Strategic Capacity Planning for Products and Services: Chapter 5_sc_

economies of scale

if the output rate is less than the optimal level, increasing the output rate results in decreasing average unit costs

diseconomies of scale

if the output rate is more than the optimal level, increasing the output rate results in increasing average unit costs

Capacity planning book 5.1

is a key strategic component in designing the system. It encompasses many basic decisions with long-term consequences for the organization.

Capacity Cushion

is an amount of capacity in excess of expected demand. Extra capacity used to offset demand uncertainty Capacity cushion = 100% - Utilization

Constraint management

is often based on the work of Eli Goldratt -The Theory of Constraints), and Eli Schragenheim and H. William Dettmer -Manufacturing at Warp Speed).

Capacity Utilization

is the ratio or percentage of actual output to design capacity. = Actual Output / Effective Capacity x 100%

The goal of strategic capacity planning 5.1

is to achieve a match between the long-term supply capabilities of an organization and the predicted level of long-term demand.

Operation X feeds into Operation Y. Operation X has an effective capacity of 55 units per hour. Operation Y has an effective capacity of 50 units per hour. Increasing X's effective capacity to ensure that Y's utilization is maximized would be an example of ________ a constraint.

none of the above

Overcapacity

operating costs that are too high

Present Value (PV)

the current value of future cash flows discounted at the appropriate discount rate

cash flow

the difference between cash coming in and cash going out of a business

range

the difference between the highest and lowest scores in a distribution

Which one of these is not a determinant of effective capacity, or are they all determinants?

All are factors

Additional questions that should be asked in making capacity planning decisions

- What are the potential risks? - Should capacity be changed all at once? - How much will it cost?

Doctor J. is considering purchasing a new blood analysis machine to test for HIV; it will cost $60,000. He estimates that he could charge $25.00 for an office visit to have a patient's blood analyzed, while the actual cost of a blood analysis would be $5.00 If this new blood analysis machine has design and effective capacities of 6,000 and 5,000 blood analyses per year, respectively, and Dr. J. expects to be 80% efficient in his use of this machine, how many HIV blood analyses does he plan to perform each year?

. 4,000 Multiply the effective capacity by 0.8.

Steps in the Capacity Planning Process

1) Estimate future capacity requirements 2) Evaluate existing capacity and facilities and identify gaps 3) Identify alternatives for meeting requirements 4) Conduct financial analyses of each alternative 5) Assess key qualitative issues for each alternative 6) Select the alternative to pursue that will be best in the long term 7) Implement the selected alternative 8) Monitor results

5.5 Strategy Formulation The Three primary strategies are leading, - following, and tracking-

1) Leading Capacity Strategy - builds capacity in anticipation of future demand increasing; if capacity increase involves a long lead time, this is the best option 2) Following Capacity Strategy - builds capacity when demand exceeds current capacity 3) Tracking Capacity Strategy - similar to the following, but it adds capacity in relatively small increments to keep pace with increasing demand

5.8 Do it -House or Outsource it? pg 205 Once capacity requirements are determined, the organization must decide whether to produce a good or service itself or outsource

1. Available capacity 2. Expertise 3. Quality considerations 4. The nature of demand 5. Cost 6. Risks

5.9 DEVELOPING CAPACITY STRATEGIES pg 206 LO5.6 Discuss the major considerations related to developing capacity alternatives. There are a number of ways to enhance the development of capacity strategies:

1. Design flexibility into systems. The long-term nature of many capacity decisions and the risks inherent in long-term forecasts suggest potential benefits from designing flexible systems. 2. Take stage of life cycle into account. Capacity requirements are often closely linked to the stage of the life cycle that a product or service is in.

resolving constraints

1. Identify the most pressing constraint 2. Change the operation to achieve maximum benefit, given the constraint 3. Make sure other portions of the process are supportive of the constraint 4. Explore and evaluate ways to overcome the constraint 5. Repeat the process until the constraint levels are at acceptable levels

Service capacity planning can present a number of challenges related to:

1. The need to be near customers' Convenience, 2. The inability to store services, Cannot store services for consumption later, 3. The degree of demand volatility,

What are the three key questions to be answered when making capacity planning decisions?

1. When is the capacity needed? 2. What kind of capacity is needed? 3. How much capacity is needed?

How many HIV blood analyses would he have to perform in order to break even?

3,000 Divide the fixed cost of $60,000 by the per-unit contribution margin of $5.

LO5.7 Describe the steps used to resolve constraint issues. 1. Identify the most pressing constraint. If it can easily be overcome, do so, and return to Step 1 for the next constraint. Otherwise, proceed to Step 2. 2. Change the operation to achieve the maximum benefit, given the constraint. This may be a short-term solution. 3. Make sure other portions of the process are supportive of the constraint (e.g., bottleneck operation).

4. Explore and evaluate ways to overcome the constraint. This will depend on the type of constraint. For example, if demand is too low, advertising or price change may be an option. If capacity is the issue, working overtime, purchasing new equipment, and out-sourcing are possible options. If additional funds are needed, working to improve cash flow, borrowing, and issuing stocks or bonds may be options. If suppliers are a problem, work with them, find more desirable suppliers, or do things in-house. If knowledge or skills are needed, seek training or consultants, or outsource. If laws or regulations are the issue, working with lawmakers or regulators may be an option. 5. Repeat the process until the level of constraints is acceptable

Suppose operation X feeds directly into operation Y. All of X's output goes to Y, and Y has no other operations feeding into it. X has a design capacity of 80 units per hour and an effective capacity of 72 units per hour. Y has a design capacity of 100 units per hour. What is Y's maximum possible utilization?

72 percent - utilization = 80/100*100

What would be the county's annual profit if they were to process 4,000 prisoners per year at this new location?

75*4000 - 50*4000 - 50,000 = 50,000

The owner of Firewood To Go is considering buying a hydraulic wood splitter which sells for $50,000. He figures it will cost an additional $100 per cord to purchase and split wood with this machine, while he can sell each cord of split wood for $125. If, for this machine, design capacity is 50 cords per day, effective capacity is 40 cords per day, and actual output is expected to be 32 cords per day, what would be its efficiency?

80 percent

Computing Utilization = Actual Output / Design Capacity x 100% Utilization is the ratio or percentage of actual output to design capacity. Given the following information, compute the efficiency and utilization of the vehicle repair department: Design capacity = 50 trucks per day, Max with ideal conditions Effective capacity = 40 trucks per day. Max minus variables Actual output = 36 trucks per day. Actual Production

= Actual Output / Design Capacity x 100% =36 trucks per day / 50 trucks per day x 100%=72%

Computing Efficiency = Actual Output / Effective Capacity x 100% Efficiency is the ratio or percentage of actual output to effective capacity. Given the following information, compute the efficiency and utilization of the vehicle repair department: Design capacity = 50 trucks per day, Max with ideal conditions Effective capacity = 40 trucks per day. Max minus variables Actual output = 36 trucks per day. Actual Production Design capacity- The theoretical maximum output rate or service capacity of an operation of a system in a given period under ideal conditions. 50 trucks is the given MAX Effective capacity-Design capacity minus allowances such as personal time, equipment maintenance, delays due to scheduling problems, and changing the mix of products. It is always less than the design capacity. 40 trucks is the given Actual output- The actual production rate of goods and services, Cannot exceed effective capacity because of machine breakdowns, absenteeism, shortages of materials, and quality problems.

= Actual Output / Effective Capacity x 100% =36 trucks per day / 40 trucks per day x 100%=90%

Efficiency Utilization

= actual output/effective capacity = actual output/design capacity

optimal level

A comfortable level of alertness at which people perform most effectively at certain tasks

Bottleneck Operation pg 207

An operation in a sequence of operations whose capacity is lower than that of the other operations

5.11 EVALUATING ALTERNATIVES Alternatives should be evaluated from varying perspectives. Economic Non-economic Public opinion

An organization needs to examine alternatives for future capacity from a number of different perspectives. Most obvious are economic considerations: Will an alternative be economically feasible? How much will it cost? How soon can we have it? What will operating and maintenance costs be? What will its useful life be? Will it be compatible with present personnel and present operations?

If their holding area at this new location has design and effective capacities of 10,000 and 7,500 prisoners processed annually, respectively, and they plan to be 80% efficient in their use of this space, how many prisoners does the county plan to process per year?

Answer: E Multiply the effective capacity by 0.8 6000

Cost-Volume Symbols

CH 5 PG 212

Cost-Volume Relationships

Capacity alternatives may involve step costs, which increase stepwise as potential volume increases. The implication of such a situation is the possible occurrence of multiple break-even quantities.

LO5.8 Briefly describe approaches that are useful for evaluating capacity alternatives. Techniques for Evaluating Alternatives

Cost-volume analysis Financial analysis Decision theory Waiting-line analysis Simulation

Which one of these is the primary input in capacity planning?

Demand forecasts.

Two useful definitions of capacity

Design capacity Effective capacity

Effective capacity- Max capacity minus variables Design capacity=Max capacity

Design capacity minus allowances (variables- such as personal time, equipment maintenance, delays due to scheduling problems, and changing the mix of products. is always less than the design capacity,

Efficiency

Efficiency is the ratio or percentage of actual output to effective capacity. Actual Output / Effective Capacity x 100%

5.4 DETERMINANTS OF EFFECTIVE CAPACITY pg 200 Name several determinants of effective capacity

Facilities Product & Service Factors Process Factors Human Factors Policy Factors Operational Factors Supply Chain Factors External Factors

Determinants of Effective Capacity 5.4 Pg 200, Factors that Impact Capacity

Facilities- design, location Product / Service -design, product, service Process factors-quantity/quality capabilities Human factors-job content, training, experience, motivation, compensation, learning rate absent, turnover Policy factors management, company policy Operational factors-scheduling, maintenance policies Supply chain factors-capacity increase or decrease External factors/forces-Product standards, safety regulations unions, pollution control standards

Cost-volume analysis

Fixed Costs (FC) Variable Costs (VC) Total Cost TC = FC + VC Total Revenue (TR) TR = revenue per unit (R) x Q

Which one of these is not a reason for diseconomies of scale?

Fixed costs are spread over more units.

Which of the following are assumptions of the break-even model? I. Only one product is involved. II. Everything that is produced can be sold. III. The revenue per unit will be the same regardless of volume.

I , II and III

Evaluating Alternatives

Involves determining the value or adequacy of the alternatives that were generated

capacity

the maximum amount that something can contain.

Capacity planning impacts all areas of the organization

It determines the conditions under which operations will have to function Flexibility allows an organization to be agile Bottleneck management is one way by which organizations can enhance their effective capacities. Capacity expansion strategies are important organizational considerations Capacity contraction is sometimes necessary

Leading Following Tracking

Leading Build capacity in anticipation of future demand increases. Following Build capacity when demand exceeds current capacity. Tracking Similar to the following strategy, but adds capacity in relatively small increments to keep pace with increasing demand

5.6 Forecasting Capacity Requirements

Long-term considerations relate to the overall level of capacity requirements. Short-term considerations relate to probable variations in capacity requirements.

Capacity decisions must be integrated into the organization's mission and strategy, The following must be considered:

Long-term demand Facility costs Technology Competitive behavior Availability of capital

There are seven categories of constraints

Market Resource Material Financial Knowledge or competency Policy

Design capacity 5.3

Maximum output rate or service capacity an operation, process, or facility is designed for

Why are capacity decisions strategic? 5.2

Meet future market demand Long term commitment of scarce resources Becoming and remaining competitive Initial and operating costs Successfully managing a business

Calculating processing requirements requires reasonably accurate demand forecasts, standard processing times, and available work time.. pg 203

N = pI * DI / T

Which one of these does not enhance developing capacity alternatives?

Staying focused on quantitative factors.

Cost-volume analysis is a viable tool for comparing capacity alternatives if certain assumptions are satisfied

One product is involved Everything produced can be sold The variable cost per unit is the same regardless of 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

Capacity cushion strategy

Organizations that have greater demand uncertainty typically have a greater capacity cushion. Organizations that have standard products and services generally have a greater capacity cushion.

Strategies used to offset capacity limitations and that are intended to achieve a closer match between supply and demand

Pricing Promotions Discounts Other tactics to shift demand from peak periods into slow periods

BEP

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

Diseconomies of Scale pg 210

Reasons for diseconomies of scale Distribution costs increase due to traffic congestion and shipping from a centralized facility rather than multiple smaller facilities. Complexity increases costs Inflexibility can be an issue Additional levels of bureaucracy

Economies of Scale pg 209

Reasons for economies of scale: Fixed costs are spread over a larger number of units Construction costs increase at a decreasing rate as facility size increases Processing costs decrease due to standardization

Constraint

Something that limits the performance of a process or system in achieving its goals. 1. A limit to a design process. Constraints may include appearance, funding, space, materials, and human capabilities. 2. A limitation or restriction.

How many prisoners would they have to process annually to make a profit of $100,000 at this new location?

Suppose they need Q prisoners to make profit of $100,000. We know that the total revenue is TR = 75*Q. The total cost is TC = 50,000 + 50Q. And, profit = TR - TC. That is, 75Q - 50,000 = 50Q, then we can have Q = 6000

Actual output

The actual rate or production of goods and services, Cannot exceed effective capacity because of machine breakdowns, absenteeism, shortages of materials, and quality problems.

Cash flow Present value

The difference between cash received from sales and other sources, and cash outflow for labor, material, overhead, and taxes The sum, in current value, of all future cash flow of an investment proposal

Capacity alternatives may involve step costs, which increase stepwise as potential volume increases.

The implication of such a situation is the possible occurrence of multiple break-even quantities.

LO5.2 Explain the importance of capacity planning.

The most important concept of capacity planning is to find a medium between long term supply and capabilities of an organization and the predicted level of long-term demand. Organizations also must plan for actual changes in capacity, changes in consumer wants and demand, technology and even the environment. When evaluating alternatives in capacity planning, managers must consider qualitative and quantitative aspects of the business. These aspects involve economic factors, public opinions, personal preferences of managers.

Which one of these is not necessarily an important factor in planning service capacity?

The need to be near customers.

Financial Analysis

The process of planning, maintaining, monitoring, controlling, and reporting the use of financial resources

Capacity

The upper limit or ceiling on the load that an operating unit can handle

Capacity Planning

The upper limit or ceiling on the load that an operating unit can handle Capacity needs include Equipment Space Employee skill

Capacity Planning Questions

What kind of capacity is needed? How much is needed to match demand? When is it needed? How much will it cost? What are the potential benefits and risks? Are there sustainability issues? Should capacity be changed all at once, or through several smaller changes Can the supply chain handle the necessary changes?

Measure capacity in units that do not require updating

Why is measuring capacity in dollars problematic?

The ratio of actual output to effective capacity is:

efficiency

Given the following information, what would efficiency be? Effective capacity = 50 units per day Design capacity = 100 units per day Actual output = 30 units per day

efficiency = 30/50*100= 60%

breakeven point

the point at which the costs of producing a product equal the revenue made from selling the product

Production units have an optimal rate of output where:

average unit costs are minimum

Operation X feeds into Operation Y. Operation X has an effective capacity of 55 units per hour. Operation Y has an effective capacity of 50 units per hour. Finding a way to increase Y's effective capacity would be an example of ________ a constraint.

overcoming times 2 on quiz

Students at a major university must go through several registration steps. Officials have observed that it is typically the case that the waiting line at the fee-payment station is the longest. This would seem to suggest that the fee-payment station is the ___________ in the student registration process.

restraint

Undercapacity

strained resources and possible loss of customers