Strategic Capacity Planning

Made by :-
Abhishek Malik 206
Achin Jain 207
Aditya Krishna 208
Ajit Rajian 209
Akshay Khandelwal 210
Strategic Capacity Planning
 Capacity
 The maximum level of output .

 The amount of resource inputs available

relative to output requirements at a particular
time.

 Capacity is the upper limit or ceiling on the

load that an operating unit can handle.
Examples of Capacity Measures
Type of Measures of Capacity
Organization Inputs Outputs
Manufacturer Machine hours Number of units
per shift per shift
Hospital Number of beds Number of
patients treated
Airline Number of planes Number of
or seats seat-miles flown
Restaurant Number of seats Customers/time
Retailer Area of store Sales dollars
Theater Number of seats Customers/time
Capacity Planning
 Thebasic questions in capacity
planning are:
 What type of capacity is needed?
 How much is needed?
 When is it needed?
 How does productivity relate to capacity?
 Two Capacity Strategies

Planned unused Forecast of Forecast of

capacity Planned use of
capacity needed short-term options capacity needed
Capacity

Capacity
Time between
increments

Expansionist Strategy Wait-and-See Strategy

 Capacity Utilization
 Capacity used
 rate of output actually achieved
 Best operating level
 capacity for which the process was designed
(effective or maximum capacity)

Capacity Used
Utilization = _______________
Best Operating Level
 Utilization--Example
 Best operating level = 120 units/week

 Actual output = 83 units/week

Capacity used 83 units/wk

Utilization  =  .692
 Utilization Best
= operating
? level 120 units/wk
 Best Operating Level

Average
unit cost
of output
Underutilization Over-utilization
Best Operating
Level

Volume
Break-Even Problem with Step Fixed Costs

C =
+ V
FC
= TC TC
V C
+
C FC 3 machines
C =T
+ V
F C
2 machines

1 machine
Quantity
Step fixed costs and variable costs.
Break-Even Problem with Step Fixed Costs

$
BE
P 3
TC
BEP2
TC
3
TC
2
TR 1
Quantity
Multiple break-even points
Breakeven Analysis

Fixed Costs
Breakeven quantity =
Price - Variable Costs
 Breakeven example
Thomas Manufacturing intends to increase capacity
by overcoming a bottleneck operation through the
addition of new equipment. Two vendors have
presented proposals as follows:
Proposal Fixed Costs Variable Costs
A $ 50,000 $12
B $ 70,000 $10

The revenue for each product is $20

What is the breakeven quantity for each proposal?
Breakeven Solution
FC
BEQ =
P- VC

Proposal A
$ 50,000
BEQ = = 6250
$20 - 12
Proposal B
$ 70,000
BEQ = = 7000
$20 - 10
 Breakeven Analysis
In the previous example, at what capacity would
both plans incur the same cost?

Solution -consider total cost

Total cost = Fixed cost + Variable Cost (Q)

$50,000 + $12Q = $70,000 + $10 Q

Q = 10,000
 The Experience Curve
As plants produce more products, they
gain experience in the best production
methods and reduce their costs per unit.

Cost or
price
per unit

Total accumulated production of units

 Capacity Flexibility: Having the ability
to respond rapidly to demand volume
changes and product mix changes.

 Flexible plants
 Flexible processes
 Flexible workers
 Capacity Bottlenecks

Operation 1 Operation 2 Operation 3

Raw 200/hour 75/hour 200/hour

material

Bottleneck
Operation
 Determining Capacity
Requirements
 Forecast sales within each individual
product line

 Calculate
equipment and labor
requirements to meet the forecasts

 Projectequipment and labor availability

over the planning horizon
 Example--Capacity
Requirements
A manufacturer produces two lines of ketchup,
FancyFine and a generic line. Each is sold in
small and family-size plastic bottles.

The following table shows forecast demand for

the next four years.
Year: 1 2 3 4
FancyFine
Small (000s) 50 60 80 100
Family (000s) 35 50 70 90
Generic
Small (000s) 100 110 120 140
Family (000s) 80 90 100 110
Example of Capacity Requirements:
The Product from a Capacity Viewpoint
 Question: Are we really producing
two different types of ketchup from
the standpoint of capacity
requirements?
Answer: No, it’s the same product just
packaged differently.
 Example of Capacity Requirements:
Equipment and Labor Requirements
Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200

Three 100,000 units-per-year machines are available

for small-bottle production. Two operators required
per machine.

Two 120,000 units-per-year machines are available

for family-sized-bottle production. Three operators
required per machine.
 26

Question: Identify the Year 1 values for capacity, machine, and labor?
Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6

Family-size Mach. Cap. 240,000 Labor 6
150,000/300,000=50% At 1 machine for 100,000, it
Small takes 1.5 machines for 150,000
Percent capacity used 50.00%
Machine requirement 1.50
Labor requirement 3.00 At 2 operators for
Family-size 100,000, it takes 3
Percent capacity used 47.92% operators for 150,000
Machine requirement 0.96
Labor requirement 2.88
©The McGraw-Hill Companies, Inc., 2001
 27
Question: What are the values for columns 2, 3 and 4 in the table below?
Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6

Family-size Mach. Cap. 240,000 Labor 6

Small
Percent capacity used 50.00% 56.67% 66.67% 80.00%
Machine requirement 1.50 1.70 2.00 2.40
Labor requirement 3.00 3.40 4.00 4.80
Family-size
Percent capacity used 47.92% 58.33% 70.83% 83.33%
Machine requirement 0.96 1.17 1.42 1.67
Labor requirement 2.88 3.50 4.25 5.00
©The McGraw-Hill Companies, Inc., 2001
 Capacity Cushion
Capacity Cushion = level of capacity in excess of the average
utilization rate or level of capacity in excess of the expected
demand .

Cushion = Best Operating Level - 1

Capacity Used
 Large capacity cushion
Required to handle uncertainty in demand
 service industries
 high level of uncertainty in demand (in terms of
both volume and product-mix)
 to permit allowances for vacations,
holidays, supply of materials delays, equipment
breakdowns, etc.
 if subcontracting, overtime, or the cost of
missed demand is very high
Sources of Uncertainty

Manufacturing Customer Deliveries

•Process design •Transportation
•Product design •Location
•Capacity •Information
•Quality

Supplier Performance
•Responsiveness Customer Demand
•Transportation •Past performance
•Location •Market research
•Quality •Analytical techniques
•Information •Promotions / Incentives
Small capacity cushion

Unused capacity still incurs the fixed costs

 highly capital intensive businesses

 time perishable capacity
Example: Target 5% Cushion
cushion = Best Operating Level - 1
Capacity Used

.05 = (1800/x) - 1
1.05 = (1800/x) 1714.3/1800 = .9524
1.05x = 1800
x = 1714.3
Decision Trees
A glass factory specializing in crystal is experiencing a
substantial backlog, and the firm's management is
considering three courses of action:

A) Arrange for subcontracting,

B) Construct new facilities.
C) Do nothing (no change)

The correct choice depends largely upon demand, which

may be low, medium, or high. By consensus,
management ranks the respective probabilities as .10, .
50, and .40. A cost analysis that reveals the effects
upon costs is shown in the following table.
Payoff Table

0.1 0.5 0.4

Low Medium High
A 10 50 90
B -120 25 200
C 20 40 60
 We start with our decisions...

Subcontracting

A
B
Construct new facilities
C

Do nothing
 Then add our possible states of
nature, probabilities, and payoffs

High demand (.4) $90k

Medium demand (.5) $50k
Low demand (.1) $10k

A High demand (.4) $200k

B Medium demand (.5) $25k
Low demand (.1) -$120k
C
High demand (.4) $60k
Medium demand (.5) $40k
Low demand (.1) $20k
 Determine the expected value
of each decision
High demand (.4) $90k
Medium demand (.5) $50k
$62k Low demand (.1) $10k

EVA=.4(90)+.5(50)+.1(10)=$62k
Solution
High demand (.4) $90k
Medium demand (.5) $50k
$62k Low demand (.1) $10k

A High demand (.4) $200k

$80.5k
B Medium demand (.5) $25k
Low demand (.1) -$120k
C
High demand (.4) $60k
$46k Medium demand (.5) $40k
Low demand (.1) $20k
Planning Service Capacity
 Time

 Location

 Volatility of Demand
 Capacity Utilization &
Service Quality
 Best
operating point is near 70% of
capacity

 From 70% to 100% of service capacity,

what do you think happens to service
quality? Why?
 Two Capacity Strategies

Planned unused Forecast of Forecast of

capacity Planned use of
capacity needed short-term options capacity needed
Capacity

Capacity
Time between
increments

Expansionist Strategy Wait-and-See Strategy

 Advantages/Disadvantages of each strategy
Advantages Disadvantages

Expansionist • ahead of competition • risky if demand

• no lost sales changes

Wait-and-See • no unused capacity • rely on short-

• easier to adapt to term options
new technologies
Some Short-Term Capacity Options
 lease extra space temporarily
 authorize overtime
 staff second or third shift with temporary workers
 add weekend shifts
 alternate routings, using different work stations
that may have excess capacity
 schedule longer runs to minimize
capacity losses