STRATEGIC CAPACITY

PLANNING

Engr. Muhammad Sajid

Lecturer

Department of Chemical Engineering, UOG

1

CAPACITY PLANNING

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

The basic questions in capacity handling are: What kind of capacity is needed?

How much is needed?

When is it needed?

2

TYPES OF CAPACITY PLANNING OVER TIME HORIZON

3

Sa

ba

Ba

hou

th –

UC

O

Add Facilities Add equipment

Schedule Jobs Schedule Personnel Allocate Machinery

Sub-Contract Add Equipment Add Shifts

Long Range Planning

Intermediate Range Planning

Short Range Planning

Modify Capacity Manage with existing

Capacity

*

*

*Limited options

Add Personnel

Build or Use Inventory

DEFINITIONS AND MEASUREMENTS

Capacity: The “throughput,” or number of units a facility

can hold, receive, store, or produce in a period of

time.

Design Capacity: Maximum theoretical output

Effective Capacity: Capacity a firm can expect to receive given

its product mix, methods of scheduling,

maintenance, scrap, personal time.

Actual Output: What is actually being produced, in units.

4

DEFINITIONS AND MEASUREMENTS

Efficiency: Actual Output / Effective Capacity

(Actual Output in units / Standard Output in

units)

Utilization: Actual Output / Design Capacity

(Hours used / Total hours available)

5

SIMPLE EXAMPLE A dentist assistant schedules a patient every 10 minutes.

This dentist treated 40 patients today.

The dentist works 8 hours a day.

The office is set up to handle a maximum of 60 patients a

day.

What is the efficiency of this dentist office?

What is the utilizations of this dentist office?

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7

Actual output 36 units/day Efficiency = = = 90% Effective capacity 40 units/ day Utilization = Actual output = 36 units/day = 72%

Design capacity 50 units/day

EFFICIENCY/UTILIZATION EXAMPLE

Design capacity = 50 trucks/day

Effective capacity = 40 trucks/day

Actual output = 36 units/day

SPECIAL REQUIREMENTS FOR MAKING GOOD CAPACITY DECISIONS

Forecasting demand accurately

Cycles; overestimating growth; seasons; complementary

products

Building for change

Understanding capacity increments

Finding the optimal operating level (volume)

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9

DETERMINANTS OF EFFECTIVE CAPACITY

Facilities

Product and service factors

Process factors ( output quality )

Human factors

Operational factors ( late delivery for the raw materials )

Supply chain factors

External factors

UNDERSTANDING CAPACITY INCREMENTS

10

Expected Demand Expected Demand

Expected Demand Expected Demand

Time in Years Time in Years

Time in Years Time in Years

De

ma

nd

D

em

an

d

De

ma

nd

D

em

an

d

New Capacity

New Capacity New Capacity

New Capacity

Capacity leads demand with an incremental expansion Capacity leads demand with a one-step expansion

Capacity lags demand with an incremental expansion Attempts to have an average

capacity, with an incremental

expansion

ECONOMIES OF SCALE

11

Cost

per

un

it

0

Small plant Medium

plant Large

plant

Output rate

TOOLS FOR CAPACITY DECISIONS 1. Break-even Analysis

Single-product case Break-even in units: Break-even in Dollar

Sales:

2. Decision Theory

Decision Making Tools

3. Financial Analysis Net Present Value (NPV):

4. Queueing / Waiting lines

(Simulation)

Ni

FNPV

)1(

Cost VariablePrice

Cost Fixed Total

Saba Bahouth – UCO

Price

Cost Variable1

Cost Fixed Total

COST-VOLUME RELATIONSHIPS

13

Am

ou

nt

($)

BEP

(Quantity in units) 0

CROSSOVER CHART

14

Fixed cost - Process A

Fixed cost - Process B

Fixed cost - Process C

Process A: low volume, high variety

Process B: Repetitive

Process C: High volume, low variety

Process C Process B Process A Quantity

Cost

BREAK-EVEN PROBLEM WITH STEP FIXED COSTS

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Quantity

$

Revenues

TC

1 machine 2 machines 3 machines

ASSUMPTIONS OF COST-VOLUME ANALYSIS

1. One product is involved

2. Everything produced can be sold

3. Variable cost per unit is the same regardless of volume

4. Fixed costs do not change with volume

5. Revenue per unit constant with volume

6. Revenue per unit exceeds variable cost per unit

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MANAGING EXISTING CAPACITY

17

Vary staffing

Change equipment

& processes

Change methods

Redesign the product for

faster processing

Capacity Management

• Vary prices

• Vary promotion

• Change lead times

(e.g., backorders)

• Offer complementary

products

Demand Management

PLANNING SERVICE CAPACITY

Need to be near customers Capacity and location are closely tied

Inability to store services Capacity must be matched with timing of

demand

Degree of volatility of demand Peak demand periods

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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 flows of an investment proposal.

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A department works one eight hour shift ,250 days a

year, and has these figures for usage of a machine that

is being considered :

Product

Annual

Demand

Standard processing time

per unit (hr.)

#1

#2

#3

400

300

700

5.0 8.0 2.0

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CALCULATING PROCESSING REQUIREMENTS

Product

Annual

Demand

Standard

processing time

per unit (hr.)

Processing time

needed (hr.)

#1

#2

#3

400

300

700

5.0

8.0

2.0

2,000

2,400

1,400 5,800

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Annual capacity =8× 250=2000

Number of machines required =5800÷ 2000=2.9