Capacity
The upper limit or ceiling on the load or amount of work a business or operating unit can handle
What determines capicity?
Availability of resources including facilities, equipment, employees and supply chains
Why are capacity decisions strategic? (5)
- Ability to meet future market demand
- Long-term commitment of scarce resources
- Ability to become and remain competitive
- Initial (startup) and operating costs
- Ability to successfully manage business
Goals of strategic capacity planning
To match long-term supply capabilities with forecasted level of long-term demand
Capacity planning - key questions (3)
- What kind of capacity is needed?
- How much capacity is needed to meet demand?
- When is the capacity needed?
Capacity planning inputs (5)
- Growth rate and variability of market demand
- Cost of building and operating facilitates
- Pace and direction of technological innovation
- Likely behavior of competitors
- Availability of capital and other inputs
Capacity planning process - critical first step
Develop detailed forecasts of demand for both long-term and short-term planning horizons
Capacity planning process
- based of demand forecasts, estimate future capacity requirements
- evaluate existing capacity in relation to future requirements and identify any gaps
- identify alternative to address capacity gaps
Capacity planning process
- conduct financial analysis of alternatives
- assess qualitative aspects of alternatives
- select the best alternative for long-term needs
- implement the selected alternative
- monitor results if implementation
Capacity planning - considerations for developing alternatives
- design flexibility into system
- take life stage of product/services into account
- take a systems approach to capacity changes
- prepare to deal with capacity chunks
- attempt to smooth out capacity requirements
- identify optimal operating level
- cho
Capacity planning issues - In-house work vs. outsources
- available capacity
- required expertise
- quality
- nature of demand
- total cost
- risks
Capacity planning - optimal level of output
- for a given capacity, there is usually some optimal rate or level of production
- increasing output to that rate or level creates economies of scale
- increasing output beyond that rate or level creates dieconomices of scale
Capacity planning - expansion strategy alternatives (3)
- leading strategy
- following strategy
- tracking strategy
Leading strategy
plan to add capacity in anticipation of future demand increases
Following strategy
plan to add capacity when demand exceeds current capacity
Tracking strategy
incrementally add capacity to keep pace with increasing demand
Capacity planning tools
- processing machine requirements
- cost-volume analysis (CVA)
What is cost-volume analysis (CVA)?
a tool for evaluating capacity alternatives based on relationship between fixed costs, variable costs per unit, and revenue per unit
Cost-volume analysis (CVA)
CVA formula uses cost and revenue information to determine a break-even point in units for each capacity alternative
Cost-volume analysis (CVA) assumptions
- only one product is involved
- everything produced can be sold
Cost-volume analysis (CVA) assumptions
- variable cost per unit is the same regardless of volume
- fixed costs do not change with volume changes
- revenue per unit is the same regardless of volume
- revenue per unit exceeds variable cost per unit
Capacity measurements (2)
- design capacity
- effective capacity
Design capacity
maximum output rate of an operation, process or facility based on its design
Effective capacity
design capacity less allowances for factors or determinate that negatively impact output rate
Effective capacity determinants (8)
- facility factors
- product or service factors
- process factors
- human factors
- policy factors
- operational factors
- supply chain factors
- external factors
Facility factors
issues associated with design, location, layout and work environment
Product or service factors
issues associated with standardized verses customized product/services
Process factors
issues associated with quantity of output verses quality of output
Human factors
issues associated with job design and employee training, experience and motivation
Policy factors
Upper management decisions regarding operating policies
Operational factors
scheduling, materials inventory, equipment, quality control
Supply chain factors
issues with suppliers, distributers, warehousing and transportation
External factors
government regulations and environmental standards
Evaluating capacity use - system effectiveness measures
a set of measures of hoe well a business or operating unit is currently using its capacity
System effectiveness measures (2)
- efficiency
- utilization
Efficiency formula
Efficiency = actual output / effective capacity x 100%
Utilization
Efficiency = actual output / design capacity x 100%