Capacity Planning Facility Planning Facility planning answers l

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Capacity Planning

Capacity Planning

Facility Planning Facility planning answers: l How much long-range capacity is needed l When

Facility Planning Facility planning answers: l How much long-range capacity is needed l When more capacity is needed l Where facilities should be located (location) l How facilities should be arranged (layout)

Capacity Planning Process Forecast Demand Develop Alternative Plans Quantitative Factors (e. g. , Cost)

Capacity Planning Process Forecast Demand Develop Alternative Plans Quantitative Factors (e. g. , Cost) Compute Rated Capacity Evaluate Capacity Plans Qualitative Factors (e. g. , Skills) Compute Needed Capacity Select Best Capacity Plan Implement Best Plan

Types of Planning & Time Horizons Long Add Facilities * Add long lead time

Types of Planning & Time Horizons Long Add Facilities * Add long lead time Range equipment Planning Sub-Contract Add Personnel Intermediate Add Equipment Build or Use Inventory Range Add Shifts Planning Short Range Planning Schedule Jobs * Schedule Personnel Allocate Machinery Modify Capacity Use Capacity

Definition & Measures of Capacity Design Capacity : The theoretical maximum “throughput, ” or

Definition & Measures of Capacity Design Capacity : The theoretical maximum “throughput, ” or number of units a facility can hold, receive, store, or produce in a period of time. Effective Capacity a firm can expect to receive Capacity: given its product mix, methods of scheduling, maintenance, and standards of quality. Utilizatio Actual output as a percent of design n: capacity. Efficienc Actual output as a percent of effective y: capacity.

Utilization Measure of planned or actual capacity usage of a facility, work center, or

Utilization Measure of planned or actual capacity usage of a facility, work center, or machine Actual Output Utilization = Design Capacity Planned hours to be used = Total hours available

Efficiency Measure of how well a facility or machine is performing when used Actual

Efficiency Measure of how well a facility or machine is performing when used Actual output Efficiency = Effective Capacity Actual output in units = Standard output in units Average actual time = Standard time

Actual or Expected Output Actual (or Expected) Output = (Effective Capacity) X (Efficiency)

Actual or Expected Output Actual (or Expected) Output = (Effective Capacity) X (Efficiency)

Capacity Changes in capacity will likely have implications for: l Sales l Cash flow

Capacity Changes in capacity will likely have implications for: l Sales l Cash flow l Quality l Supply chain l Human resources l Maintenance

Make Good Capacity Decisions: l Forecast demand accurately l Understand the technology and capacity

Make Good Capacity Decisions: l Forecast demand accurately l Understand the technology and capacity increments l Find the optimal operating level (volume) l Build for change

Matching Capacity to Demand Make staffing changes (increasing or decreasing the number of employees)

Matching Capacity to Demand Make staffing changes (increasing or decreasing the number of employees) 2. Adjust equipment and processes – which might include purchasing additional machinery or selling or leasing out existing equipment 3. Improve methods to increase throughput; and/or 4. Redesign the product to facilitate more throughput 1.

Matching Capacity to Demand l Demand management l l l Vary prices Change lead

Matching Capacity to Demand l Demand management l l l Vary prices Change lead times Encourage or discourage business Offer complementary products Capacity management l l Adjust staffing Adjust equipment and processes Change methods to facilitate production Redesign the product to facilitate production

Approaches to Capacity Expansion Expected Demand New Capacity Time in Years Capacity leads demand

Approaches to Capacity Expansion Expected Demand New Capacity Time in Years Capacity leads demand with an incremental expansion Demand Expected Demand Time in Years Capacity leads demand with a one-step expansio Expected Demand Time in Years Capacity lags demand with an incremental expansion Demand Expected Demand New Capacity Time in Years Attempts to have an average capacity, with an incremental expansion

Approaches to Capacity Expansion Expected Demand New Capacity Time in Years Capacity leads demand

Approaches to Capacity Expansion Expected Demand New Capacity Time in Years Capacity leads demand with an incremental expansion

Approaches to Capacity Expansion Expected Demand New Capacity Time in Years Capacity leads demand

Approaches to Capacity Expansion Expected Demand New Capacity Time in Years Capacity leads demand with a one-step expansion

Approaches to Capacity Expansion Expected Demand New Capacity Time in Years Capacity lags demand

Approaches to Capacity Expansion Expected Demand New Capacity Time in Years Capacity lags demand with an incremental expansion

Approaches to Capacity Expansion Demand New Capacity Expected Demand Time in Years Attempts to

Approaches to Capacity Expansion Demand New Capacity Expected Demand Time in Years Attempts to have an average capacity, with an incremental expansion

Breakeven Analysis l Technique for evaluating process & equipment alternatives l Objective: Find the

Breakeven Analysis l Technique for evaluating process & equipment alternatives l Objective: Find the point ($ or units) at which total cost equals total revenue l Assumptions Revenue & costs are related linearly to volume l All information is known with certainty l No time value of money l

Break-Even Analysis l Fixed costs: costs that continue even if no units are produced:

Break-Even Analysis l Fixed costs: costs that continue even if no units are produced: depreciation, taxes, debt, mortgage payments l Variable costs: costs that vary with the volume of units produced: labor, materials, portion of utilities

Breakeven Chart Cost in Dollars Total revenue line Profit Breakeven point Total cost =

Breakeven Chart Cost in Dollars Total revenue line Profit Breakeven point Total cost = Total revenue Total cost line Variable cost Loss Fixed cost Volume (units/period)

Breakeven in Units (x) TFC = Total Fixed Cost VC = Unit Variable Cost

Breakeven in Units (x) TFC = Total Fixed Cost VC = Unit Variable Cost P = Unit Selling Price

Breakeven in Dollars ($) TFC = Total Fixed Cost VC = Unit Variable Cost

Breakeven in Dollars ($) TFC = Total Fixed Cost VC = Unit Variable Cost P = Unit Selling Price

Breakeven Example l. A new process costs $10, 000 to set up l The

Breakeven Example l. A new process costs $10, 000 to set up l The revenue earned is $25, 000 per 1, 000 units sold l The variable cost is $22. 50 per unit l What is the BEP(x)? l What is the BEP($)? 4, 000 $100, 000

Strategy Driven Investment Select investments as part of a coordinated strategic plan l Choose

Strategy Driven Investment Select investments as part of a coordinated strategic plan l Choose investments yielding competitive advantage l Consider product life cycles l Include a variety of operating factors in the financial return analysis l Test investments in light of several revenue projections l

Net Present Value F P i N = Future value = Present value =

Net Present Value F P i N = Future value = Present value = Interest rate = Number of years

Net Present Value Example #1 A new machine costs $5, 000 l Over the

Net Present Value Example #1 A new machine costs $5, 000 l Over the 3 years of useful life of the machine it produces revenues of $2, 000 per year, paid at the end of each year l At the end of the 3 rd year the machine is sold to a competitor for $1, 000 l l What is the NPV of the investment if the company has a cost of capital of 10%?

NPV Solution #1 NPV = $725. 02

NPV Solution #1 NPV = $725. 02

Net Present Value Example #2 Machine A Price = $15, 000 l Maintenance costs

Net Present Value Example #2 Machine A Price = $15, 000 l Maintenance costs = $5, 000 at the end of each of 3 years l Salvage value = $2, 000 at the end of year 3 l Discount rate = 10% l Machine B Price = $20, 000 l Maintenance costs = $4, 000 at the end of each of 3 years l Salvage value = $7, 000 at the end of year 3 l Discount rate = 10% l

NPV Solution #2 l Which machine should the production Machine B manager buy? NPVA

NPV Solution #2 l Which machine should the production Machine B manager buy? NPVA = -25, 931. 63 NPVB = -24, 688. 20

Limitations of Net Present Value Investments with the same present value may have significantly

Limitations of Net Present Value Investments with the same present value may have significantly different project lives and different salvage values l Investments with the same net present values may have different cash flows l We assume that we know future interest rates - which we do not l We assume that payments are always made at the end of the period - which is not always the case l