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This module examines how important strategic capacity planning is for products and services. The overall objective of strategic capacity planning is to reach an optimal level where production capabilities meet demand. Capacity needs include equipment, space, and employee skills. If production capabilities are not meeting demand, it will result in higher costs, strains on resources, and possible customer loss. It is important to note that capacity planning has many long-term concerns given the long-term commitment of resources. Managers should recognize the broader effects capacity decisions have on the entire organization. Common strategies include leading capacity, where capacity is increased to meet expected demand, and following capacity, where companies wait for demand increases before expanding capabilities. A third approach is tracking capacity, which adds incremental capacity over time to meet demand. Finally, the two most useful functions of capacity planning are design capacity and effective capacity. Design capacity refers to the maximum designed capacity or output rate and the effective capacity is the design capacity minus personal and other allowances. These two functions of capacity can be used to find the efficiency and utilization. These are calculated by the formulas below: Efficiency = (Actual Output / Effective Capacity) x 100% Utilization = (Actual Output / Design Capacity) x 100% Effective Capacity = Design Capacity – allowances Example Actual production last week = 25,000 units Effective capacity = 28,000 units Design capacity = 230 units per hour Factory operates 7 days / week, three 8-hour shifts
Solution (Using the formulas above)
Capacity Planning for Products and ServicesCapacity refers to a system’s potential for producing goods or delivering services over a specified time interval. Capacity planning involves long-term and short- term considerations. Long-term considerations relate to the overall level of capacity; short-term considerations relate to variations in capacity requirements due to seasonal, random, and irregular fluctuations in demand. Excess capacity arises when actual production is less than what is achievable or optimal for a firm. This often means that the demand in the market for the product is below what the firm could potentially supply to the market. Excess capacity is inefficient and will cause manufacturers to incur extra costs. Capacity can be broken down in two categories: Design Capacity and Effective Capacity. Three key inputs to capacity planning are:
Defining and Measuring CapacityWhen selecting a measure of capacity, it is best to choose one that doesn’t need updating. For example, dollar amounts are often a poor measure of capacity (e.g., a restaurant may have capacity of $1 million of sales a year) because price changes over time necessitate updating of that measure. When dealing with more than one product, it is best to measure capacity in terms of each product. For example, the capacity of a firm is to either produce 100 microwaves or 75 refrigerators. This is less confusing than just saying the capacity is 100 or 75. Another method of measuring capacity is by referring to the availability of inputs. This is usually more helpful if we are dealing with several type of output. Note that one specific measure of capacity can’t be used in all situations; it needs to be tailored to the specific situation at hand. The following table shows examples of both output and input used for capacity measures. Figure 4.1: Various businesses and their respective input and output measures of capacity.Determinants of Effective Capacity
Inadequate planning can be a major limitation in determining the effective capacity. The most important parts of effective capacity are process and human factors. Process factors must be efficient and must operate smoothly. If not, the rate of output will dramatically decrease. They must be motivated and have a low absenteeism and labour turnover. In resolving constraint issues, all possible alternative solutions must be evaluated.
The above content is an adaptation of Saylor Academy’s BUS300 course.[1] The Sequential Processes and the BottleneckAny process that has several steps, one after another, is considered a sequential process. A good example of these processes is the manufacturing assembly line in which each workstation gets inputs from a previous workstation and give its outputs to the next workstation. It is safe to assume that each step has its own staff member, since this is exactly what happens in assembly lines. For this kind of process, it is crucial to have a balanced time across all steps. That is, there should not be any big difference between the amounts of time that different steps take to process one unit of product. For example, if step 1, 2 and 3 take 3, 10 and 5 minutes consecutively to process one unit of product, two main issues will happen during the production: 1) There will be a big pile of inventory sitting right before step 2, since step 1 is much faster than step 2, and the products that are already processed in step 1 will need to wait for step 2 to be done with its current unit at hand. As a result, this becomes an inventory holding issue, which is costly. 2) Step 3 will always need to wait for step 2 for an extra 5 minutes. This is due to the fact that step 3 finished its current product at hand in 5 minutes, but step 2 needs a total of 10 minutes to finish its work and feed it to step 3. This causes step 3 to be idle for a long time, which is also costly for the company. This is costly, because the company is already paying the staff who works in step 3 for the whole time, but they are not able to produce as many units as they should due to the very slow entry of the inputs coming from step 2. Figure 4.3: A diagram displaying the effects of a bottleneck.The bottleneck is the slowest step in each process or the slowest process in a system. The capacity of the bottleneck defines the capacity of the whole process. In our example above, step 2 was the slowest, and as a result, the bottleneck. This means that the whole process (including all steps 1 to 3) will not be able to have an output any faster than one every 10 minutes. In the following, let’s see why this is happening: In an 8-hour shift per day, we have 8 x 60 = 480 minutes Assuming that step 1 has enough input to process during the day, the total output from step 1 will be 480 / 3 = 160 units per day. This is the capacity for step 1. In a similar way, the capacity for step 2 is 480 / 10 = 48, and the capacity for step 3 is 480 / 5 = 96 units. This means that the input to step 2 will be 160 units to be processed. But as we see, step 2 will only be able to process a maximum of 48 units per day. That means that only 48 units get to step 3 for processing. Since step 3 has a capacity of 96 units per day, it will easily process those 48 units of inputs, and the output from step 3 will be 48 units. Because the step 3 is the last step of our process, this output of 48 units will automatically be the total output of the whole process per day. The key observation here is that the capacity of step 2, which is the bottleneck, determined the capacity of the whole process. This concept is very important in practice. Often times, the companies that do not pay attention to the concept of bottleneck and its implications invest in parts of the process that are not bottleneck. This will keep the bottleneck unchanged and as a result, they will not see any improvement in the capacity of the whole process. Example Caroline has a thriving business selling her tote bags through several popular websites. Her business volume has caused her to hire full-time employees. Her business has four main manufacturing operations: 1) cutting fabric (4 min), 2) stitching fabric (7 min), 3) adding zippers, toggles, and liner (10 min), and 4) inspecting, packing, and labeling (5 min). 4.3: Flow diagram depicting the time taken for each step of Caroline’s manufacturing process.Employees work 7 hours per day. Help Caroline to determine the following:
Solution Figure 4.4: Solution for Caroline’s Totes example(Based on 7×60 = 420 min per day) Accessible format for Figure 4.4
Evaluating Capacity AlternativesThere are two major ways to evaluate the capacity alternatives to select the best one: economic and non-economic. Economic considerations take into account the cost, useful life, compatibility and revenue for each alternative. Techniques used for evaluation are:
Non-economic considerations include public opinion, reactions from employees and community pressure. Break Even AnalysisBasically, since there is usually a fixed cost (FC) associated with the usage of a capacity, we look for the right quantity of output that gives us enough total revenue (TR) to cover for the total cost (TC) that we have to incur. This quantity is called Break-Even Point (BEP), Break-Even Quantity (Q BEP). Total cost is the summation of the fixed cost and the total variable cost (VC, which depends on the quantity of output). In other words, at Q BEP, we have: TC = FC + VC A list of relevant notation can be found below: TC = total cost Fixed cost is regardless of the quantity of output. Some examples of fixed costs are rental costs, property taxes, equipment costs, heating and cooling expenses, and certain administrative costs With the above notation and some simplification in the calculation, we have: TC = FC + VC Example The management of a pizza place would like to add a new line of small pizza, which will require leasing a new equipment for a monthly payment of $4,000. Variable costs would be $4 per pizza, and pizzas would retail for $9 each.
Solution
Question: For what quantities would buying the product be preferred to making it in-house? For quantities larger than the break-even quantity or for smaller ones? vm = per unit variable cost of “make” total cost of “make” = total cost of “buy” Example The ABX Company has developed a new product and is wondering if they should make this product in-house or have a capable supplier make the product for them. The costs associated with each option are provided in the following table:
Solution
We want “make” to be better than “buy” in this part of the question. Thus, for any quantity Q, we need to have: Total cost of “make” < Total cost of “buy” Question: For what quantities would machine A be preferred to machine B? For quantities larger that the break-even quantity or for smaller ones? If we assume the two options for making a product are machine A, with a fixed cost of FCA and a variable cost of vA, and machine B, with a fixed cost of FCB and a variable cost of vB, we have: total cost of A = total cost of B In any problem, it is suggested that you write down the total cost of each option and simplify from there to make sure that you do not miss any possible additional cost factors (if any). Example The ABX Company has developed a new product and is going to make this product in-house. To be able to do this, they need to get a new equipment to be able to do the special type of processing required by the new product design. They have found two suppliers that sell such equipment. They are wondering which supplier they go ahead with. The costs associated with each option are provide in the following table:
Solution
Let’s see for what quantities Supplier B will be better than Supplier A. In that case, for the quantity Q, we need to have: Total cost of Supplier B < Total cost of Supplier A This means that for quantities above 800 units, Supplier B will be cheaper in total. Thus, for quantities less than 800, Supplier A will be cheaper in total. What are the key inputs to capacity planning?The three inputs are the kind of capacity to be determined, how much of the products will be needed, and when will the product be needed. The most important concept of capacity planning is to find a medium between long term supply and capabilities of an organization and the predicted level of long term demand.
What is capacity planning?In turn, capacity planning is a process that identifies whether or not you have the resources and skills to do the work, or the supply to meet the demand. In contrast to resource planning, capacity planning looks at the organizational level to forecast and ensure that businesses can keep up with customer needs.
What are the methods of capacity planning?There are four major techniques used in capacity planning - 1) capacity planning using overall factors, 2) capacity bills, 3) resource profiles, and 4) capacity requirements planning (CRP). The latter is used in conjunction with material requirements planning (MRP) systems.
What is capacity planning explain with example?Capacity planning refers to the process of deciphering how much resource you're going to need to meet demand. This “demand” can be for any unit of time: the coming week, next season, or even in a year's time. Some things that fall under capacity planning are: Employing staff to meet coming demand.
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