Unit 4
Impaler_2019Chapter 5
Strategic Capacity Planning for Products and Services
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Learning Objectives (1 of 2)
You should be able to:
5.1 Name the three key questions in capacity planning
5.2 Explain the importance of capacity planning
5.3 Describe ways of defining and measuring capacity
5.4 Name several determinants of effective capacity
5.5 Discuss factors to consider when deciding whether to operate in-house or outsource
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Learning Objectives (2 of 2)
5.6 Discuss the major considerations related to developing capacity alternatives
5.7 Describe the steps that are used to resolve constraint issues
5.8 Briefly describe approaches that are useful for evaluating capacity alternatives
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Learning Objective 5.1
Capacity Planning
Capacity
The upper limit or ceiling on the load that an operating unit can handle
Capacity needs include
Equipment
Space
Employee skills
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Learning Objective 5.1
Strategic Capacity Planning
Goal
To achieve a match between the long-term supply capabilities of an organization and the predicted level of long-term demand
Overcapacity operating costs that are too high
Undercapacity strained resources and possible loss of customers
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Learning Objective 5.1
Capacity Planning Questions (1 of 2)
Key questions:
What kind of capacity is needed?
How much is needed to match demand?
When is it needed?
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Learning Objective 5.1
Capacity Planning Questions (2 of 2)
Related questions:
How much will it cost?
What are the potential benefits and risks?
Are there sustainability issues?
Should capacity be changed all at once, or through several smaller changes
Can the supply chain handle the necessary changes?
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Learning Objective 5.2
Capacity Decisions Are Strategic
Capacity decisions
Impact the ability of the organization to meet future demands
Affect operating costs
Are a major determinant of initial cost
Often involve long-term commitment of resources
Can affect competitiveness
Affect the ease of management
Have become more important and complex due to globalization
Need to be planned for in advance due to their consumption of financial and other resources
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Learning Objective 5.3
Defining and Measuring Capacity
Measure capacity in units that do not require updating
Why is measuring capacity in dollars problematic?
Two useful definitions of capacity
Design capacity
The maximum output rate or service capacity an operation, process, or facility is designed for
Effective capacity
Design capacity minus allowances such as personal time and maintenance
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Learning Objective 5.3
Measuring System Effectiveness (1 of 2)
Actual output
The rate of output actually achieved
It cannot exceed effective capacity
Efficiency
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Learning Objective 5.3
Measuring System Effectiveness (2 of 2)
Utilization
Measured as percentages
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Learning Objective 5.3
Example – Efficiency and Utilization
Design Capacity = 50 trucks per day
Effective Capacity = 40 trucks per day
Actual Output = 36 trucks per day
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Learning Objective 5.4
Determinants of Effective Capacity
Facilities
Product and service factors
Process factors
Human factors
Policy factors
Operational factors
Supply chain factors
External factors
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Strategy Formulation
Strategies are typically based on assumptions and predictions about:
Long-term demand patterns
Technological change
Competitor behavior
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Capacity Strategies
Leading
Build capacity in anticipation of future demand increases
Following
Build capacity when demand exceeds current capacity
Tracking
Similar to the following strategy, but adds capacity in relatively small increments to keep pace with increasing demand
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Capacity Cushion
Capacity cushion
Extra capacity used to offset demand uncertainty
Capacity cushion = 100% - utilization
Capacity cushion strategy
Organizations that have greater demand uncertainty typically have greater capacity cushion
Organizations that have standard products and services generally have smaller capacity cushion
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Steps in Capacity Planning
Estimate future capacity requirements
Evaluate existing capacity and facilities; identify gaps
Identify alternatives for meeting requirements
Conduct financial analyses
Assess key qualitative issues
6. Select the best alternative for the long term
7. Implement alternative chosen
8. Monitor results
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Forecasting Capacity Requirements
Long-term considerations relate to overall level of capacity requirements
Require forecasting demand over a time horizon and converting those needs into capacity requirements
Short-term considerations relate to probable variations in capacity requirements
Less concerned with cycles and trends than with seasonal variations and other variations from average
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Calculating Processing Requirements
Calculating processing requirements requires reasonably accurate demand forecasts, standard processing times, and available work time
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Service Capacity Planning
Service capacity planning can present a number of challenges related to:
The need to be near customers
Convenience
The inability to store services
Cannot store services for consumption later
The degree of demand volatility
Volume and timing of demand
Time required to service individual customers
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Demand Management Strategies
Strategies used to offset capacity limitations and that are intended to achieve a closer match between supply and demand
Pricing
Promotions
Discounts
Other tactics to shift demand from peak periods into slow periods
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Learning Objective 5.5
In-House or Outsource?
Once capacity requirements are determined, the organization must decide whether to produce a good or service itself or outsource
Factors to consider:
Available capacity
Expertise
Quality considerations
The nature of demand
Cost
Risks
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Learning Objective 5.6
Developing Capacity Alternatives
Things that can be done to enhance capacity management:
Design flexibility into systems
Take stage of life cycle into account
Take a “big-picture” approach to capacity changes
Prepare to deal with capacity “chunks”
Attempt to smooth capacity requirements
Identify the optimal operating level
Choose a strategy if expansion is involved
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Learning Objective 5.6
Bottleneck Operation
An operation in a sequence of operations whose capacity is lower than that of the other operations
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Learning Objective 5.6
Optimal Operating Level
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Learning Objective 5.6
Economies and Diseconomies of Scale
Economies of scale
If output rate is less than the optimal level, increasing the output rate results in decreasing average per unit costs
Diseconomies of scale
If the output rate is more than the optimal level, increasing the output rate results in increasing average per unit costs
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Learning Objective 5.6
Economies of Scale
Economies of scale
If output rate is less than the optimal level, increasing the output rate results in decreasing average per unit costs
Reasons for economies of scale:
Fixed costs are spread over a larger number of units
Construction costs increase at a decreasing rate as facility size increases
Processing costs decrease due to standardization
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Learning Objective 5.6
Diseconomies of Scale
Diseconomies of scale
If the output rate is more than the optimal level, increasing the output rate results in increasing average per unit costs
Reasons for diseconomies of scale
Distribution costs increase due to traffic congestion and shipping from a centralized facility rather than multiple smaller facilities
Complexity increases costs
Inflexibility can be an issue
Additional levels of bureaucracy
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Learning Objective 5.6
Facility Size and Optimal Operating Level
Minimum cost & optimal operating rate are functions of size of production unit.
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Learning Objective 5.7
Constraint Management
Constraint
Something that limits the performance of a process or system in achieving its goals
Categories
Market
Resource
Material
Financial
Knowledge or competency
Policy
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Learning Objective 5.7
Resolving Constraint Issues
Identify the most pressing constraint
Change the operation to achieve maximum benefit, given the constraint
Make sure other portions of the process are supportive of the constraint
Explore and evaluate ways to overcome
the constraint
Repeat the process until the constraint levels are at acceptable levels
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Learning Objective 5.8
Evaluating Alternatives (1 of 2)
Alternatives should be evaluated from varying perspectives
Economic
Is it economically feasible?
How much will it cost?
How soon can we have it?
What will operating and maintenance costs be?
What will its useful life be?
Will it be compatible with present personnel and present operations?
Non-economic
Public opinion
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Learning Objective 5.8
Evaluating Alternatives (2 of 2)
Techniques for Evaluating Alternatives
Cost-volume analysis
Financial analysis
Decision theory
Waiting-line analysis
Simulation
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Learning Objective 5.8
Cost-Volume Analysis
Cost-volume analysis
Focuses on the relationship between cost, revenue, and volume of output
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 = FC + VC
Total Revenue (TR)
TR = revenue per unit (R) x Q
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Learning Objective 5.8
Break-Even Point (BEP)
BEP
The volume of output at which total cost and total revenue are equal
Profit (P) = TR – TC = R x Q – (FC +v × Q)
= Q(R – v) – FC
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Learning Objective 5.8
Cost-Volume Relationships (1 of 8)
Fixed, variable, and total costs
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Learning Objective 5.8
Cost-Volume Relationships (2 of 8)
Total revenue increases linearly with output
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Learning Objective 5.8
Cost-Volume Relationships (3 of 8)
Profit = TR - TC
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Learning Objective 5.8
Cost-Volume Relationships (4 of 8)
Profit versus loss
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Learning Objective 5.8
Cost-Volume Relationships (5 of 8)
Point of difference for two alternatives
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Learning Objective 5.8
Cost-Volume Relationships (6 of 8)
Step fixed costs and variable costs
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Learning Objective 5.8
Cost-Volume Relationships (7 of 8)
Multiple break-even points
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Learning Objective 5.8
Cost-Volume Relationships (8 of 8)
Capacity alternatives may involve step costs, which are costs that increase stepwise as potential volume increases
The implication of such a situation is the possible occurrence of multiple break-even quantities
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Learning Objective 5.8
Cost-Volume Analysis Assumptions
Cost-volume analysis is a viable tool for comparing capacity alternatives if certain assumptions are satisfied
One product is involved
Everything produced can be sold
The variable cost per unit is the same regardless of 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
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Learning Objective 5.8
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
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Operations Strategy (1 of 2)
Capacity planning impacts all areas of the organization
It determines the conditions under which operations will have to function
Flexibility allows an organization to be agile
It reduces the organization’s dependence on forecast accuracy and reliability
Many organizations utilize capacity cushions to achieve flexibility
Bottleneck management is one way by which organizations can enhance their effective capacities
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Operations Strategy (2 of 2)
Capacity expansion strategies are important organizational considerations
Expand-early strategy
Wait-and-see strategy
Capacity contraction is sometimes necessary
Capacity disposal strategies become important under these conditions
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End of Presentation
© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
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