Capacity Planning For Products and Services Facility Planning

Capacity Planning For Products and Services

Facility Planning Facility planning answers: Ø What kind of capacity is needed? Ø How much capacity is needed? Ø When more capacity is needed? Ø Where facilities should be located (location) Ø How facilities should be arranged (layout)

Capacity (Definition of) ØThe number of units a facility can hold, receive, store or produce in a period of time ØIt is the upper limit or ceiling on the load that an operating unit can handle. It includes equipment, space, employee skills

Capacity Planning ü Establishes overall level of productive resources ü Affects lead time responsiveness, cost & competitiveness ü Determines when and how much to increase capacity

Types of Planning Over a Time Horizon Long Range Planning Intermediate Range Planning Short Range Planning *Limited options exist Add Facilities * Add long lead time equipment Sub-Contract Add Equipment Add Shifts Add Personnel Build or Use Inventory Schedule Jobs * Schedule Personnel Allocate Machinery Modify Capacity Use Capacity

Importance of Capacity Decisions 1. 2. 3. 4. 5. 6. 7. 8. Impacts ability to meet future demands Affects operating costs Major determinant of initial costs Involves long-term commitment Affects competitiveness Affects ease of management Globalization adds complexity Impacts long range planning

Capacity Measures ØDesign capacity Maximum output rate or service capacity an operation, process, or facility is designed for ØEffective capacity Capacity a firm can expect to attain given its product mix, methods of scheduling, maintenance and standards of quality. Design capacity minus allowances such as personal time, maintenance and scrap

Capacity Related Concepts Ø Actual output Rate of output actually achieved—cannot exceed effective capacity Ø Utilization Actual output as a percent of design capacity Ø Efficiency Actual output as a percent of effective capacity

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

Efficiency Measure of how well a facility or machine is performing when used Efficiency = Actual output Effective Capacity (expressed as a percentage)

Utilization Measure of planned or actual capacity usage of a facility, work center, or machine Utilization = Actual Output Design Capacity (expressed as a percentage)

Efficiency/Utilization Example Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 units/day Efficiency = Utilization = Actual output = 36 units/day Effective capacity Actual output Design capacity 40 units/ day = 36 units/day 50 units/day = 90% = 72%

Determinants of Effective Capacity Ø Facilities ØProduct and Service Factors ØProcess Factors ØHuman Factors ØPolicy Factors ØOperational Factors ØSupply Chain Factors ØExternal Factors

Key Decisions in Capacity Planning 1. Amount of capacity needed 2. Timing of changes (frequency of capacity additions) 3. Need to maintain balance 4. Extent of flexibility of facilities 5. External sources of capacity

Steps for Capacity Planning 1. 2. 3. 4. 5. 6. 7. 8. Estimate future capacity requirements Evaluate existing capacity Identify alternatives Conduct financial analysis Assess key qualitative issues Select the best alternative Implement the alternative chosen Monitor results

Calculating Processing Requirements: Example 1 (1 of 2)

Calculating Capacity Requirements Example 1 (2 of 2) If the department works one eight hour shift, 250 days a year, calculate the number of machines that would be needed to handle the required volume. Solution: 5800/(250)(8) = 2. 9 3 machines are needed

Special Requirements for Making Good Capacity Decisions Ø Forecasting the demand accurately Ø Understanding the technology and capacity increments Ø Finding the optimal operating level (volume) Ø Build for change

Make or Buy 1. 2. 3. 4. 5. 6. Available capacity Expertise Quality considerations Nature of demand Cost Risk

Economies of Scale ØEconomies of scale Ø If the output rate is less than the optimal level, increasing output rate results in decreasing average unit costs ØDiseconomies of scale Ø If the output rate is more than the optimal level, increasing the output rate results in increasing average unit costs

Average cost per room Best Operating Levels Best operating level Economies of scale 250 Diseconomies of scale 500 # Rooms 1000

Economies of Scale Average cost per unit Minimum cost & optimal operating rate are functions of size of production unit. 0 Small plant Medium plant Large plant Volume

Economies & Diseconomies of Scale Economies of Scale and the Experience Curve working Average unit cost of output 100 -unit plant 200 -unit plant 300 -unit plant 400 -unit plant Diseconomies of Scale start working Volume

The Experience Curve As plants produce more products, they gain experience in the best production methods and reduce their costs per unit Yesterday Cost or price per unit Today Tomorrow Total accumulated production of units

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

Capacity Expansion Volume and certainty of anticipated demand Ø Strategic objectives for growth Ø Costs of expansion and operation Ø Incremental or one-step expansion Ø Frequency of capacity additions Ø

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

Issues in Capacity Management 1. Design flexibility into systems 2. Take stage of life cycle into account 3. Take a “big picture” approach to capacity changes 4. Prepare to deal with capacity “chunks” 5. Attempt to smooth out capacity requirements 6. Identify the optimal operating level

Capacity Planning: Balance Unbalanced stages of production Units per month Stage 1 Stage 2 6, 000 7, 000 Stage 3 5, 000 Maintaining System Balance: Output of one stage is the exact input requirements for the next stage Balanced stages of production Units per month Stage 1 Stage 2 6, 000 Stage 3 6, 000

Bottleneck Operation Machine #1 Machine #2 Bottleneck operation: An operation in a sequence of operations whose capacity is lower than that of the other operations 10/hr Machine #3 Bottleneck Operation 10/hr Machine #4 10/hr 30/hr

Bottleneck Operation 1 20/hr. Operation 2 10/hr. Operation 3 15/hr. Maximum output rate limited by bottleneck 10/hr.

Capacity Flexibility · Flexible plants · Flexible processes · Flexible workers

Evaluating Alternatives Ø Cost-volume analysis ØBreak-even point Ø Financial analysis ØCash flow ØPresent value Ø Decision theory Ø Waiting-line analysis

Amount ($) Cost-Volume Relationships (1 of 3) c l ta t s o To C V = le b ia s co t ) C (V r a lv ta o T C F + Fixed cost (FC) 0 Q (volume in units)

Amount ($) Cost-Volume Relationships (2 of 3) 0 e u n e v e r l a t o T Q (volume in units)

Amount ($) Cost-Volume Relationships in Making Capacity Decisions (3 of 3) 0 e v e e u n r l a t o T t To t i f o Pr st o al c BEP units Q (volume in units)

Break-Even Problem with Step Fixed Costs (1 of 2) C T C= V + FC TC = C F V + C TC = C V 3 machines 2 machines 1 machine Quantity Step fixed costs and variable costs.

Break-Even Problem with Step Fixed Costs (2 of 2) $ BEP 3 TC BEP 2 TC 3 TC 2 TR 1 Quantity Multiple break-even points

Assumptions of Cost-Volume Analysis 1. One product is involved 2. Everything produced can be sold 3. Variable cost per unit is the same regardless of volume 4. Fixed costs do not change with volume 5. Revenue per unit constant with volume 6. Revenue per unit exceeds variable cost per unit

Decision Theory ØHelpful tool for financial comparison of alternatives under conditions of risk or uncertainty ØSuited to capacity decisions

Waiting-Line Analysis · · Useful for designing or modifying service systems Waiting-lines occur across a wide variety of service systems Waiting-lines are caused by bottlenecks in the process Helps managers plan capacity level that will be cost-effective by balancing the cost of having customers wait in line with the cost of additional capacity

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

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 future cash flows of an investment proposal.

Net Present Value F = future value P = present value I = interest rate N = number of years

Planning Service Capacity Ø Inability to store services: Capacity must be available to provide a service when it is needed (capacity must be matched with the timing of demand) Ø Need to be near customers: Capacity and location are closely tied. Service goods must be at the customer demand point and capacity must be located near the customer Ø Volatility of Demand: Much greater than in manufacturing

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?

Extras

Managing Existing Capacity Demand Management Capacity Management Ø Vary prices Ø Ø Vary promotion Ø Ø Change lead times (e. g. , backorders) Ø Ø Offer complementary products Ø Vary staffing Change equipment & processes Change methods Redesign the product for faster processing

Complementary Products Sales (Units) 5, 000 4, 000 3, 000 2, 000 1, 000 0 Total Snowmobiles Jet Skis J M M J S N J Time (Months)