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Strategic Capacity Planning

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**1. **Strategic Capacity Planning Chapter 11

**2. **Strategic Capacity Planning Capacity
The maximum level of output
The amount of resource inputs available relative to output requirements at a particular time
Capacity is the upper limit or ceiling on the load that an operating unit can handle.

**3. **Examples of Capacity Measures

**4. **Capacity Planning The basic questions in capacity planning are:
What type of capacity is needed?
How much is needed?
When is it needed?
How does productivity relate to capacity?

**5. **Two Capacity Strategies

**6. **Terminology Design capacity
maximum obtainable output
Effective capacity
Maximum capacity given product mix, scheduling difficulties, and other doses of reality.
Actual output
rate of output actually achieved--cannot exceed effective capacity.

**7. **Capacity Utilization Capacity used
rate of output actually achieved
Best operating level
capacity for which the process was designed (effective or maximum capacity)

**8. **Utilization--Example Best operating level = 120 units/week
Actual output = 83 units/week
Utilization = ?

**9. **Best Operating Level

**10. **Economies & Diseconomies of Scale

**11. **Evaluating Alternatives

**12. **Calculating Processing Requirements

**13. **Cost-Volume Relationships

**14. **Cost-Volume Relationships

**15. **Cost-Volume Relationships

**16. **Break-Even Problem with Step Fixed Costs

**17. **Break-Even Problem with Step Fixed Costs

**18. **Breakeven Analysis Breakeven quantity =

**19. **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 Fixed Costs Variable Costs
A $ 50,000 $12
B $ 70,000 $10
The revenue for each product is $20
What is the breakeven quantity for each proposal?

**20. **Breakeven Solution BEQ =

**21. **Breakeven Analysis In the previous example, at what capacity would both plans incur the same cost?

**22. **The Experience Curve

**23. **Capacity Flexibility: Having the ability to respond rapidly to demand volume changes and product mix changes. Flexible plants
Flexible processes
Flexible workers

**24. **Capacity Bottlenecks

**25. **Capacity Planning Maintaining System Balance

**26. **Determining Capacity Requirements Forecast sales within each individual product line
Calculate equipment and labor requirements to meet the forecasts
Project equipment and labor availability over the planning horizon

**27. **Capacity Planning Process

**28. **Example--Capacity Requirements

**29. **Example of Capacity Requirements: The Product from a Capacity Viewpoint Question: Are we really producing two different types of ketchup from the standpoint of capacity requirements?

**30. **Example of Capacity Requirements: Equipment and Labor Requirements

**33. **Capacity Cushion

**34. **Large capacity cushion Required to handle uncertainty in demand
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

**35. **Sources of Uncertainty

**36. **Small capacity cushion Unused capacity still incurs the fixed costs
highly capital intensive businesses
time perishable capacity

**38. **Example: Target 5% Cushion

**39. **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?

**40. **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

**41. **How does Quality affect capacity? Suppose a three operation process is followed by an inspection. If the average proportion of defectives produced at operations 1, 2, and 3 are .04, .01, and .02 respectively, and if the demand is 200 units, then what is the required capacity for this operation?

**42. **Capacity requirements with Yield Loss Notation:
di = avg. proportion of defective units at operation i
n = number of operations in the production process
M = order quantity (good units only or desired yield)
B = avg. number of units at the start of the
production process

**43. **Solution Desired yield = 200
Operation Defective rate 1 .04
2 .01
3 .02
(1) What is the capacity required?

**44. **Capacity and Quality Suppose we have a 6 process assembly line that must produce 1000 good products. Each process produces only 1% defects. How is capacity affected?

**45. **Decision Trees

**46. **Payoff Table

**47. **We start with our decisions...

**48. **Then add our possible states of nature, probabilities, and payoffs

**49. **Determine the expected value of each decision

**50. **Solution

**51. **Planning Service Capacity Time
Location
Volatility of Demand

**52. **Capacity Utilization & Service Quality Best operating point is near 70% of capacity
From 70% to 100% of service capacity, what do you think happens to service quality? Why?

**53. **Capacity Expansion Strategies: Entrepreneurial Stage Shift resources to different tasks as needed
Customer co-production

**54. **Capacity Planning Frequency of Capacity Additions
External Sources of Capacity

**55. **Two Capacity Strategies

**56. **Advantages/Disadvantages of each strategy Expansionist • ahead of competition • risky if demand • no lost sales changes
Wait-and-See • no unused capacity • rely on short- • easier to adapt to term options new technologies

**57. **Some Short-Term Capacity Options 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

**58. **Some Short-Term Capacity Options level 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