Om Cap Plan Class

7/31/2019 Om Cap Plan Class

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Capacity Planning

Session 6

1


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GACL Reading

2


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Capacity is the upper limit or ceiling onthe load that an operating unit canhandle.

Capacity also includes Equipment Space Employee skills

3

Capacity Definition


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A systematic approach to three issuespertaining to capacity:

Estimating the amount of capacityrequired Evaluating alternative methods ofcap acity augmentation (at FORE?)

Devising methods to use capacityeffectively

Capacity Planning

4


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How to express capacityMeasures:Design capacity

maximum output rate or service capacity an

operation, process, or facility is designedfor

Effective capacity Design capacity minus allowances such aspersonal time, maintenance, and scrap

Actual output rate of output actually achieved--cannot

exceed effective capacity.

5

Measuring Capacity


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Efficiency and Utilization

Actual outputEfficiency =

Effective capacity

Actual outputUtilization =

Design capacity

Both measures expressed aspercentages


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Actual output = 36 units/day

Efficiency = = 90%Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day= 72% Design

capacity 50 units/day

7

Efficiency/UtilizationExample

Design capacity = 50 trucks/dayEffective capacity = 40 trucks/day

Actual output = 36 units/day


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Steps for CapacityPlanning

1. Estimate future capacityrequirements


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Product annual demand processingtime/unit total1. 400 5 hours 2000

2. 300 8 hours 2400

3. 700 2 hours 1400

total= 5800

If one 8 hour shift , 250 days an year is used, thetotal time available?

How many equipments needed to meet therequirement?

Calculating requirements:

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2. Evaluate existing capacity

3. Identify alternatives


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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


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Make or Buy?

1.Expertise

2.Quality considerations

3.Cost

4.Risk

l i i


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Developing CapacityAlternatives

1.Design flexibility into systems

1. Take a big picture approach tocapacity changeslook for bottlenecks

A bottleneck is an operation whosecapacity is lower than that of otheroperations

1. bottlenecksb

l i C i


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2. Take a big picture approach tocapacity changeslook for bottlenecks

A bottleneck is an operationwhose capacity is lower thanthat of other operations

1. bottlenecksb


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Bottleneck Operation

Machine #2 BottleneckOperation

Machine #1

Machine #3

Machine #4

10/hr

10/hr

10/hr

10/hr

30/hr


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Bottleneck Operation

Operation 1

20/hr.

Operation 2

10/hr.

Operation 3

15/hr.

10/hr.

Bottleneck

Maximum outputratelimited by

bottleneck

D l i C it


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2. Take a big picture approach tocapacity changes

3. Prepare to deal with capacity

chunks


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Economies of Scale

Economies of scale If the output rate is less than the optimal

level, increasing output rate results indecreasing average unit costs

Diseconomies of scale If the output rate is more than the optimal

level, increasing the output rate results inincreasing average unit costs

Economies of scale indicates relationshipbetween cost and capacity

Helps in choosing the levels of capacitydeployment and output rates


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Evaluating Alternatives

Minimumcost

Averagec

ostperunit

0 Rate of output

Production units have an optimal rate of output forminimal cost.

Minimum averagecost per unit


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Evaluating Alternatives

Minimum cost & optimal operating rate arefunctions of size of production unit.

A

verage

cos

tper

u

nit

0

Small

plant

Medium

plantLarg

eplan

t

Outputrate


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Evaluating alternativesCost-Volume Relationships

Amount($)

0Q (volume inunits)

Totalcos

t=VC

+

FCTo

talvar

iablecost

(VC)

Fixed cost(FC)


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Cost-Volume Relationships

Amou

nt($)

Q (volume inunits)

0

Total

revenu

e


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Cost-Volume Relationships

Amou

nt($)

Q (volume inunits)

0 BEPunits

Profi

t

To

talr

even

ue

Totalcos

t


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A company is contemplating adding anew line of products, which will requireleasing new equipment for a monthlypayment of $6000. VC= $2.00 per piece

and would retail for $7.00each.How many pieces must be sold for

breakeven?Profit/loss if 100 units sold in a month?How many pieces should be sold to get

a profit of $4,000?

Exercise 1

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A manager has the option of purchasing1or 2 or 3 machines.m/c FC output range1 $9,600 0 to 300

2 15.000 301 to 6003 20,000 601 to 900VC-

VC=$10/unit, Revenue= $40 per unitDetermine BEP for each range.If projected annual demand is between

580 to 660 units, how many machinesshould the manager buy?

Exercise 2

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Break-Even Problem withStep Fixed Costs

Quantity

FC+VC

=TC

FC+

VC=T

C

FC+V

C=TC

Step fixed costs and variable costs.

1 machine

2 machines

3 machines


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Break-Even Problem withStep Fixed Costs

$

TC

TC

TCBEP2

BEP3

TRQuantity

1

2

3

Multiple break-even points


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1. One product is involved2. Everything produced can be sold3. Variable cost per unit is the same

regardless of volume4. Fixed costs do not change with volume5. Revenue per unit constant with volume6. Revenue per unit exceeds variable cost

per unit

Assumptions of Cost-Volume Analysis

Om Cap Plan Class

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