Capacity Planning 2003

8/8/2019 Capacity Planning 2003

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5-1 Capacity Planning

Capacity Planning


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Capacity PlanningCapacity Planning

Capacity planning is the process ofdetermining the production capacity needed by

an organization to meet changing demands for

its products.

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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1. Impacts ability to meet future demands2. Affects operating costs

3. Involves long-term commitment

4. Affects competitiveness

5. Affects ease of management

Importance of Capacity DecisionsImportance of Capacity Decisions


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CapacityCapacity

Design capacity maximum output rate or service capacity an

operation, process, or facility is designed for

Effective capacity Design capacity minus allowances such as

personal time, maintenance, and scrap

Actual output rate of output actually achieved--cannot

exceed effective capacity.


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Efficiency and UtilizationEfficiency and Utilization

Actual outputEfficiency =Effective capacity

Actual outputUtilization =

Design capacity

Both measures expressed as percentages


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Actual output = 36 units/dayEfficiency = =

90%Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day=

72% Design capacity 50 units/day

Efficiency/Utilization ExampleEfficiency/Utilization Example

Design capacity = 50 trucks/day

Effective capacity = 40 trucks/day

Actual output = 36 units/day


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Determinants of Effective CapacityDeterminants of Effective Capacity

Facilities (equipments , tools) Product and service factors Human factors

Operational factors Supply chain factors External factors


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Key Decisions of Capacity PlanningKey Decisions of Capacity Planning

1. Amount of capacity needed2. Timing of changes

3. Need to maintain balance

4. Extent of flexibility of facilities


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Steps for Capacity PlanningSteps for Capacity Planning

1. Estimate future capacity requirements2. Evaluate existing capacity

3. Identify alternatives

4. Conduct financial analysis

5. Assess key qualitative issues

6. Select one alternative

7. Implement alternative chosen

8. Monitor results


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Economies of ScaleEconomies 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 increasingaverage unit costs


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Evaluating AlternativesEvaluating Alternatives

Minimum cost & optimal operating rate arefunctions of size of production unit.

A

verag

ecos

tp

erunit

0

Smallplant Medium

plant Largeplant

Output rate

Figure 5.4


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Cost-Volume RelationshipsCost-Volume Relationships

Amou n

t($)

0Q (volume in units)

Totalcost

=VC

+FC

Total

variable

cost(V

C)

Fixed cost (FC)

Figure 5.5a


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Amou

nt($)

Q (volume in units)0

Totalrev

enue

Figure 5.5b

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Amou

nt($)

Q (volume in units)0 BEP units

Profi

t

Totalr

even

ue

Totalcos

t

Figure 5.5c

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Break-Even Problem with Step Fixed CostsBreak-Even Problem with Step Fixed Costs

Quantity

FC+VC

=TC

FC+

VC=T

C

FC+V

C=

TC

Step fixed costs and variable costs.

1 machine

2 machines

3 machines

Figure 5.6a

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Break-Even Problem with Step Fixed CostsBreak-Even Problem with Step Fixed Costs

$

TC

TCTC

BEP2

BEP3

TR

Quantity

1

2

3

Multiple break-even points

Figure 5.6b

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1. One product is involved2. Everything produced can be sold

3. Variable cost per unit is the same regardless

of volume4. Fixed costs do not change with volume

5. Revenue per unit constant with volume

6. Revenue per unit exceeds average cost perunit

Assumptions of Cost-Volume AnalysisAssumptions of Cost-Volume Analysis

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Capacity Planning 2003

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