Chapter 5: Capacity Planning

Chapter 5: Capacity Planning

1. Capacity

   • Def: Upper limit on the load that an operating unit can handle
     • Production Rate
     • Capacity time frame
     • Strategic capacity planning
   • Basic questions
     • What kind needed?
     • How much needed?
     • When needed?
   • Importance of LT capacity
     • ability to meet future demands
       • errors limit rate of output
     • affect operating costs
       • under capacity plants & additional costs
     • determine initial costs
     • LT commitment
     • affect competitiveness

2. Measuring Capacity

   • efficiency & utilization
     • efficiency = actual output / effective capacity
       • EXAMPLES
     • utilization = actual output / design capacity
       • EXAMPLES
   • terminology
     • actual output
     • effective capacity
     • design capacity
   • How to measure?
     • product specific efficiency measures
     • efficiency of single major product among product mix

3. Factors affecting capacity

   • facilities
   • products/services
   • human
   • planning & operational
   • external

4. Develop capacity Alternatives

   • 1. design flexibility into systems
   • 2. differentiate between new & mature products
   • 3. take a "big picture" approach to capacity changes
   • 4. prepare to deal with capacity "chunks"
   • 5. attempt to smooth out capacity requirements
   • 6. use capacity cushion
   • 7. identify the optimal operating level

5. Evaluating Alternatives

   • Optimal operating level: lowest marginal costs
   • Economies & Diseconomies of scale
     • Econ: FC spread out over more units & volume purchase discounts
     • Disecon: worker fatigue, equip breakdown, less room for error, difficulties in coordination
   • Economic Considerations & Non Econ Considerations
     • Econ consideration: cost, useful life, compatibility, revenue
     • Non econ: public opinion, reactions from employees, community pressure
   • Techniques used for evaluation
     • Break Even Analysis
       • TC = FC + VC; VC = Q * v; TR = Q * r; P = TR - TC; Qbep = FC / (r - v)
       • CHART & EXAMPLES
       • Assumptions
         • 1. one product is involved
         • 2. everything produced can be sold
         • 3. VC/unit is the same regardless of volume
         • 4. FC do not change with volume
         • 5. revenue/unit constant with volume
         • 6. revenue/unit exceeds VC/unit
       • Make vs. Buy
         • Buy: only VC
         • Make: FC & VC/unit
       • Cost vs. Cost
     • Payback Period
     • Net Present Value

6. Capacity planning process

   • 1. forecast demand 1 - 5 yrs ahead
   • 2. determine capacity requirements
     • EXAMPLES
     • 1. reasonably accurate forecast of annual demand; 2. standard run time for each product on respective machine; 3. number of hours worked per day; 4. number of work days per year
   • 3. measure capacity now & decide how to bridge the gap
     • a. generate feasible alternatives - subcontract, lease plant space, expand facilities
     • b. evaluate alternatives considering econ & non econ aspects
     • c. choose the best alternative & implement it