5-1

Capacity Planning

Chapter 5

Capacity Planning

McGraw-Hill/Irwin

Operations Management, Seventh Edition, by William J. Stevenson Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

5-2

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?

McGraw-Hill/Irwin

Operations Management, Seventh Edition, by William J. Stevenson Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

5-3

Capacity Planning

Importance of Capacity Decisions Impacts ability to meet future demands Affects operating costs Major determinant of initial costs Involves long-term commitment Affects competitiveness Affects ease of management

McGraw-Hill/Irwin

Operations Management, Seventh Edition, by William J. Stevenson Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

5-4

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.
Operations Management, Seventh Edition, by William J. Stevenson Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

5-5

Capacity Planning

Efficiency and Utilization Actual output Efficiency = Effective capacity Actual output Utilization =

Design capacity

McGraw-Hill/Irwin

Operations Management, Seventh Edition, by William J. Stevenson Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

5-6

Capacity Planning

Efficiency/Utilization Example
Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 units/day
Actual output Efficiency = Effective capacity Utilization = Actual output Design capacity = 40 units/ day 36 units/day 50 units/day = 72% = 36 units/day = 90%

McGraw-Hill/Irwin

Operations Management, Seventh Edition, by William J. Stevenson Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

5-7

Capacity Planning

Determinants of Effective Capacity Facilities Products or services Processes Human considerations Operations External forces

McGraw-Hill/Irwin

Operations Management, Seventh Edition, by William J. Stevenson Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

5-8

Capacity Planning

Some Possible Growth Patterns

Figure 5-1

Volume

Volume

Growth
Time

Decline
Time

Volume

0
McGraw-Hill/Irwin

Volume

Cyclical

Stable

Time

Time

Operations Management, Seventh Edition, by William J. Stevenson Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

5-9

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

McGraw-Hill/Irwin

Operations Management, Seventh Edition, by William J. Stevenson Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

5-10

Capacity Planning

Evaluating Alternatives
Figure 5-3
Production units have an optimal rate of output for minimal cost. Average cost per unit Minimum cost

0
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Rate of output
Operations Management, Seventh Edition, by William J. Stevenson Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

5-11

Capacity Planning

Evaluating Alternatives
Figure 5-4 Minimum cost & optimal operating rate are functions of size of production unit.
Average cost per unit

Small
plant

Medium plant

Large plant

0
McGraw-Hill/Irwin

Output rate
Operations Management, Seventh Edition, by William J. Stevenson Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

5-12

Capacity Planning

Planning Service Capacity 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

McGraw-Hill/Irwin

Operations Management, Seventh Edition, by William J. Stevenson Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

5-13

Capacity Planning

Calculating Processing Requirements

Annual Demand Standard processing time per unit (hr.) Processing time needed (hr.)

Product

#1 #2 #3

400 300 700

5.0 8.0 2.0

2,000 2,400 1,400 5,800

McGraw-Hill/Irwin

Operations Management, Seventh Edition, by William J. Stevenson Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

5-14

Capacity Planning

Cost-Volume Relationships
Figure 5-5a

Amount ($)

Fixed cost (FC) 0 Q (volume in units)

Operations Management, Seventh Edition, by William J. Stevenson Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

5-15

Capacity Planning

Cost-Volume Relationships
Figure 5-5b

Amount ($) 0

Q (volume in units)
Operations Management, Seventh Edition, by William J. Stevenson Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

5-16

Capacity Planning

Cost-Volume Relationships
Figure 5-5c

Amount ($) 0
McGraw-Hill/Irwin

BEP units Q (volume in units)

Operations Management, Seventh Edition, by William J. Stevenson Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

5-17

Capacity Planning

Break-Even Problem with Step Fixed Costs

Figure 5-6a

3 machines

2 machines 1 machine
Quantity Step fixed costs and variable costs.
McGraw-Hill/Irwin
Operations Management, Seventh Edition, by William J. Stevenson Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

5-18

Capacity Planning

Break-Even Problem with Step Fixed Costs

Figure 5-6b $
BEP2 TC 3 TC 2 1

BE P 3

TC

Quantity Multiple break-even points

McGraw-Hill/Irwin
Operations Management, Seventh Edition, by William J. Stevenson Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

5-19

Capacity Planning

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

McGraw-Hill/Irwin

Operations Management, Seventh Edition, by William J. Stevenson Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

5-20

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.

McGraw-Hill/Irwin

Operations Management, Seventh Edition, by William J. Stevenson Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.