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5-1 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Capacity Planning Chapter 5 Capacity Planning

Transcript of 5-1 McGraw-Hill/Irwin Operations Management, Seventh Edition, by William J. Stevenson Copyright ©...

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McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Capacity Planning

Chapter 5

Capacity Planning

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Capacity Planning

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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Capacity Planning

• Impacts ability to meet future demands

• Affects operating costs

• Major determinant of initial costs

• Involves long-term commitment

• Affects competitiveness

• Affects ease of management

Importance of Capacity Decisions

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McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Capacity Planning

Capacity

• Design capacity– maximum obtainable output

• Effective capacity– Maximum capacity given product mix,

scheduling difficulties, and other doses of reality.

• Actual output– rate of output actually achieved--cannot

exceed effective capacity.

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Capacity Planning

Efficiency and Utilization

Actual outputEfficiency =

Effective capacity

Actual outputUtilization =

Design capacity

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Capacity Planning

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

Efficiency/Utilization Example

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Capacity Planning

Determinants of Effective Capacity

• Facilities

• Products or services

• Processes

• Human considerations

• Operations

• External forces

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Capacity Planning

Some Possible Growth PatternsV

olu

me

Vo

lum

e

Vo

lum

e

Vo

lum

e

0 0

0 0

Time Time

Time Time

Growth Decline

Cyclical Stable

Figure 5-1

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McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Capacity Planning

Developing Capacity Alternatives

• Design flexibility into systems

• 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

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Capacity Planning

Evaluating Alternatives

Minimumcost

Av

era

ge

co

st

per

un

it

0 Rate of output

Production units have an optimal rate of output for minimal cost.

Figure 5-3

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McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Capacity Planning

Evaluating Alternatives

Minimum cost & optimal operating rate are functions of size of production unit.

Av

era

ge

co

st

per

un

it

0

Smallplant Medium

plant Largeplant

Output rate

Figure 5-4

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Capacity Planning

• Need to be near customers– Capacity and location are closely tied

• Inability to store services– Capacity must me matched with timing of

demand

• Degree of volatility of demand– Peak demand periods

Planning Service Capacity

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Capacity Planning

Calculating Processing Requirements

P r o d u c tA n n u a l

D e m a n d

S t a n d a r dp r o c e s s i n g t i m e

p e r u n i t ( h r . )P r o c e s s i n g t i m e

n e e d e d ( h r . )

# 1

# 2

# 3

4 0 0

3 0 0

7 0 0

5 . 0

8 . 0

2 . 0

2 , 0 0 0

2 , 4 0 0

1 , 4 0 0 5 , 8 0 0

P r o d u c tA n n u a l

D e m a n d

S t a n d a r dp r o c e s s i n g t i m e

p e r u n i t ( h r . )P r o c e s s i n g t i m e

n e e d e d ( h r . )

# 1

# 2

# 3

4 0 0

3 0 0

7 0 0

5 . 0

8 . 0

2 . 0

2 , 0 0 0

2 , 4 0 0

1 , 4 0 0 5 , 8 0 0

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Capacity Planning

Cost-Volume Relationships

Am

ou

nt

($)

0Q (volume in units)

Total cost = VC + FC

Total variable cost (V

C)

Fixed cost (FC)

Figure 5-5a

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Capacity Planning

Cost-Volume Relationships

Am

ou

nt

($)

Q (volume in units)0

Total r

evenue

Figure 5-5b

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Capacity Planning

Cost-Volume Relationships

Am

ou

nt

($)

Q (volume in units)0 BEP units

Profit

Total r

even

ue

Total cost

Figure 5-5c

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McGraw-Hill/IrwinOperations Management, Seventh Edition, by William J. StevensonCopyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Capacity Planning

Break-Even Problem with Step Fixed Costs

Quantity

FC + VC = TC

FC + VC = TC

FC + VC =

TC

Step fixed costs and variable costs.

1 machine

2 machines

3 machines

Figure 5-6a

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Capacity Planning

Break-Even Problem with Step Fixed Costs

$

TC

TC

TCBEP2

BEP 3

TR

Quantity

1

2

3

Multiple break-even points

Figure 5-6b

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Capacity Planning

• 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

Assumptions of Cost-Volume Analysis

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Capacity Planning

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.


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