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Chapter 5 Strategic Capacity Planning

Chapter 5 Strategic Capacity Planning. Sputnik. 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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Chapter 5 Strategic Capacity Planning

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  1. Chapter 5Strategic Capacity Planning Saba Bahouth – UCO

  2. Sputnik Saba Bahouth – UCO

  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? Saba Bahouth – UCO

  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 Saba Bahouth – UCO

  5. Types of Capacity Planning Over Time Horizon Long Range Planning Add Facilities Add equipment * Intermediate Range Planning Sub-ContractAdd EquipmentAdd Shifts Add PersonnelBuild or Use Inventory Short Range Planning Schedule Jobs Schedule Personnel Allocate Machinery * *Limited options Modify Capacity Manage with existing Capacity Saba Bahouth – UCO

  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) Saba Bahouth – UCO

  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? Saba Bahouth – UCO

  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) Saba Bahouth – UCO

  9. 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 Understanding Capacity Increments Saba Bahouth – UCO

  10. Economies of Scale Cost per unit Small plant Medium plant Large plant 0 Output rate Saba Bahouth – UCO

  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) Saba Bahouth – UCO

  12. Profit Total revenue Amount ($) Total cost 0 BEP (Quantity in units) Cost-Volume Relationships Saba Bahouth – UCO

  13. Process A: low volume, high variety Process B: Repetitive Process C: High volume, low variety Total cost - Process A Total cost - Process B Total cost - Process C Fixed cost - Process C Fixed cost - Process B Fixed cost - Process A Quantity Process C Process A Process B Crossover Chart Cost Saba Bahouth – UCO

  14. Break-Even Problem with Step Fixed Costs $ Revenues TC 1 machine 2 machines 3 machines Quantity Saba Bahouth – UCO

  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 Saba Bahouth – UCO

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

  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 Saba Bahouth – UCO

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