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    POM Capacity Planning

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    POM Capacity Planning

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    18 views23 pages

    POM Capacity Planning

    Uploaded by

    fariha ether

    Copyright:

    © All Rights Reserved
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    Capacity

    Planning
    Dr. Md Shamimul
    Islam

    Operations Management, Eighth Edition, by William J. Stevenson


    McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
    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?
    Importance of Capacity
    Decisions
    1. Impacts ability to meet future
    demands
    2. Affects operating costs
    3. Major determinant of initial costs
    4. Involves long-term commitment
    5. Affects competitiveness
    6. Affects ease of management
    7. Globalization adds complexity
    8. Impacts long range planning
    Capacit
     Design capacity y
     maximum output rate or service capacity an operation,
    process, or facility is designed for.
     Effective capacity
     Design capacity minus allowances such as personal
    time, maintenance, and scrap.
    Effective capacity is usually less than design capacity owing
    to realities of changing product mix, the need for periodic
    maintenance of equipment, lunch breaks, problems in
    scheduling and balancing operations, and similar
    circumstances.
    Efficiency and
    Utilization
    - Actual output
    rate of output actually achieved— exceed
    cannot effective capacity.

    Actual output
    Efficiency =
    Effective capacity

    Actual output
    Utilization =
    Design capacity
    Both measures expressed as
    Efficiency/Utilization
    Example
    Design capacity = 50 units/day
    Effective capacity = 40 units/day
    Actual output = 36 units/day

    Actual output 36 units/day


    Efficiency = = 90%
    = Effective capacity 40 units/ day

    Utilization Actual output 36 units/day


    = = = 72%
    Design capacity 50 units/day
    Determinants of Effective
    Capacity
     Facilities (size and provision for expansion)
     Product and service factors
     Process factors (quality of output)
     Human factors (training, skill, experience)
     Operational factors (inventory stocking decisions, late
    deliveries, quality inspection)
     Supply chain factors (suppliers, ware house, transportation,
    distributors)
     External factors (pollution standards, unnecessary paper
    works)
    Strategy
     Strategies plans for achieving organizational
    goals
     Vision
     Mission

     Goal

     Strategy
    Tactics (It(this
    provides
    the focus for decision making)
    and actions used to
    methods accomplish
    strategies)
     Operations
    Strategy
    Formulation
     Capacity strategy for long-term demand
     Demand patterns
     Growth rate and variability

     Facilities
     Cost of building and operating
     Technological changes
     Rate and direction of technology changes
     Behavior of competitors
     Availability of capital and other inputs
    Key Decisions of Capacity
    1. Planning
    Amount of capacity needed
    2. Timing of changes (availability of capital, lead
    time, etc. needed to make the changes, expected
    demand)
    3. Need to maintain balance
    4. Extent of flexibility of facilities (uncertainty of
    demand will influence it)
    Steps for Capacity
    1. Estimate future capacity requirements
    Planning
    2. Evaluate existing capacity
    3. Identify alternatives
    4. Conduct financial analysis
    5. Assess key qualitative issues
    6. Select one alternative
    7. Implement alternative chosen
    8. Monitor results
    Make or
    Make
    Buy
    - Produce good or provide service itself
    Buy – Outsource from another organizations

    Factors:
    • Available capacity
    • Expertise
    • Quality considerations
    • Nature of demand
    • Cost
    • Risk
    Developing Capacity
    Alternatives
    1. Design flexibility into systems
    2. Take stage of life cycle into account
    3. Take a “big picture” approach to capacity changes
    4. Prepare to deal with capacity “chunks” (mass/large)
    5. Attempt to smooth out capacity requirements
    6. Identify the optimal operating level ( in terms of
    cost of unit cost of output)
    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 (instability) of demand
     Peak demand periods
    Economies of
     Economies Scale
    of scale
     If the output rate is less than the optimal level,
    increasing 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
    Evaluating
    Alternatives
    Production units have an optimal rate of output for minimal cost.

    Average cost per unit

    Minimum average cost per unit

    Minimum
    cost

    0 Rate of output
    Evaluating
    Alternatives
    Minimum cost & optimal operating rate
    are functions of size of production
    Average cost per unit unit.

    Small
    plant Medium
    plant Large

    plant

    0 Output rate
    Cost-Volume
    Relationships
    A. Fixed, variable and total costs

    Amount ($)

    Fixed cost (FC)

    0
    Q (volume in units)
    Cost-Volume
    Relationships
    B. Total revenue increases linearly with output

    Amount ($)

    0
    Q (volume in units)
    Cost-Volume
    Relationships
    C. Profit = TR – TC
    (At BEP, TR = TC)

    Amount ($)

    0 BEP units
    Q (volume in
    Cost-Volume
    Relationships
    Formulae
    - Total Cost (TC) = Fixed Cost (FC) + Variable Cost (VC) = FC + Q x v
    - Profit, (P) = TR – TC = R x Q – (FC + Q x v) = R x Q – FC – Q x v
    - Profit, (P) = Q (R – v) – FC
    - Quantity to generate specific profit, Q = (P + FC) / (R – v)
    - QBEP = FC / (R – v)

    [Where, v = Variable cost per unit, R = Price per unit (Also called revenue), Q =
    Given quantity of output]
    Cost-Volume
    Problem: TheAnalysis
    owner of old fashion berry pies, Mr. Simon, is
    planning a new line of pies, which will require leasing new
    equipment for a monthly payment of $6,000. Variable costs would be
    $2.00 per pie, and pies retail for $7.00 each.

    1. How many pies must be sold in order to break even?


    2. What would be profit or loss if 1,000 pies sold in a
    month?
    3. How many pies must be sold to realize a profit of
    $4,000?
    4. If 2,000 can be sold. And profit target is $5,000, what
    price should be charged per pie?
    Cost-Volume
    Analysis
    Solution:
     Given: FC = $6000, VC = $2 per pie, Revenue (R) = $7 per pie

    1. QBEP = FC / (R – v) = $6000 / ($7 - $2) = 1200 pies/month


    2. For Q = 1,000, Profit (P) = Q (R – v) – FC = 1000 ($7-$2) -
    $6000 = - $1000 (Loss)
    3. P = $ 4000, Q = (P + FC) / (R – v) = ($4000 + $6000) / ($7 -
    $2)
    = 2000 pies
    4. Q = 2000, P = $5000
    Profit (P) = Q (R – v) – FC
    $ 5000 = 2000 (R - $2) -
    $6000 R = $7.5

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