Stevenson_CH05_Accessible.pptx

Chapter 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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