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Capacity Planning
Capacity
The maximum level of output The amount of resource inputs available relative to output requirements at a particular time
Capacity
Productive
Capacity, generally measured in physical units, refers either to the maximum output rate for (products or services) or to the amounts of key resources available in each operating unit.
Capacity
The
throughput, or the number of units a facility can hold, receive, store, or produce in a period of time Determines fixed costs Determines if demand will be satisfied
Capacity Planning
Capacity is the maximum output rate of a production or service facility Capacity Planning is the process of establishing the output rate that may be needed at a facility. Capacity is usually purchased in Chunks Strategic issues: how much and when to spend capital for additional facility and equipment Tactical Issues: Work force and inventory levels & day-to-day use of equipment
Capacity Planning
Determination of Plant Capacity First Level Planning Design Capacity Based on Long Range Forecast System capacity Output produced by workers
and equipments
Capacity Planning
The
type of capacity is needed? How much is needed? When is it needed? How does productivity relate to capacity?
Dimension of Demand
Quantity
Timing
Quality
Location
or accommodate raw material, finished products ,customers etc. Strategic Capacity Planning is an approach for determining the overall capacity level of capital intensive resources ,including facilities, equipment and overall labor force size
Capacity
Efficiency
Capacity Utilization
Capacity
rate
used
Best
operating level
capacity
Utilization =
Utilization--Example
During one week of production , a plant produces 83 units of a product. Its historic best utilization was 120 units per week what is the plants capacity utilization rate ?
Solution
Utilization Rate ?
Engineers design engine and assembly lines to operate at an ideal or best operating level to maximize output and minimize wear.
Volume
hotel
The Best Operating Level is the output that results in the lowest average unit cost.
Economies of scale
Where the cost per unit of output drops as volume of output increases Spread the fixed costs of buildings & equipment over multiple units, allow bulk purchasing & handling of materials Production or operating cost do not increase linearly with output levels Quantity discounts are available for material purchase Operating efficiency increases as worker gain experience
Diseconomies of scale:
Where the cost per unit rises as volume increases Often caused by congestion (overwhelming the process with too much work-in-process ) and scheduling complexity. Diseconomies of Distribution Diseconomies of Bureaucracy Diseconomies of Confusion Diseconomies of Vulnerability
Volume
Volume
Why the average unit cost is decreasing when the volume is increasing or when the time is passing by?
Capacity increase depends on Volume and certainty of anticipated demand Strategic objectives Cost of expansion and operation Best Operating Level % of capacity utilization that minimizes unit costs
Capacity Decision..
Capacity
Cushion
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
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 Deliveries Transportation Location Information
Customer Demand Past performance Market research Analytical techniques Promotions / Incentives
- 1
1714.3/1800 = .9524
is the demand which is going to act as one of the guide lines in taking the decision that whether the capacity needed to be added or not. When we take a decision regarding capacity requirement these three points to be taken under consideration:
Cont
Forecast
sale (within each individual product line) Calculate equipment and labor requirements to meet forecasts Project equipment and labor availability
are three-step procedure for making capacity planning decisions is as follows: Step1: Identify Capacity Requirements Step2: Develop Capacity Alternatives Step3: Evaluate Capacity Alternatives
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: FancyFine Small (000s) Family (000s) Generic Small (000s) Family (000s) 1 50 35 100 80 2 60 50 110 90 3 80 70 120 100 4 100 90 140 110
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.
40
Question: Identify the Year 1 values for capacity, machine, and labor?
1 150 115
2 170 140
3 200 170
4 240 200 6 6
Small Mach. Cap. 300,000 Labor Family-size Mach. Cap. 240,000 Labor 150,000/300,000=50% At 1 machine for 100,000, it takes 1.5 machines for 150,000 Small Percent capacity used 50.00% Machine requirement 1.50 Labor requirement 3.00 At 2 operators for Family-size 100,000, it takes 3 Percent capacity used 47.92% operators for 150,000 Machine requirement 0.96 Labor requirement 2.88
41
Question: What are the values for columns 2, 3 and 4 in the table below?
Year: Small (000s) Family (000s) Small Family-size Small Percent capacity used Machine requirement Labor requirement Family-size Percent capacity used Machine requirement Labor requirement
4 240 200 6 6
50.00% 56.67% 1.50 1.70 3.00 3.40 47.92% 58.33% 0.96 1.17 2.88 3.50
Breakeven Analysis
Breakeven quantity = Fixed Costs Price - Variable Costs
Breakeven example
Thomas Manufacturing intends to increase capacity by overcoming a bottleneck operation through the addition of new equipment. Two vendors have presented proposals as follows:
Proposal A B
The revenue for each product is $20 What is the breakeven quantity for each proposal?
Breakeven Solution
FC BEQ = P- VC
Proposal B
BEQ = $ 70,000 $20 - 10 = 7000
Breakeven Analysis
In the previous example, at what capacity would both plans incur the same cost?
Solution -consider total cost
Capacity Flexibility: Having the ability to respond rapidly to demand volume changes and product mix changes.
Flexible
Capacity Bottlenecks
Operation 1 Raw material 200/hour Operation 2 75/hour Operation 3 200/hour
Bottleneck Operation
sales within each individual product line equipment and labor requirements to meet the forecasts equipment and labor availability over the planning horizon
Calculate
Project
Capacity Example
An automobile equipment supplier wishes to install a sufficient number of ovens to produce 400,000 good castings per year. The baking operation takes 2.0 minutes per casting, and management requires a capacity cushion of 5%. How many ovens will be required if each one is available for 1800 hours (of capacity) per year?
Solution
Required system capacity = 400,000 good units per year Number of oven minutes required = 400,000 x 2 min/unit = 800,000 Number of oven minutes available/oven = (1800 hrs/oven) x(60 minutes/hour) (.9524) = 102,859 minutes/oven Number of ovens required = 800,000 min /102,859 min/oven = 7.8 or 8 ovens
B =
M [(1-d1)(1-d2).(1-dn)]
Solution
Desired yield = 200 Operation Defective rate 1 .04 2 .01 3 .02 (1) What is the capacity required?
B=
200 (1-.04)(1-.01)(1-.02)
= 215
Decision Trees
A 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 Low 10 -120 20 0.5 Medium 50 25 40 0.4 High 90 200 60
A B C
Do nothing
A B C
High demand (.4) Medium demand (.5) Low demand (.1) High demand (.4) Medium demand (.5) Low demand (.1)
$62k
A
EVA=.4(90)+.5(50)+.1(10)=$62k
Solution
High demand (.4) Medium demand (.5)
$62k
A B C
$80.5k
$46k
Location
Volatility
of Demand
operating point is near 70% of capacity 70% to 100% of service capacity, what do you think happens to service quality? Why?
From
Capacity
Expansionist Strategy
Wait-and-See Strategy
Disadvantages
risky if demand changes
Wait-and-See
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
output by building up inventory in slack season postpone preventive maintenance (risky) use multi-skilled workers to alleviate bottlenecks allow backorders to increase, extend due date promises, or have stock-outs. subcontract work