Capacity Planning
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Transcript of Capacity Planning
Strategic Capacity Planning
Made by :- Abhishek Malik 206 Achin Jain 207 Aditya Krishna 208 Ajit Rajian 209 Akshay Khandelwal 210
Strategic Capacity Planning Capacity
The maximum level of output .
The amount of resource inputs available relative to output requirements at a particular time.
Capacity is the upper limit or ceiling on the load that an operating unit can handle.
Examples of Capacity Measures
Type of Measures of CapacityOrganization Inputs Outputs
Manufacturer Machine hoursper shift
Number of unitsper shift
Hospital Number of beds Number ofpatients treated
Airline Number of planesor seats
Number ofseat-miles flown
Restaurant Number of seats Customers/timeRetailer Area of store Sales dollarsTheater Number of seats Customers/time
Capacity Planning The basic questions in capacity
planning are:What type of capacity is needed?How much is needed?When is it needed?How does productivity relate to capacity?
Two Capacity Strategies
Time between increments
Forecast of capacity needed
Forecast of capacity needed
Planned unused capacity Planned use of
short-term options
Expansionist Strategy Wait-and-See Strategy
Cap
acity
Cap
acity
Capacity UtilizationCapacity used
rate of output actually achieved Best operating level
capacity for which the process was designed (effective or maximum capacity)
Utilization = _______________Capacity Used
Best Operating Level
Utilization--Example
Best operating level = 120 units/week
Actual output = 83 units/week
Utilization = ? .692
units/wk 120units/wk 83=
level operatingBest usedCapacity nUtilizatio
Best Operating Level
Underutilization
Best OperatingLevel
Averageunit costof output
Volume
Over-utilization
Break-Even Problem with Step Fixed Costs
Quantity
FC + VC = TC FC + VC = TCFC + VC =
TC
Step fixed costs and variable costs.
1 machine
2 machines
3 machines
Break-Even Problem with Step Fixed Costs
$
TC
TC
TCBEP2
BEP 3
TR
Quantity1
2
3
Multiple break-even points
Breakeven Analysis
Breakeven quantity = Fixed CostsPrice - Variable Costs
Breakeven exampleThomas Manufacturing intends to increase capacity by overcoming a bottleneck operation through the addition of new equipment. Two vendors have presented proposals as follows:
Proposal Fixed Costs Variable Costs A $ 50,000 $12 B $ 70,000 $10
The revenue for each product is $20 What is the breakeven quantity for each proposal?
Breakeven Solution
BEQ = FC
P- VC
Proposal A
BEQ = = 6250$ 50,000
$20 - 12
Proposal B
BEQ = = 7000$ 70,000
$20 - 10
Breakeven Analysis
In the previous example, at what capacity would both plans incur the same cost?
Solution -consider total cost
Total cost = Fixed cost + Variable Cost (Q)
$50,000 + $12Q = $70,000 + $10 Q
Q = 10,000
The Experience Curve
Total accumulated production of units
Cost orpriceper unit
As plants produce more products, they gain experience in the best production methods and reduce their costs per unit.
Capacity Flexibility: Having the ability to respond rapidly to demand volume changes and product mix changes.
Flexible plantsFlexible processesFlexible workers
Capacity Bottlenecks
Rawmaterial
200/hour 75/hour 200/hour
Operation 1 Operation 2 Operation 3
BottleneckOperation
Determining Capacity Requirements
Forecast sales within each individual product line
Calculate equipment and labor requirements to meet the forecasts
Project equipment and labor availability over the planning horizon
Example--Capacity Requirements
A manufacturer produces two lines of ketchup, FancyFine and a generic line. Each is sold in small and family-size plastic bottles.
The following table shows forecast demand for the next four years.
Year: 1 2 3 4FancyFineSmall (000s) 50 60 80 100Family (000s) 35 50 70 90GenericSmall (000s) 100 110 120 140Family (000s) 80 90 100 110
Example of Capacity Requirements: The Product from a Capacity Viewpoint
Question: Are we really producing two different types of ketchup from the standpoint of capacity requirements?
Answer: No, it’s the same product just packaged differently.
Example of Capacity Requirements: Equipment and Labor Requirements
Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200
Three 100,000 units-per-year machines are available for small-bottle production. Two operators required per machine.
Two 120,000 units-per-year machines are available for family-sized-bottle production. Three operators required per machine.
Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200
Small Mach. Cap. 300,000 Labor 6Family-size Mach. Cap. 240,000 Labor 6
SmallPercent capacity used 50.00%Machine requirement 1.50Labor requirement 3.00Family-sizePercent capacity used 47.92%Machine requirement 0.96Labor requirement 2.88
Question: Identify the Year 1 values for capacity, machine, and labor?
150,000/300,000=50% At 1 machine for 100,000, it takes 1.5 machines for 150,000
At 2 operators for 100,000, it takes 3 operators for 150,000
©The McGraw-Hill Companies, Inc., 2001
26
Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200
Small Mach. Cap. 300,000 Labor 6Family-size Mach. Cap. 240,000 Labor 6
SmallPercent capacity used 50.00%Machine requirement 1.50Labor requirement 3.00Family-sizePercent capacity used 47.92%Machine requirement 0.96Labor requirement 2.88
Question: What are the values for columns 2, 3 and 4 in the table below?
56.67%1.703.40
58.33%1.173.50
66.67%2.004.00
70.83%1.424.25
80.00%2.404.80
83.33%1.675.00
27
©The McGraw-Hill Companies, Inc., 2001
Capacity Cushion
Capacity Cushion = level of capacity in excess of the average utilization rate or level of capacity in excess of the expected demand .
Cushion = Best Operating Level Capacity Used
- 1
Large capacity cushionRequired to handle uncertainty in demand
service industries high level of uncertainty in demand (in
terms of both volume and product-mix) to permit allowances for vacations, holidays,
supply of materials delays, equipment breakdowns, etc.
if subcontracting, overtime, or the cost of missed demand is very high
Sources of Uncertainty
Customer Demand•Past performance•Market research•Analytical techniques•Promotions / Incentives
Manufacturing•Process design•Product design•Capacity•Quality
Supplier Performance•Responsiveness•Transportation•Location•Quality•Information
Customer Deliveries•Transportation•Location•Information
Small capacity cushion
Unused capacity still incurs the fixed costs
highly capital intensive businesses time perishable capacity
Example: Target 5% Cushion
- 1cushion = Best Operating LevelCapacity Used
.05 = (1800/x) - 11.05 = (1800/x) 1714.3/1800 = .95241.05x = 1800x = 1714.3
Decision TreesA glass factory specializing in crystal is experiencing a substantial backlog, and the firm's management is considering three courses of action:
A) Arrange for subcontracting,B) Construct new facilities.C) Do nothing (no change)
The correct choice depends largely upon demand, which may be low, medium, or high. By consensus, management ranks the respective probabilities as .10, .50, and .40. A cost analysis that reveals the effects upon costs is shown in the following table.
Payoff Table
0.1 0.5 0.4Low Medium High
A 10 50 90B -120 25 200C 20 40 60
We start with our decisions...
AB
C
Subcontracting
Do nothing
Construct new facilities
Then add our possible states of nature, probabilities, and payoffs
AB
C
High demand (.4)
Medium demand (.5)
Low demand (.1)
$90k$50k$10k
High demand (.4)
Medium demand (.5)
Low demand (.1)
$200k$25k
-$120k
High demand (.4)
Medium demand (.5)
Low demand (.1)
$60k$40k$20k
Determine the expected value of each decision
High demand (.4)
Medium demand (.5)
Low demand (.1)
A
$90k$50k$10k
EVA=.4(90)+.5(50)+.1(10)=$62k
$62k
SolutionHigh demand (.4)
Medium demand (.5)
Low demand (.1)
High demand (.4)
Medium demand (.5)
Low demand (.1)
AB
CHigh demand (.4)
Medium demand (.5)
Low demand (.1)
$90k$50k$10k
$200k$25k
-$120k
$60k$40k$20k
$62k
$80.5k
$46k
Planning Service CapacityTime
Location
Volatility of Demand
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? Why?
Two Capacity Strategies
Time between increments
Forecast of capacity needed
Forecast of capacity needed
Planned unused capacity Planned use of
short-term options
Expansionist Strategy Wait-and-See Strategy
Cap
acity
Cap
acity
Advantages/Disadvantages of each strategy
Expansionist • ahead of competition • risky if demand • no lost sales changes
Wait-and-See • no unused capacity • rely on short- • easier to adapt to term options new technologies
Advantages Disadvantages
Some Short-Term Capacity Options lease extra space temporarily authorize overtime staff second or third shift with temporary workers add weekend shifts alternate routings, using different work
stations that may have excess capacity schedule longer runs to minimize
capacity losses