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Maximizing Operational Capacity: Strategies and Optimization in Business

Capacity planning sets the limit on a firm's production capabilities. Learn how to identify and evaluate the right capacity needs, develop alternatives, and consider service capacity. Understand effective capacity, cost-volume analysis, and make informed decisions using the tools provided.

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Maximizing Operational Capacity: Strategies and Optimization in Business

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  1. BUAD 306 Chapter 5 - Capacity Planning If needed: Chapter 8 – Location Planning (Cost Volume ONLY)

  2. Daily Capacity • “There’s only so many hours in a day…” • “I can’t take it anymore” • “If I eat one more piece, I am going to explode”

  3. Capacity Planning • The upper limit or ceiling on the load that an operating unit can handle. • Establishes the overall level of productive resources for a firm. • Enables managers to quantify production capabilities for a firm and make plans accordingly.

  4. What to Ask? • The basic questions in capacity handling are: • What kind of capacity is needed? (equipment/resources/facility) • How much is needed? (add to existing or build new?) • When is it needed? WHO / WHAT / WHERE / WHEN / WHY

  5. Why Does it Matter? • Should meet future demand • Affects operating costs • Determines initial cost • Involves long-term commitment (requires lots of $$$) • Affects competitiveness

  6. Developing Capacity Alternatives • Design flexibility into systems • Take a “big picture” approach to capacity changes • Prepare to deal with capacity “chunks” • Attempt to smooth out capacity requirements • Must identify the optimal operating level

  7. Service Capacity Considerations • Need to be near the customer • Can’t inventory services • Volatility in demand

  8. Definitions • 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.

  9. Determinants of Effective Capacity • Facilities • Location / layout • Products or services • Standard vs. customized • Processes • Design and execution • Human considerations • Operations • External forces Design: Planned Effective: Reality Actual: Realized

  10. Cost-Volume Analysis • Relationships between cost, revenue, and volume of output. • Variable costs vary directly with volume of output. • Break-even point - the volume of output at which total cost and total revenue are equal.

  11. Assumptions of Cost-Volume Analysis • One product is involved • Everything produced can be sold • The variable cost per unit is the same regardless of the volume • Fixed costs do not change with volume changes • The revenue per unit is the same regardless of volume

  12. Amount ($) Total cost = VC + FC Total variable cost (VC) Fixed cost (FC) 0 Q (volume in units) Cost-Volume Relationships

  13. Total revenue Amount ($) 0 Q (volume in units) Cost-Volume Relationships

  14. Profit Total revenue Amount ($) Total cost 0 BEP units Q (volume in units) Cost-Volume Relationships Loss

  15. BEP Calculations To calculate a break-even point: QBEP = FC R - VC To calculate Total Profit: P = Q(R - VC) - FC To calculate the required volume, Q, needed to generate a specified profit, P : Q = P + FC R – VC where Q = Quantity R = Revenue/unit VC = Variable cost/unit FC = Fixed Cost

  16. Example A • What is the breakeven point for each if revenue = 50? • Which would you choose?

  17. Example A – Part 2 • Are you still comfortable with your selections from before given the capacities above? • What if demand was expected to be 20,000 for ever?

  18. FACTORY EXAMPLE • BEP given revenue = 10, which do you choose? • Are you still comfortable with your selections from before given the capacities above? • If demand is to range from 7,000–9,000? • If demand was expected to be 14,000-20,000? • If demand was to be around 5,000 steadily?

  19. Total Cost Analysis • Comparisons between 2 or more alternatives: TC = FC + Q (VC)

  20. Example B • Which process to use at low volumes? • Which process to use at very high volumes? • Point of indifference between the two processes?

  21. Example B – Part 2

  22. Example B – Part 3

  23. Example C

  24. HW #7 • A firms plans to begin production of a new small appliance. The manager must decide whether to purchase the motors for the item from a vendor for $7 each or produce in house. If produced in house, it would use one of 2 processes: One has an annual FC = $160,000 and VC = $5/unit. The other has an annual FC = $190,000 and a VC = $4/unit. • Determine the range of annual volume for which each alternative would be best.

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