Strategic capacity planning for products and services
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Transcript of Strategic capacity planning for products and services
Strategic Capacity Planning for Products and Services
Gerlyn BonusAgnes Regala
Roselyn PudaoMary Grace Ibanez
Matex Carillo
BSBA. ManagementProf. Joey Acuῆa
Capacity Capacity is the upper limit or ceiling on the
load that an operating unit can handle. Capacity also includes:
EquipmentSpaceEmployee skill
• The basic questions in capacity handling are:– What kind of capacity is needed?– How much is needed?– When is it needed?
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.
Efficiency and Utilization
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
Determinants of Effective Capacity
FACILITIES The design of facilities, including size and provision
for expansion, is key. Locational factors, such as transportation costs,
distance to market, labor supply, energy sources and room for expansion are also important.
Likewise, layout of the work area and environmental factors also play a significant role.
PRODUCT AND SERVICE FACTORS Product and service design can have a tremendous
influence on capacity. The more uniform the output, the more
opportunities there are for standardization of methods and materials.
PROCESS FACTORS The quantity capability of a process is an obvious
determinant of capacity but subtle determinant is the influence of output quality.
Process improvement that increase quality and productivity can result in increased capacity.
HUMAN FACTORS The tasks that make up a job, the variety of activities
involved, also the training, skill and experience required to perform a job all have an impact on the potential and actual output.
Employee motivation has a very basic relationship to capacity , as do absenteeism.
POLICY FACTORS Management policy can affect capacity by allowing
or not allowing capacity options such as overtime or second or third shifts.
OPERATIONAL FACTORS Inventory stocking decisions, late deliveries,
purchasing requirements, acceptability of purchased materials, quality inspection and control procedures also have an impact on effective capacity.
SUPPLY CHAIN FACTORS It must be taken into account in capacity planning if
substantial capacity changes are involved.
EXTERNAL FACTORS Product standards , especially minimum quality and
performance standards, can restrict management’s options for increasing capacity.
Strategy Formulation• An organization typically its base its capacity
strategy on assumption and predictions about long term demand patterns, technological changes , and the behavior of its competitors.
Key decisions of capacity planning
• The amount of capacity needed• The timing of changes • The need to maintain balance throughout the system• The extent of flexibility of facilities and the workforce.
• Deciding on the amount capacity involves consideration of expected demand and capacity cost.
• Capacity cushion which is an amount capacity in excess of expected demand when there is some uncertainty about demand.
the greater the degree of demand uncertainty , the greater the amount cushion used.
Steps in the Capacity Planning Process
• Estimate future capacity requirement • Evaluate existing capacity and facilities and identify
gaps.• Identify alternative for meeting requirements• Conduct financial analyses of each alternative• Assess key qualitative issues for each alternative • Select the alternative to pursue that will be bests in
long term• Implement the selected alternative• Monitor results
Forecasting Capacity Requirements• Long-term vs. Short-term capacity needs• Long-term relates to overall level of capacity such as
facility size, trends, and cycles.• Short-term relates to variations from seasonal,
random, and irregular fluctuations in demand
Calculating Processing Requirements• A department works one 8-hour shift, 250
days a year , and has these figures for usage of a machine that is currently being considered:
Working one 8 hour shift 250 days a year provides an annual capacity of 8×250=2000 hours per year.5800 hours/2000 hours/machine=2.90 Machines
Product Annual demand
Standard Processing
time per unit
Processing time needed
1 400 5 20002 300 8 24003 700 2 1400
5800
The Challenge of Planning Service CapacityThree Important Factors in planning service capacity
The need to be near customers• Convenience for customers is often an important
aspects of services. Generally, a service must be located near customer.
The inability to store service• Speed of the delivery, or customers waiting time
become a major concern in a service capacity planning .
The degree of volatility• Demand volatility presents problem for capacity
planners. Demand volatility tend to be higher for services than goods, not only in timing of demand, But also in amount of time required to the service individual customers.
Make Or Buy• Once capacity requirements have been determined ,
the organization must decide whether to produce a good or provide a service itself. or outsource (buy) from another organization.
Factors:Available Capacity • If an organization has available the equipment, necessary skills, and time, if often makes sense to
produce an item of perform a service in-house, The additional cost would be relatively small compared with those required to buy items or subcontract services.
Expertise• If a firm lacks the expertise to do the job satisfactory
buying might be reasonable alternative.
Quality Considerations• Firm that specialize can usually offer higher quality
than an organization can attain itself. Conversely unique quality requirements or the desire to closely monitor quality may cause an organization to perform a job itself.
The nature of Demand• When demand for an items is high and steady, the
organization is often better off doing the work itself.
Cost• Any cost savings achieved from buying of making
must weighed against the preceding factors. Cost savings might come from the item itself or from transportation cost savings. If there are fixed cost associated with making an item that cannot be reallocated if the service or product outsourced, that has to recognized in the analysis.
Risk• Outsourcing may involved certain risks. One is loss of
control over operations. Another is the need to disclosed proprietary information.
Developing Capacity AlternativesDesign Flexibility into system.o Provisions for Future Expansion in the original
design.
Take Stage of life cycle into accounto Capacity requirements are often closely linked to the
stage of the life cycle that a product or service is in.
Take a “Big Picture” approach to capacity changes
o When developing capacity alternatives, it is important to consider how parts of the system interrelate.
o Bottleneck Operation
BottleneckOperation
Machine #1
Machine #3
Machine #4
10/hr
10/hr
10/hr
10/hr
30/hrMachine #2
Prepare to deal with capacity “chunks.”o no machine comes in continuous capacities.
Attempt to smooth out capacity requirements.o Unevenness in capacity requirements also can create
certain problems.
Identify the optimal operating level.o Production units typically have an ideal or optimal
level of operation in terms of unit cost of output.Economies of Scaleo If the output rate is less than the optimal level,
increasing the output rate results in decreasing average unit costs.
Diseconomies of scaleo If the output rate is more than the optimal level,
increasing the output rate results in increasing average unit costs.
Choose a strategy if expansion is involved.o Consider whether incremental expansion or single
step is more appropriate.
Cost-Volume Analysiso Focuses on relationships between cost, revenue and
volume of output.FC= Fixed CostVC= Total variable costv= variable cost per unitTC= Total CostTR= Total revenueR= Revenue per unitQ= Quantity or Volume of output
QBEP= Break even quantity P=Profit
•Fixed Costs (FC)– tend to remain constant regardless of output
volume
•Variable Costs (VC)– vary directly with volume of output– VC = Quantity(Q) x variable cost per unit (v)
•Total Cost– TC = Q x v
•Total Revenue (TR)– TR = revenue per unit (R) x Q
Profit (P) = TR – TC = R x Q – (FC +v x Q)
= Q(R – v) – FC
Q=P+FC/R-v ; QBEP=FC/R-V
Examples:• The owner of Old-Fashioned Berry Pies, Simon Chen, is contemplating adding a new line of pies, which will require leasing new equipment for a monthly payment of $6000. Variable costs would be $ 2.00 per pie, and pies would retail for $7.00.a) How many pies must be sold in order to break-even?b) What would the profit be if 1000 pies are made and sold in a month?c) How many pies must be sold to realize a profit of $4000?d) If 2000 can be sold, and a profit target is $5000, what price should be charged per pie?
Solution:FC=$6000 VC=$2 per pie REV=$7 per pie
a) QBEP= FC/R-V =$6000/$7-$2 =1200 pies/monthb) For Q=1000; P=Q(R-V)-FC =1000($7-$2)-$6000= $1000c) P=$4000; SOLVE for Q using Q=P+FC/R-VQ=$4000+$6000/$7-$2 = 2000 piesd) Profit=Q(R-V)-FC$5000=$2000(R-$2)-$6000R=$7.50
• A manager has the option of purchasing one, two, or three machines. Fixed costs and potential volumes are as follows:
VC is $10 per unit and R is $40 per unit.a) Determine the break-even point for each range.b) If projected annual demand is between 580 and 660
units, how many machines should the manager purchase?
Number of Machines
Total annual Fixed Costs
Corresponding range of output
1 $9 600 0-3002 15000 301-6003 20000 601-900
I. Solution:a) For one machine:
QBEP= $9600/$40 per unit-$10 per unit= 320 units( not in range, so there is no BEP)
b) For two machines:
QBEP= $15000/$40 per unit- $10 per unit=500 unitsc) For three machines:
QBEP= $20000/$40 per unit- $10 per unit=666.67 units
B. Comparing the projected range of demand to the two ranges for which a break-even point occurs, you can see that the break-even point is 500, which is in the range 301-600. this means that even if demand is at the low end of the range, it would be above the break-even point and thus yield a profit. At the top end of projected demand, the volume would still be less than the break-even point for that range, so there would be no profit.
Assumptions of Cost-Volume Analysis• One product is involved.• Everything produced can be sold.• The variable cost per unit is the same regardless of
the volume.• Fixed costs do not change with volume changes, or
they are step changes.• The revenue per unit is the same regardless of
volume.• Revenue per unit exceeds variable cost per unit.
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 flow of an investment proposal
Decision Theory • represents a general approach to decision making
which is suitable for a wide range of operations management decisions, including:
capacity planning
product andservice design
product andservice design
equipment selection
location planning