Strategic Capacity Planning for Products and Services Gerlyn Bonus

Agnes Regala Roselyn Pudao Mary Grace Ibanez Matex Carillo BSBA. Management Prof. Joey Acua

Capacity
Capacity is the upper limit or ceiling on the load that an operating unit can handle. Capacity also includes: Equipment Space Employee skill The basic questions in capacity handling are: What kind of capacity is needed? How much is needed? When is it needed?

Design capacity
maximum

output rate or service capacity an operation, process, or facility is designed for. capacity minus allowances such as

Effective capacity
Design

personal time, maintenance, and scrap. Actual output

rate

of output actually achieved--cannot exceed effective capacity.

Efficiency and Utilization

Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 units/day

Actual output = 36 units/day
40 units/ day 36 units/day 50 units/day = 90%

Efficiency = Utilization =

Effective capacity

Actual output =
Design capacity

= 72%

Determinants of Effective Capacity

FACILITIES The design of facilities, including size and provision
for 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 and environmental factors also play a significant role.

PRODUCT AND SERVICE FACTORS Product and service design can have a tremendous
influence 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 is the influence of output quality. Process improvement that increase quality and productivity can result in increased capacity.

HUMAN FACTORS
The tasks that make up a job, the variety of activities involved, also the training, skill and experience required to perform a job all have an impact on the potential and actual output. Employee motivation has a very basic relationship to capacity , as do absenteeism.

POLICY FACTORS Management policy can affect capacity by allowing

or not allowing capacity options such as overtime or second or third shifts.

OPERATIONAL FACTORS
Inventory stocking decisions, late deliveries, purchasing requirements, acceptability of purchased materials, quality inspection and control procedures also have an impact on effective capacity.

SUPPLY CHAIN FACTORS

It must be taken into account in capacity planning if substantial capacity changes are involved.

EXTERNAL FACTORS
Product standards , especially minimum quality and performance standards, can restrict managements options for increasing capacity.

Strategy Formulation
An organization typically its base its capacity strategy 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.

 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.

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

Forecasting Capacity Requirements

Long-term vs. Short-term capacity needs Long-term relates to overall level of capacity such as facility size, trends, and cycles. Short-term relates to variations from seasonal, random, and irregular fluctuations in demand

Calculating Processing Requirements A department works one 8-hour shift, 250 days a year , and has these figures for usage of a machine that is currently being considered:

Product
1

Annual demand
400

2 3

300 700

Standard Processing Processing time needed time per unit 5 2000 8 2400 2 1400 5800

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

The Challenge of Planning Service Capacity

Three 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 capacity planning .

The degree of volatility

Demand volatility presents problem for capacity planners. Demand volatility tend to be higher for services 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.

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 compared with 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.

Quality Considerations
Firm that specialize can usually offer higher quality than an organization can attain itself. Conversely unique 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.

Cost
Any cost savings achieved from buying of making must weighed against the preceding factors. Cost savings 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, that has to recognized in the analysis.

Risk
Outsourcing may involved certain risks. One is loss of control over operations. Another is the need to disclosed proprietary information.

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.
Introduction phase

Growth phase

Maturity phase

Decline phase

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
Machine #1 10/hr

Machine #2

10/hr

Machine #3 10/hr Machine #4 10/hr

Bottleneck Operation

30/hr

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 Scale o If the output rate is less than the optimal level, increasing the output rate results in decreasing average unit costs.

Diseconomies of scale o If the output rate is more than the optimal level, increasing the output rate results in increasing average unit costs.

Choose a strategy if expansion is involved.

o Consider whether incremental expansion or single step is more appropriate.

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 unit TC= Total Cost TR= Total revenue R= Revenue per unit Q= Quantity or Volume of output

QBEP= Break even quantity

P=Profit

 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 Q

Profit (P) = TR TC = R x Q (FC +v x Q)

= Q(R v) FC

Examples: The owner of Old-Fashioned Berry Pies, Simon Chen, is contemplating adding a new line of pies, which will require 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?

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

 A manager has the option of purchasing one, two, or three machines. Fixed costs and potential volumes are as follows:
Number of Machines Total annual Fixed Costs Corresponding range of output

1 2 3

$9 600 15000 20000

0-300 301-600 601-900

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?

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

B. Comparing the projected range of demand to the

two 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 projected demand, the volume would still be less than the break-even point for that range, so there would be no profit.

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, or they are step changes. The revenue per unit is the same regardless of volume. Revenue per unit exceeds variable cost per unit.

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 flow of an investment proposal

Decision Theory
represents a general approach to decision making which is suitable for a wide range of operations management decisions, including: capacity planning product and service design

location planning

equipment selection