Capacity Planning For Products and Services

1. Capacity Planning For Products and Services

2. Facility Planning Facility planning answers: • What kind of capacity is needed? • How muchcapacity is needed? • Whenmore capacity is needed? • Wherefacilities 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. Capacity Planning • Establishes overall level of productive resources • Affects lead time responsiveness, cost & competitiveness • Determines when and how much to increase capacity

5. Long Range Planning Add Facilities Add long lead time equipment * Intermediate Range Planning Sub-Contract Add Equipment Add Shifts Add Personnel Build or Use Inventory Schedule Jobs Schedule Personnel Allocate Machinery * Short Range Planning Modify Capacity Use Capacity *Limited options exist Types of Planning Over a Time Horizon

6. Importance of Capacity Decisions • Impacts ability to meet future demands • Affects operating costs • Major determinant of initial costs • Involves long-term commitment • Affects competitiveness • Affects ease of management • Globalization adds complexity • Impacts long range planning

7. 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

8. Capacity Related Concepts • Actual output Rate of output actually achieved—cannotexceedeffective capacity • Utilization Actual output as a percent of design capacity • Efficiency Actual output as a percent of effective capacity

9. Actual or Expected Output Actual (or Expected) Output = (Effective Capacity)(Efficiency)

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

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

12. Efficiency/Utilization Example Actual output = 36 units/day Efficiency = = 90% Effective capacity 40 units/ day Utilization = Actual output = 36 units/day = 72% Design capacity 50 units/day Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 units/day

13. Determinants of Effective Capacity • Facilities • Product and Service Factors • Process Factors • Human Factors • Policy Factors • Operational Factors • Supply Chain Factors • External Factors

14. Key Decisions in Capacity Planning • Amount of capacity needed • Timing of changes (frequency of capacity additions) • Need to maintain balance • Extent of flexibility of facilities • External sources of capacity

15. Steps for Capacity Planning • Estimate future capacity requirements • Evaluate existing capacity • Identify alternatives • Conduct financial analysis • Assess key qualitative issues • Select the best alternative • Implement the alternative chosen • Monitor results

16. Calculating Processing Requirements: Example 1 (1 of 2)

17. Calculating Capacity 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) = 2.9 3 machines are needed

18. Special Requirements for Making Good Capacity Decisions • Forecasting the demand accurately • Understanding the technology and capacity increments • Finding the optimal operating level (volume) • Build for change

19. Make or Buy • Available capacity • Expertise • Quality considerations • Nature of demand • Cost • Risk

20. 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

21. Average cost per room Best operating level Economies of scale Diseconomies of scale 250 500 1000 # Rooms Best Operating Levels

22. Economies of Scale Minimum cost & optimal operating rate are functions of size of production unit. Small plant Medium plant Average cost per unit Large plant 0 Volume

23. Economies & Diseconomies of Scale Economies of Scale and the Experience Curve working 100-unit plant Average unit cost of output 200-unit plant 400-unit plant 300-unit plant Diseconomies of Scale start working Volume

24. Yesterday Cost or price per unit Today Tomorrow Total accumulated production of units The Experience Curve As plants produce more products, they gain experience in the best production methods and reduce their costs per unit

25. Strategies for Matching Capacity to Demand • Making staffing changes (increasing or decreasing the number of employees) • Adjusting equipment and processes – which might include purchasing additional machinery or selling or leasing out existing equipment • Improving methods to increase throughput; and/or • Redesigning the product to facilitate more throughput

26. Capacity Expansion • Volume and certainty of anticipated demand • Strategic objectives for growth • Costs of expansion and operation • Incremental or one-step expansion • Frequency of capacity additions

27. Expected Demand Expected Demand New Capacity New Capacity Demand Demand Time in Years Time in Years Capacity leads demand with a one-step expansion Capacity leads demand with an incremental expansion Expected Demand Expected Demand New Capacity New Capacity Demand Demand Time in Years Time in Years Attempts to have an average capacity, with an incremental expansion Capacity lags demand with an incremental expansion Capacity Expansion Strategies

28. Issues in 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

29. Stage 1 Stage 1 Stage 2 Stage 2 Stage 3 Stage 3 Capacity Planning: Balance Unbalanced stages of production Units per month 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 6,000 6,000 6,000

30. 10/hr Machine #1 10/hr Bottleneck Operation 30/hr Machine #3 10/hr Machine #4 10/hr Bottleneck Operation Bottleneck operation: An operationin a sequence of operations whosecapacity is lower than that of theother operations Machine #2

31. Bottleneck Operation 120/hr. Operation 210/hr. Operation 315/hr. 10/hr. Maximum output ratelimited by bottleneck Bottleneck Operation

32. Capacity Flexibility • Flexible plants • Flexible processes • Flexible workers

33. Evaluating Alternatives • Cost-volume analysis • Break-even point • Financial analysis • Cash flow • Present value • Decision theory • Waiting-line analysis

34. Amount ($) Total cost = VC + FC Total variable cost (VC) Fixed cost (FC) 0 Q (volume in units) Cost-Volume Relationships (1 of 3)

35. Total revenue Amount ($) 0 Q (volume in units) Cost-Volume Relationships (2 of 3)

36. Profit Total revenue Amount ($) Total cost 0 BEP units Q (volume in units) Cost-Volume Relationships in Making Capacity Decisions (3 of 3)

37. FC + VC = TC FC + VC = TC 3 machines FC + VC = TC 2 machines 1 machine Quantity Step fixed costs and variable costs. Break-Even Problem with Step Fixed Costs (1 of 2)

38. $ BEP 3 TC BEP 2 TC 3 TC 2 TR 1 Quantity Multiple break-even points Break-Even Problem with Step Fixed Costs (2 of 2)

39. 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

40. Decision Theory • Helpful tool for financial comparison of alternatives under conditions of risk or uncertainty • Suited to capacity decisions

41. Waiting-Line Analysis • Useful for designing or modifying service systems • Waiting-lines occur across a wide variety of service systems • Waiting-lines are caused by bottlenecks in the process • Helps 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

42. Strategy Driven Investment • Select investments as part of a coordinated strategic plan • Choose investments yielding competitive advantage • Consider product life cycles • Include a variety of operating factors in the financial return analysis • Test investments in light of several revenue projections

43. 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.

44. Net Present Value F = future value P = present value I = interest rate N = number of years

45. Planning Service Capacity • Inability to store services: Capacity must be available to provide a service when it is needed (capacity must be matched with the timing of demand) • Need to be near customers: 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

46. 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?

47. Extras

48. Managing Existing Capacity Capacity Management Demand Management • Vary staffing • Change equipment & processes • Change methods • Redesign the product for faster processing • Vary prices • Vary promotion • Change lead times(e.g., backorders) • Offer complementary products

49. Complementary Products Sales (Units) 5,000 Total 4,000 Snow-mobiles 3,000 2,000 1,000 Jet Skis 0 J M M J S N J M M J S N J Time (Months)