TR
Quantity 1
Multiple break-even points

67. 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 is the same regardless of volume
Revenue per unit exceeds variable cost per unit

68. 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.