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Strategic Capacity

Planning forProducts and

ServicesGerlyn BonusAgnes Regala

Roselyn Pudao

Mary Grace IbanezMatex Carillo

BSBA. Management

Prof. Joey Acua


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Design capacity

maximum output rate or service capacity an

operation, process, or facility is designed for.Effective capacity

Design capacity minus allowances such as

personal time, maintenance, and scrap.Actual output

rate of output actually achieved--cannot

exceed effective capacity.


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Efficiency and Utilization


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Design capacity = 50 trucks/day

Effective capacity = 40 trucks/day

Actual output = 36 units/day

Actual output = 36 units/day

Efficiency= = 90%

Effective capacity 40 units/ day

Utilization= Actualoutput = 36 units/day= 72%

Design capacity 50 units/day


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Determinants of Effective Capacity

FACILITIES

The design of facilities, including size and provisionfor expansion, is key.

Locational factors, such as transportation costs,

distance to market, labor supply, energy sources and

room for expansion are also important.

Likewise, layout of the work area andenvironmental factors also play a significant role.


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PRODUCT AND SERVICE FACTORS

Product and service design can have a tremendousinfluence on capacity.

The more uniform the output, the more

opportunities there are for standardization of

methods and materials.PROCESS FACTORS

The quantity capability of a process is an obvious

determinant of capacity but subtle determinant isthe influence of output quality.

Process improvement that increase quality and

productivity can result in increased capacity.


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HUMAN FACTORS

The tasks that make up a job, the variety of activities

involved, also the training, skill and experiencerequired to perform a job all have an impact on the

potential and actual output.

Employee motivation has a very basic relationship tocapacity , as do absenteeism.

POLICY FACTORS

Management policy can affect capacity by allowingor not allowing capacity options such as overtime or

second or third shifts.


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OPERATIONAL FACTORS

Inventory stocking decisions, late deliveries,

purchasing requirements, acceptability of purchasedmaterials, quality inspection and control procedures

also have an impact on effective capacity.

SUPPLY CHAIN FACTORS It must be taken into account in capacity planning ifsubstantial capacity changes are involved.

EXTERNAL FACTORS Product standards , especially minimum quality andperformance standards, can restrict managements

options for increasing capacity.


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Strategy Formulation

An organization typically its base its capacitystrategy on assumption and predictions about

long term demand patterns, technological

changes , and the behavior of its competitors.

Key decisions of capacity planning The amount of capacity needed

The timing of changes The need to maintain balance throughout the system

The extent of flexibility of facilities and the

workforce.


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Deciding on the amount capacity

involves consideration of expected

demand and capacity cost.

Capacity cushion which is an amount

capacity in excess of expected demand

when there is some uncertainty about

demand. the greater the degree of demand uncertainty , the greater

the amount cushion used.


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Steps in the Capacity Planning Process Estimate future capacity requirement

Evaluate existing capacity and facilities and identify

gaps.

Identify alternative for meeting requirements

Conduct financial analyses of each alternative Assess key qualitative issues for each alternative

Select the alternative to pursue that will be bests in

long term Implement the selected alternative

Monitor results


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Working one 8 hour shift 250 days a year provides an

annual capacity of 8250=2000 hours per year.

5800 hours/2000 hours/machine=2.90 Machines

Product Annualdemand

Standard

Processing

time per unit

Processing

time needed

1 400 5 2000

2 300 8 2400

3 700 2 1400

5800


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The Challenge of Planning Service

CapacityThree Important Factors in planning service capacity

The need to be near customers

Convenience for customers is often an

important aspects of services. Generally, a

service must be located near customer.

The inability to store service

Speed of the delivery, or customers waiting time

become a major concern in a service capacityplanning .


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The degree of volatility

Demand volatility presents problem for capacity

planners. Demand volatility tend to be higher forservices than goods, not only in timing of demand,

But also in amount of time required to the service

individual customers.

Make Or Buy

Once capacity requirements have been determined ,

the organization must decide whether to produce a

good or provide a service itself. or outsource (buy)from another organization.


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Factors:

Available Capacity

If an organization has available the equipment,

necessary skills, and time, if often makes sense to

produce an item of perform a service in-house, The

additional cost would be relatively small comparedwith those required to buy items or subcontract

services.

Expertise If a firm lacks the expertise to do the job satisfactory

buying might be reasonable alternative.


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Quality Considerations

Firm that specialize can usually offer higher quality

than an organization can attain itself. Converselyunique quality requirements or the desire to closely

monitor quality may cause an organization to

perform a job itself.

The nature of Demand

When demand for an items is high and steady, the

organization is often better off doing the work itself.


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Cost

Any cost savings achieved from buying of making

must weighed against the preceding factors. Costsavings might come from the item itself or from

transportation cost savings. If there are fixed cost

associated with making an item that cannot be

reallocated if the service or product outsourced, thathas to recognized in the analysis.

Risk

Outsourcing may involved certain risks. One is loss ofcontrol over operations. Another is the need to

disclosed proprietary information.


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Developing Capacity Alternatives

Design Flexibility into system.o Provisions for Future Expansion in the original

design.

Take Stage of life cycle into account

o Capacity requirements are often closely linked to the

stage of the life cycle that a product or service is in.

Introductionphase

Growthphase

Maturityphase

Declinephase


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Take a Big Picture approach to capacity changes

o When developing capacity alternatives, it is important

to consider how parts of the system interrelate.o Bottleneck Operation

Bottleneck

Operation

Machine #1

Machine #3

Machine #4

10/hr

10/hr

10/hr

10/hr

30/hrMachine #2


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Prepare to deal with capacity chunks.

o no machine comes in continuous capacities.

Attempt to smooth out capacity requirements.

o Unevenness in capacity requirements also can create

certain problems.

Identify the optimal operating level.o Production units typically have an ideal or optimal

level of operation in terms of unit cost of output.

Economies of Scaleo If the output rate is less than the optimal level,

increasing the output rate results in decreasing

average unit costs.


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Diseconomies of scale

o If the output rate is more than the optimal level,

increasing the output rate results in increasingaverage unit costs.

Choose a strategy if expansion is involved.

o Consider whether incremental expansion or single

step is more appropriate.


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Cost-Volume Analysis

o Focuses on relationships between cost, revenue and

volume of output.FC= Fixed Cost

VC= Total variable cost

v= variable cost per unitTC= Total Cost

TR= Total revenue

R= Revenue per unitQ= Quantity or Volume of output

QBEP= Break even quantity P=Profit


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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 = Q x v

Total Revenue (TR)

TR = revenue per unit (R) x QProfit (P) = TR TC = Rx Q(FC +vx

Q)= Q(R v) FC

= + - = -


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Examples:

The owner of Old-Fashioned Berry Pies, Simon Chen, is

contemplating adding a new line of pies, which willrequire leasing new equipment for a monthly payment

of $6000. Variable costs would be $ 2.00 per pie, and

pies would retail for $7.00.

a) How many pies must be sold in order to break-even?b) What would the profit be if 1000 pies are made and

sold in a month?

c) How many pies must be sold to realize a profit of

$4000?d) If 2000 can be sold, and a profit target is $5000,

what price should be charged per pie?


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Solution:

FC=$6000 VC=$2 per pie REV=$7 per pie

a) QBEP= FC/R-V =$6000/$7-$2 =1200 pies/month

b) For Q=1000; P=Q(R-V)-FC =1000($7-$2)-$6000= $1000

c) P=$4000; SOLVE for Q using Q=P+FC/R-V

Q=$4000+$6000/$7-$2 = 2000 pies

d) Profit=Q(R-V)-FC

$5000=$2000(R-$2)-$6000

R=$7.50


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A manager has the option of purchasing one, two, or

three machines. Fixed costs and potential volumes

are as follows:

VC is $10 per unit and R is $40 per unit.

a) Determine the break-even point for each range.

b) If projected annual demand is between 580 and

660 units, how many machines should the manager

purchase?

Number of

Machines

Total annual

Fixed Costs

Corresponding

range of output

1 $9 600 0-300

2 15000 301-6003 20000 601-900


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I. Solution:

a) For one machine:

QBEP= $9600/$40 per unit-$10 per unit

= 320 units( not in range, so there is no BEP)

b) For two machines:

QBEP= $15000/$40 per unit- $10 per unit

=500 units

c) For three machines:

QBEP= $20000/$40 per unit- $10 per unit

=666.67 units


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B. Comparing the projected range of demand to thetwo ranges for which a break-even point occurs,

you can see that the break-even point is 500,

which is in the range 301-600. this means that

even if demand is at the low end of the range, it

would be above the break-even point and thus

yield a profit. At the top end of projecteddemand, the volume would still be less than the

break-even point for that range, so there would

be no profit.


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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, orthey 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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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 futurecash flow of an investment proposal


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Decision Theory

represents a general approach to decision making

which is suitable for a wide range of operationsmanagement decisions, including:

capacity

planning

product and

service design

equipment

selection

location

planning

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