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