Chapter 5 Capacity Planning

Cost-volume analysis

focuses on the relationship between cost, revenue and volumes of output

Organization that have greater demand uncertainty typically have

greater capacity cushion

capacity cushion

extra capacity used to offset demand uncertainty =100% - utilization

Economies of Scale

if output rate is less that optimal level, increasing the output rate results in decreasing the average cost per unit

Diseconomies of Scale

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

determinants of effective capacity

facilities, product and service factors, process factors, human factors, policy factors, operational factors, supply chain factors, external factors

strategies are typically based on assumptions and predictions about

long term demand patterns, technological change, competitor behavior

Design Capacity

maximum output rate or service capacity and operation process or facility designed for

Over capacity equals

operating costs that are to high

key questions in capacity planning

what kind of capacity is needed how much is needed to match demand when is it needed

The goal of capacity planning is to

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

Present value

the sum, in current value, of all future cash flow of an investment proposal

Capacity

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

Techniques for evaluating alternatives

cost-volume analysis financial analysis decision theory waiting line analysis simulation

Effective capacity

designed capacity minus allowances such as personal time, maintenance and scrap

Cash flow

difference between from cash received from sales and cash outflow for labor, material, overhead, and taxes

Factors to consider for In-house or Out Source

1. Available capacity 2. Expertise 3. Quality Consideration 4. Nature of Demand 5. Cost 6. Risk

Capacity needs include

1. Equipment 2. Space 3. employee skills

steps in capacity planning

1. estimate future capacity requirements 2. evaluate existing capacity and facilities 3. ID alternatives 4. Conduct financial analysis 5. assess key qualitative issues 6. selective the best alternative for the long term 7. implement alternative chosen 8. monitor results

service capacity planning challenges

1. need to be near clients 2. inability to store services 3. degree of demand volatility

Leading

Build capacity in anticipation of future demand increases

Following

Build capacity when demand exceeds current capacity

Constraint

Something that limits the performance of a process or system in achieving its goals

Bottle Neck Operation

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

long term considerations relate to

overall level of capacity requirements

Break even point

point at which total revenue and total cost are equal

short term considerations relate to

probable variations in capacity requirements

actual output

rate of output actually achieved--- cannot exceed effective capacity

under capacity equals

strained resources and possible loss of customers