1. Chapter 5 Strategic Capacity Planning
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2. Sputnik
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3. Capacity Planning
Capacity is the upper limit or ceiling on the load that an operating unit can handle.
The basic questions in capacity handling are:
What kind of capacity is needed?
How much is needed?
When is it needed?
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4. In-House or Outsourcing
Outsource: obtain a good or service from an external provider
Available capacity
Expertise
Quality considerations
Nature of demand
Cost
Risk
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5. Types of Capacity Planning Over Time Horizon
Long Range Planning
Add Facilities
Add equipment *
Intermediate Range Planning
Sub-Contract Add Equipment Add Shifts
Add Personnel Build or Use Inventory
Short Range Planning
Schedule Jobs
Schedule Personnel
Allocate Machinery *
*Limited options
Modify Capacity
Manage with existing Capacity
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6. Definitions and Measurements
Capacity: The “throughput,” or number of units a facility can hold, receive, store, or produce in a period of time.
Design Capacity: Maximum theoretical output
Effective Capacity: Capacity a firm can expect to receive given its product mix, methods of scheduling, maintenance, scrap, personal time.
Actual Output: What is actually being produced, in units.
Efficiency: Actual Output / Effective Capacity
(Actual Output in units / Standard Output in units)
Utilization: Actual Output / Design Capacity
(Hours used / Total hours available)
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7. Simple Example
A dentist assistant schedules a patient every 10 minutes.
This dentist treated 40 patients today.
The dentist works 8 hours a day.
The office is set up to handle a maximum of 60 patients a day.
What is the efficiency of this dentist office?
What is the utilizations of this dentist office?
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8. Special Requirements for Making Good Capacity Decisions
Forecasting demand accurately
Cycles; overestimating growth; seasons; complementary products
Building for change
Understanding capacity increments
Finding the optimal operating level (volume)
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9. Understanding Capacity Increments
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
This slide probably requires some discussion or explanation. Perhaps the best place to start is the left hand column where capacity either leads or lags demand incrementally. As you continue to explain the options, ask students to suggest advantages or disadvantages of each.
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10. Economies of Scale Small Medium plant Large plant Output rate
Cost per unit
Small
plant
Medium
plant
Large
plant
Output rate
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11. Tools for Capacity Decisions
1. Break-even Analysis
Single-product case
Break-even in units:
Break-even in Dollar Sales:
2. Decision Theory
Decision Making Tools
3. Financial Analysis
Net Present Value (NPV):
4. Queueing / Waiting lines (Simulation)
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12. Cost-Volume Relationships
Amount ($)
BEP
(Quantity in units)
Profit
Total revenue
Total cost
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13. Crossover Chart Process A: low volume, high variety
Fixed cost - Process A
Fixed cost - Process B
Fixed cost - Process C
Total cost - Process C
Total cost - Process B
Total cost - Process A
Process A: low volume, high variety
Process B: Repetitive
Process C: High volume, low variety
Process C
Process B
Process A
Quantity
Cost
This slide can be used to introduce the role of breakeven analysis in the process selection decision.
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14. Break-Even Problem with Step Fixed Costs$
Revenues TC
1 machine
2 machines
3 machines
Quantity
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15. 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
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16. Managing Existing Capacity
Demand Management
Capacity Management
Vary prices
Vary promotion
Change lead times (e.g., backorders)
Offer complementary products
Vary staffing
Change equipment & processes
Change methods
Redesign the product for faster processing
You might begin by reminding students that the real issue is matching capacity to demand, and that we can do that by varying either capacity or demand.
It might also be helpful to have students consider the magnitude of variation we can achieve for each of the alternatives listed above - and the consequences of using the alternative.
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17. 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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