Chapter 5: Strategic Capacity Planning PDF

CHAPTER 5 Strategic Capacity Planning BUS 2501 Prof. Maria Memar Zadeh Slides’ copyright belongs to: (1) Prof. V...

CHAPTER 5 Strategic Capacity Planning BUS 2501 Prof. Maria Memar Zadeh Slides’ copyright belongs to: (1) Prof. Vedmani and (2) Stevenson & Hojati, 2011, McGraw-Hill Inc. Capacity Capacity is the upper limit on the load that an operating unit can handle. Capacity refers to the maximum amount of work an operating unit can handle. Strategic Capacity Planning: Focuses on long-term decisions, like purchasing equipment or machinery to increase production capacity. Medium-term Capacity Planning: Involves aggregate planning, which relates to decisions about production levels over a few months (covered in Chapter 13). Short-term Capacity Planning: Deals with decisions about staffing and daily operations to meet immediate needs (covered in Chapter 16). 2 Measures of Capacity Business Inputs Outputs Usually measured in terms of output/production rate Auto–manufacturing Maximum numberNumber ofoflaptops availablethat can Number of cars assembled be assembled in a per assembly robots shift plant per day Square Steel mill (running feettwo of shifts ofTones 8 hours) is 500. of steel produced per day – Maximum number of beds production plantavailable space per year in a hospital Oil refinery Barrels of crude oil Barrels of gasoline produced used per day per day Farming Number of acres used Bushels of grain harvested per for farming acre per year Restaurant Number of tables, Number of meals served a day number of seats Theatre Number of seats Number of tickets sold per day Retail sales Square meters of floor Revenue generated per day space, sales per sq. ft. 3 Measuring Capacity Design capacity – Maximum obtainable output under ideal conditions (nothing goes wrong). Effective capacity – Maximum possible output given scheduling difficulties, change over time delays, scheduled maintenance, product mix, and other realities. – Less than design capacity Actual output – Rate of output actually achieved--cannot exceed effective capacity (absenteeism, breakdowns, shortage of material). 4  Design capacity is the highest possible output a system can achieve under perfect conditions. Effective capacity is the best possible output when considering real-life factors like maintenance, delays, and scheduling issues, which makes it lower than design capacity. Actual output is the real production achieved, which is always less than or equal to effective capacity due to things like breakdowns or material shortages. Measuring Capacity cont’d Efficiency: the ratio of actual output to effective capacity. 𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡 𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 = 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐶𝑎𝑝𝑎𝑐𝑡𝑖𝑦 Utilization: the ratio of actual output to design capacity, or the ratio of used time over available time. 𝑈𝑝𝑡𝑖𝑚𝑒 𝑈𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 = 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑡𝑖𝑚𝑒 ; where Uptime is the total productive hours! Or 𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡 𝑈𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 = 𝐷𝑒𝑠𝑖𝑔𝑛 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 Capacity cushion: Amount of capacity (in percentage) in excess of expected demand Capacity Cushion= 100 – Utilization Rate 6 Efficiency/Utilization Example Effective capacity = 40 trucks repaired /day Actual output = 36 trucks/day Available hours = 8 hrs x 5 days per week Downtime = 5 hours per week Actual Output 36 units day Efficiency = = = 90% Effective Capacity 40units/day Uptime 40 − 5hrs / week Utilization = = = 87.5% Available time 40hrs / week 7 Factors Influencing Capacity Factors influencing capacity include: - **Facilities**: The size and design of the facility affect how much can be produced or serviced. - **Products or Services**: Different products or services require varying amounts of resources, time, and effort. - **Human**: The skills, number, and efficiency of the workforce impact capacity. - **Planning and Operational**: Efficient planning, scheduling, and operations management help maximize capacity. - **External**: External factors like market demand, regulations, and supply chain issues also play a role in determining capacity. 8  Capacity Planning Process 1. Forecast demand one to five years ahead 2. Determine capacity requirements to make the products or provide the services one to five years ahead 3. Measure the capacity now, and decide if and how to bridge the gap in capacity in the future varying in nature (plant, equipment, sub- contract..) a) Generate feasible alternatives b) Evaluate alternatives considering economic and non economic aspects c) Choose the best alternative and implement it The capacity planning process involves predicting the demand for products or services over the next one to five years. Based on this forecast, you determine what resources (like equipment, staff, or facilities) are needed to meet this demand in the future. Next, you assess the current capacity and figure out if adjustments are needed, such as increasing production or outsourcing work. Then, you come up with different possible solutions, evaluate them based on both financial and non-financial factors, and finally, select the best option and put it into action. 9 Example 1 A department works one eight hour shift a day, 250 days a year. How many machines (with the given processing times) would be needed to handle the required volume? Product Annual Standard Processing Demand time per unit (hr.) #1 400 5.0 #2 300 8.0 #3 700 2.0 10 Example 1: Solution 𝑈𝑝𝑡𝑖𝑚𝑒 𝑈𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 = 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑇𝑖𝑚𝑒 Product Annual Standard Processing Processing time Demand time per unit (hr.) needed (hr.) #1 400 5.0 2,000 #2 300 8.0 2,400 #3 700 2.0 1,400 8  250 = 2,000 machine hours per year 2,000 + 2,400 + 1,400 = 2.9 machines 2,000 11 Example 2 Question: Calculate the efficiency and utilization rates. Actual production last week = 32,000 units Effective capacity = 35,000 units Design capacity = 250 units per hour Factory operates 7 days/week, 3shifts - 8 hour each 𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡 𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡 𝑈𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 = 𝑒𝑓𝑓𝑖𝑐𝑖𝑒𝑛𝑐𝑦 = 𝐷𝑒𝑠𝑖𝑔𝑛 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝐶𝑎𝑝𝑎𝑐𝑡𝑖𝑦 12 Example: Capacity Actual production last week = 32,000 units Effective capacity = 35,000 units Design capacity = 250 units per hour Factory operates 7 days/week, 3 - 8 hour shifts Design capacity = (7 x 3 x 8) x (250) = 42,000 units Utilization = 32,000 / 42,000 = 76.2% Efficiency = 32,000 / 35,000 = 91.4% Developing Capacity Alternatives Design flexibility into systems Differentiate between new and mature products Take a “big picture” approach to capacity changes Choose capacity timing and increments Prepare to deal with capacity “chunks” Attempt to smooth out capacity requirements Use capacity cushion Identify the optimal operating level (economy of scale) 14  Developing capacity alternatives involves several strategies to ensure that a business can effectively handle changes in demand. Here's a simplified explanation of each concept: 1. **Design flexibility into systems**: Build systems that can easily adapt to changes. This could mean using machines that can produce different products or training workers to handle multiple tasks. 2. **Differentiate between new and mature products**: New products usually require more flexibility in production because demand is uncertain. Mature products, on the other hand, have more stable demand, so production can be more predictable. 3. **Take a “big picture” approach to capacity changes**: When making decisions about increasing or decreasing capacity, consider the long-term needs of the business, not just immediate problems. 4. **Choose capacity timing and increments**: Decide when and how much to increase capacity based on future demand forecasts. Too much too soon can lead to waste, while too little too late can mean missed opportunities. 5. **Prepare to deal with capacity “chunks”**: Sometimes, increasing capacity has to be done in large steps, even if the need is small. Be ready to handle this. 6. **Attempt to smooth out capacity requirements**: Try to balance production so that it's steady throughout the year, avoiding big spikes or drops in demand. 7. **Use capacity cushion**: Maintain a small buffer of extra capacity to handle unexpected increases in demand without overloading the system. 8. **Identify the optimal operating level (economy of scale)**: Find the level of production where costs are the lowest and production is most efficient. This is the "sweet spot" where the business operates most effectively. Break-Even Analysis Total revenue Break-even point Total cost Total revenue = Total cost Amount ($) Variable cost Fixed cost Q (quantity in units) 16 Break-Even Point 𝑇𝐶 = 𝐹𝐶 + 𝑉𝐶 = 𝐹𝐶 + 𝑄 × 𝑣 TC = Total Cost FC = Total Fixed Cost 𝑉𝐶 = 𝑄 × 𝑣 VC = Total Variable Cost TR = Total Revenue 𝑇𝑅 = 𝑟 × 𝑄 v = variable cost per unit r = revenue per unit 𝑃 = 𝑇𝑅 − 𝑇𝐶 = 𝑟 × 𝑄 − 𝐹𝐶 + 𝑉 × 𝑄 𝑃 = (𝑟 − 𝑣) × 𝑄 − 𝐹𝐶 Q = volume of output 𝑃 + 𝐹𝐶 = (𝑟 − 𝑣) × 𝑄 QBEP = break even volume P = profit 𝑃+𝐹𝐶 𝐹𝐶 𝑄= P=0 ➔ 𝑄𝐵𝐸𝑃 = 𝑟−𝑣 𝑟−𝑣 17 Example: Break-Even Fixed costs = $40,000 Material = $1.50/unit Labour costs = $3/unit Selling price = $10.00 per unit FC $40,000 QBEP = R-v = 10.00 - (3 +1.50) = 7273 18 Example A firm’s manager must decide whether to make or buy a certain item used in the production of vending machines. Cost and volume estimates are as follows: Make Buy Annual fixed cost $150,000 None Variable cost/unit $60 $80 Annual volume (units) 12,000 12,000 a. Given these numbers, should the firm buy or make this item? b. There is a possibility that volume could change in the future. At what volume would the manager be indifferent between making or buying? 19  Solution a. Given these numbers, should the firm buy or make this item? Determine the annual cost for each alternative; Total cost = Fixed costs + volume x Variable cost 𝑇𝐶 = 𝐹𝐶 + 𝑉𝐶 𝑉𝐶 = 𝑄 × 𝑣 Make: 150,000 + 12,000($60) = $870,000 Buy: 0 + 12,000($80) = $960,000 → manager should choose to make the item. 20 1000 To determine the 950 960 volume at which the 900 two choices would be 870 850 equivalent, set the 800 two total costs equal to each other, and 750 Make solve for volume 700 Tcmake = TCBuy 650 600 550 $150,000 + Q($60) = 0 500 VC + Q($80). 450 Solving for Q = 7,500 400 units. 350 Therefore at 7,500 300 Buy units the manager 250 would be indifferent between making or 200 buying. 150 For lower volumes 100 buy and for higher FC 50 volumes make 1 2 3 4 5 6 7 8 21 9 10 11 12 1000 21 Your Turn! The school cafeteria can make pizza for about $.30 per slice. – Cost for kitchen and labour is $200 per day The nearby Pizza Den delivers for $9.00 per pizza (8 slices) – Cost for labour reduced to $75 per day Make or Buy? 22 Planning Service Capacity Manufacturing Service Capacity Capacity Capacity must be available Goods can be stored for later when service is needed – use cannot be stored Goods can be shipped to other Service must be available at locations customer demand point Volatility of demand is relatively Much higher volatility is typical low 23 Example of Exam Question Which of the following is not a determinant of effective capacity? A. Facilities B. Product mix C. Actual output D. The workforce