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Strategic Capacity Planning for Products and
Services
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
You should be able to:1. Summarize the importance of capacity
planning2. Discuss ways of defining and measuring
capacity3. Describe the determinants of effective
capacity4. Discuss the major considerations related to
developing capacity alternatives5. Briefly describe approaches that are useful
for evaluating capacity alternatives
5-2Student Slides
CapacityThe upper limit or ceiling on the load that an
operating unit can handleIt can be measured in terms of input or outputCapacity needs include
EquipmentSpaceEmployee skills
Student Slides 5-3
Key Questions: What kind of capacity is needed? How much in total to match demand? How much currently exists? How much in shortage or excess? When to change the capacity?
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?
Student Slides 5-4
Two useful definitions of capacity Design capacity
The maximum output rate or service capacity an operation, process, or facility is designed for
Effective capacityDesign capacity minus allowances such as personal
time and maintenance, and scrap
Unit of Measure for capacity Dollars Raw material in lbs. Yields (of output)
All are potentially problematic?
5-5Student Slides
Actual outputThe rate of output actually achievedIt cannot exceed effective capacity
Efficiency
Utilization
Measured as percentages
capacity effective
output actualEfficiency
capacitydesign
output actualnUtilizatio
5-6Student Slides
1. Estimate future capacity requirements
2. Evaluate existing capacity and facilities; identify gaps
3. Identify alternatives for meeting requirements
4. Conduct financial analyses
5. Assess key qualitative issues
6. Select the best alternative for the long term
7. Implement alternative chosen
8. Monitor results
5-7Student Slides
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 laterThe degree of demand volatility
Volume and timing of demandTime required to service individual customers
5-8Student Slides
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
5-9Student Slides
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
5-10Student Slides
Minimum cost & optimal operating rate are functions of size of production unit.
5-11Student Slides
Cost-volume analysisFocuses on the relationship between cost,
revenue, and volume of outputFixed Costs (FC)
tend to remain constant regardless of output volumeVariable Costs (VC)
vary directly with volume of outputVC = Quantity(Q) x variable cost per unit (v)
Total CostTC = FC + VC
Total Revenue (TR)TR = revenue per unit (R) x Q
Student Slides 5-12
BEPThe volume of output at which total cost and
total revenue are equalProfit (P) = TR – TC = R x Q – (FC +v x Q)
= Q(R – v) – FC
vRQBEP
FC
Student Slides 5-13