05 module05 facility capacity 98

8/8/2019 05 Module05 Facility Capacity 98

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Facility CapacityFacility Capacity

MODULEMODULE--55MODULEMODULE--55



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OverviewOverviewOverviewOverview

FacilityFacility PlanningPlanning

Facility LocationFacility Location

LongLong--RangeRange Capacity PlanningCapacity Planning

Facility LayoutFacility Layout

WrapWrap--Up: What WorldUp: What World--ClassClass

Companies DoCompanies Do



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Facility PlanningFacility PlanningFacility PlanningFacility Planning

HOW MUCH long range capacity isHOW MUCH long range capacity is

needed?needed?

WHEN additional capacity isWHEN additional capacity is needed?needed? WHER E the production facilitiesWHER E the production facilities

should beshould be located?located?

WHAT the layout and characteristicsWHAT the layout and characteristics

of the facilities shouldof the facilities should be? be?



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Facility PlanningFacility PlanningFacility PlanningFacility Planning The capital investment in land, buildings,The capital investment in land, buildings,

technology, and machinery is enormoustechnology, and machinery is enormous

A firm must live with its facility planningA firm must live with its facility planning

decisions for a long time, and these decisionsdecisions for a long time, and these decisionsaffect:affect:

O perating efficiencyO perating efficiency

Economy of scaleEconomy of scale

Ease of schedulingEase of scheduling

Maintenance costsMaintenance costs

« Profitability!« Profitability!



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LongLong--RangeRangeCapacity PlanningCapacity Planning



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Steps in the Capacity Planning ProcessSteps in the Capacity Planning ProcessSteps in the Capacity Planning ProcessSteps in the Capacity Planning Process

Estimate the capacity of the presentEstimate the capacity of the present

facilities.facilities.

Forecast the longForecast the long--range future capacityrange future capacity

needs.needs.

Identify and analyze sources of capacityIdentify and analyze sources of capacity

to meet these needs.to meet these needs. Select from among the alternative sourcesSelect from among the alternative sources

of capacity.of capacity.



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Definitions of CapacityDefinitions of CapacityDefinitions of CapacityDefinitions of Capacity

In general,In general, production capacityproduction capacity is theis themaximum production rate of an organization.maximum production rate of an organization.

CapacityCapacity can be difficult to quantify due to «can be difficult to quantify due to «

DayDay--toto--day uncertainties such as employeeday uncertainties such as employeeabsences, equipment breakdowns, andabsences, equipment breakdowns, and

materialmaterial--delivery delaysdelivery delays

Products and services differ in productionProducts and services differ in productionrates (so product mix is a factor)rates (so product mix is a factor)

Different interpretations of maximumDifferent interpretations of maximum

capacitycapacity



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A facility¶s maximum productive capability,A facility¶s maximum productive capability,usually expressed as volume of output per usually expressed as volume of output per

period of time. It is also called period of time. It is also called designdesign

capacitycapacity.. The capacity of a facility is defined as theThe capacity of a facility is defined as the

maximum load that can be handled by it duringmaximum load that can be handled by it during

a given period.a given period.

The load can be expressed as amounts of inputThe load can be expressed as amounts of input

or output e.g. ³Tons of steel produced per year´or output e.g. ³Tons of steel produced per year´

or ³Amount of plastic processed per year´.or ³Amount of plastic processed per year´.



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TheThe CentralCentral Reserve Board definesReserve Board defines sustainablesustainablepractical capacitypractical capacity or or effective capacityeffective capacity asas

the greatest level of output that a plant canthe greatest level of output that a plant can

maintain «maintain « within the framework of a realistic work within the framework of a realistic work

scheduleschedule

taking account of normal downtimetaking account of normal downtime

assuming sufficient availability of inputs toassuming sufficient availability of inputs to

operate the machinery and equipment in placeoperate the machinery and equipment in place



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TheThe actual capacityactual capacity is equal or is equal or

lower than the effective capacity. Itlower than the effective capacity. It

is maximum output rate achievedis maximum output rate achievedunder constraints of machineunder constraints of machine

breakdown, labor inefficiency / breakdown, labor inefficiency /

absenteeism, defective products, lateabsenteeism, defective products, latedelivery of raw materials etc.delivery of raw materials etc.



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Capacity Planning EnvironmentCapacity Planning EnvironmentCapacity Planning EnvironmentCapacity Planning Environment

Need for capacity planning. Need for capacity planning. Measurement of capacityMeasurement of capacity

MethodsMethods to increase effective capacity.to increase effective capacity.

Capacity planning decisions.Capacity planning decisions.

Role of forecasting in capacity needs.Role of forecasting in capacity needs.

O ptimal capacity determination.O ptimal capacity determination. Strategic capacity planning as key toStrategic capacity planning as key to

competitiveness.competitiveness.



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Need for Capacity PlanningNeed for Capacity PlanningNeed for Capacity PlanningNeed for Capacity Planning

To satisfy the future demand of products.To satisfy the future demand of products. Investments in facility are longInvestments in facility are long--term.term.

To keep the initial investment in theTo keep the initial investment in the

facility as low as possible to achievefacility as low as possible to achievelower break lower break--even volume.even volume.

To find theTo find the optimal capacityoptimal capacity of theof the

facility i.e. when [(cost of under facility i.e. when [(cost of under

capacity) + (cost of over capacity)] iscapacity) + (cost of over capacity)] is

minimum.minimum.



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Measurements of CapacityMeasurements of CapacityMeasurements of CapacityMeasurements of Capacity

Output Rate CapacityOutput Rate Capacity For a facility having a single product or aFor a facility having a single product or a

few homogeneous products, the unit of few homogeneous products, the unit of

measure is straightforward (barrels of beer measure is straightforward (barrels of beer per month) per month)

For a facility having a diverse mix of For a facility having a diverse mix of

products, an products, an aggregate unit of capacityaggregate unit of capacity

must be established using a common unitmust be established using a common unit

of output (sales dollars per week)of output (sales dollars per week)



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Input Rate CapacityInput Rate Capacity

Commonly used for service operationsCommonly used for service operations

where output measures are particularlywhere output measures are particularly

difficult :difficult :

Hospitals use available beds per monthHospitals use available beds per month

Airlines use available seatAirlines use available seat--miles per miles per

monthmonth

Movie theatres use available seats per Movie theatres use available seats per

monthmonth



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Capacity Utilization PercentageCapacity Utilization Percentage

Relates actual output to output capacityRelates actual output to output capacity

Example: Actual automobiles producedExample: Actual automobiles produced

in a quarter divided by the quarterlyin a quarter divided by the quarterly

automobile production capacityautomobile production capacity

Relates actual input used to input capacityRelates actual input used to input capacity

Example: Actual accountant hours usedExample: Actual accountant hours used

in a month divided by the monthlyin a month divided by the monthly

accountaccount--hours availablehours available



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Capacity CushionCapacity Cushion

An additional amount of capacity added ontoAn additional amount of capacity added onto

the expected demand to allow for:the expected demand to allow for:

greater than expected demandgreater than expected demand

demand during peak demand seasonsdemand during peak demand seasons

lower production costslower production costs

product and volume flexibility product and volume flexibility

improved quality of products and servicesimproved quality of products and services



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Methods to Increase Effective CapacityMethods to Increase Effective CapacityMethods to Increase Effective CapacityMethods to Increase Effective Capacity

Proper process quality control to ensure lesser defectiveProper process quality control to ensure lesser defectiveitems.items.

Proper facility location, layout and internal workingProper facility location, layout and internal working

conditions.conditions.

Make long batch sizes to reduce no. of setMake long batch sizes to reduce no. of set--ups required.ups required.

Proper implementation of environmental and pollutionProper implementation of environmental and pollution

control norms.control norms.

Good motivation & training and less absenteeism andGood motivation & training and less absenteeism andturnover on the part of workers.turnover on the part of workers.

Good coordination with suppliers.Good coordination with suppliers.

Proper scheduling of products on machines to reduce idleProper scheduling of products on machines to reduce idle

time.time.



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Capacity Planning DecisionsCapacity Planning DecisionsCapacity Planning DecisionsCapacity Planning Decisions

Assessing existing capacity.Assessing existing capacity.

Forecasting capacity needs.Forecasting capacity needs.

Identifying alternative ways to modifyIdentifying alternative ways to modifycapacity.capacity.

Evaluating financial and technologicalEvaluating financial and technological

impacts on capacity.impacts on capacity. Selecting a capacity alternative most suitedSelecting a capacity alternative most suited

to strategic mission.to strategic mission.



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Forecasting Capacity DemandForecasting Capacity DemandForecasting Capacity DemandForecasting Capacity Demand

Consider the life of the input (e.g. facilityConsider the life of the input (e.g. facility

is 10is 10--30 yr)30 yr)

Understand product life cycle as itUnderstand product life cycle as itimpacts capacityimpacts capacity

Anticipate technological developmentsAnticipate technological developments

Anticipate competitors¶ actionsAnticipate competitors¶ actions Forecast the firm¶s demandForecast the firm¶s demand



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Other Considerations in ForecastingOther Considerations in ForecastingOther Considerations in ForecastingOther Considerations in Forecasting

Resource availabilityResource availability

Accuracy of the longAccuracy of the long--rangerange

forecastforecast

Capacity cushionCapacity cushion

Changes in competitiveChanges in competitiveenvironmentenvironment



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General Trends in Demand ForecastingGeneral Trends in Demand ForecastingGeneral Trends in Demand ForecastingGeneral Trends in Demand Forecasting

Growth TrendGrowth Trend

DeclineT

rendDeclineT

rendCyclical TrendCyclical Trend

Stable TrendStable Trend



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Expansion of LongExpansion of Long--Term CapacityTerm CapacityExpansion of LongExpansion of Long--Term CapacityTerm Capacity

Subcontract with other companiesSubcontract with other companies Acquire other companies, facilities, or resourcesAcquire other companies, facilities, or resources

Develop sites, construct buildings, buy equipmentDevelop sites, construct buildings, buy equipment

Expand, update, or modify existing facilitiesExpand, update, or modify existing facilities

Reactivate standby facilitiesReactivate standby facilities

Overtime to workersOvertime to workers

Running plant in more shiftsRunning plant in more shifts

Accumulate inventory during period of low demandAccumulate inventory during period of low demand MultiMulti--skill employeesskill employees

Hire more employeesHire more employees



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Reduction of LongReduction of Long--Term CapacityTerm CapacityReduction of LongReduction of Long--Term CapacityTerm Capacity

Sell off existing resources, laySell off existing resources, lay

off employeesoff employees

Mothball facilities, transfer Mothball facilities, transfer employeesemployees

Develop andDevelop and phase phase--inin newnew products/services products/services



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Economies of ScaleEconomies of ScaleEconomies of ScaleEconomies of Scale

Best operating levelBest operating level -- least average unitleast average unit

cost.cost.

Economies of scaleEconomies of scale -- average cost per average cost per

unit decreases as the volume increasesunit decreases as the volume increases

toward the best operating leveltoward the best operating level

Diseconomies of scaleDiseconomies of scale -- average cost per average cost per unit increases as the volume increasesunit increases as the volume increases

beyond the best operating level beyond the best operating level



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Economies and Diseconomies of ScaleEconomies and Diseconomies of ScaleEconomies and Diseconomies of ScaleEconomies and Diseconomies of Scale

Average UnitAverage UnitCost of Output ($)Cost of Output ($)

Annual Volume (units)Annual Volume (units)

Best O perating LevelBest O perating Level

EconomiesEconomiesof Scaleof Scale

DiseconomiesDiseconomiesof Scaleof Scale



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Diseconomies of ScaleDiseconomies of ScaleDiseconomies of ScaleDiseconomies of Scale

Increasing costs result from increasedIncreasing costs result from increasedcongestion of workers and material, whichcongestion of workers and material, which

contributes to:contributes to:

Increasing inefficiencyIncreasing inefficiency Difficulty in schedulingDifficulty in scheduling

Damaged goodsDamaged goods

Reduced moraleReduced morale

Increased use of overtimeIncreased use of overtime

« and other diseconomies« and other diseconomies



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Two General ApproachesTwo General Approaches

to Expanding Longto Expanding Long--Range CapacityRange Capacity



All at OnceAll at Once ± ± build the build the

ultimate facility now and growultimate facility now and grow

into itinto it IncrementallyIncrementally ± ± build build

incrementally as capacityincrementally as capacitydemand growsdemand grows



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All at OnceAll at Once

Little risk of having to turn down business due toLittle risk of having to turn down business due to

inadequate capacityinadequate capacity

Less interruption of productionLess interruption of production One large construction project costs less thanOne large construction project costs less than

several smaller projectsseveral smaller projects

Due to inflation, construction costs will be higher Due to inflation, construction costs will be higher

in the futurein the future

Most appropriate for mature products with stableMost appropriate for mature products with stable

demanddemand



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IncrementallyIncrementally

Less risky if forecast needs do notLess risky if forecast needs do not

materializematerialize Funds that could be used for other Funds that could be used for other

types of investments will not betypes of investments will not be

tied up in excess capacitytied up in excess capacity

More appropriate for new productsMore appropriate for new products



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Subcontractor NetworksSubcontractor NetworksSubcontractor NetworksSubcontractor Networks

A viable alternative to larger A viable alternative to larger--capacity facilities iscapacity facilities isto develop subcontractor and supplier networks.to develop subcontractor and supplier networks.

³Farming out´ or outsourcing your capacity³Farming out´ or outsourcing your capacityneeds to your suppliersneeds to your suppliers

Developing longDeveloping long--range relationships withrange relationships withsuppliers of parts, components, andsuppliers of parts, components, andsubassembliessubassemblies

Relying less on backward vertical integrationRelying less on backward vertical integration Requiring less capital for production facilitiesRequiring less capital for production facilities

More easily varying capacity during slack or More easily varying capacity during slack or

peak demand periods peak demand periods



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Outsourcing Service FunctionsOutsourcing Service FunctionsOutsourcing Service FunctionsOutsourcing Service Functions

Building maintenanceBuilding maintenance Data processingData processing

DeliveryDelivery

PayrollPayroll Book Book--keepingkeeping

Customer serviceCustomer service

MailroomMailroom Benefits administrationBenefits administration

«« and moreand more



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Economies of ScopeEconomies of ScopeEconomies of ScopeEconomies of Scope

The ability to produce many productThe ability to produce many productmodels in one flexible facility moremodels in one flexible facility more

cheaply than in separate facilitiescheaply than in separate facilities

Highly flexible and programmableHighly flexible and programmable

automation allows quick, inexpensiveautomation allows quick, inexpensive

product product--toto--product changes product changes

Economies are created by spreading theEconomies are created by spreading the

automation cost over many productsautomation cost over many products



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Analyzing CapacityAnalyzing Capacity--Planning DecisionsPlanning DecisionsAnalyzing CapacityAnalyzing Capacity--Planning DecisionsPlanning Decisions

Break Break--Even AnalysisEven Analysis

PresentPresent--Value AnalysisValue Analysis

Computer SimulationComputer Simulation Waiting Line AnalysisWaiting Line Analysis

Linear ProgrammingLinear Programming Decision Tree AnalysisDecision Tree Analysis



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Example: King PublishingExample: King PublishingExample: King PublishingExample: King Publishing

Break Break--Even AnalysisEven AnalysisK ingK ing PublishingPublishing intendsintends toto publish publish aa book book inin residentialresidentiallandscapinglandscaping.. FixedFixed costscosts areare $$125125,,000000 per per year,year,variablevariable costscosts per per unitunit areare $$3232,, andand sellingselling price price per per unitunit

isis $$4242..AA) How many units must be sold per year to break even?) How many units must be sold per year to break even?

B) How much annual revenue is required to break even?B) How much annual revenue is required to break even?

C) If annual sales are 20,000 units, what are the annualC) If annual sales are 20,000 units, what are the annual profits? profits?

D) What variable cost per unit would result in $100,000D) What variable cost per unit would result in $100,000annual profits if annual sales are 20,000 units?annual profits if annual sales are 20,000 units?



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Break Break--EvenEven AnalysisAnalysis

A) How many units must be sold per year toA) How many units must be sold per year to

break even? break even?

Q = FC/(pQ = FC/(p--v) = $125,000/(42v) = $125,000/(42 ± ± 32) = 12,500 books32) = 12,500 books



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Break Break--Even AnalysisEven Analysis

B) How much annual revenue is required toB) How much annual revenue is required to

break even? break even?

TR TR == pQ pQ = 42(12,500) = $525,000= 42(12,500) = $525,000



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Break Break--Even AnalysisEven AnalysisD) What variable cost per unit would result inD) What variable cost per unit would result in

$100,000 annual profits if annual sales are$100,000 annual profits if annual sales are

20,000 units?20,000 units?

P =P = pQ pQ ± ± (FC +(FC + vQvQ))

100,000 = 42(20,000)100,000 = 42(20,000) ± ± [125,000 + v(20,000)][125,000 + v(20,000)]

100,000 = 840,000100,000 = 840,000 ± ± 125,000125,000 ± ± 20,000v20,000v20,000v = 615,00020,000v = 615,000

v = $30.75v = $30.75



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Decision Tree AnalysisDecision Tree AnalysisDecision Tree AnalysisDecision Tree Analysis

Structures complexStructures complex multiphase decisionmultiphase decisions,s,

showing:showing:

What decisions must be madeWhat decisions must be made

What sequence the decisions must occur What sequence the decisions must occur

Interdependence of the decisionsInterdependence of the decisions

Allows objective evaluation of alternativesAllows objective evaluation of alternatives

Incorporates uncertaintyIncorporates uncertainty

Develops expected valuesDevelops expected values



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Example: Good Eats CaféExample: Good Eats CaféExample: Good Eats CaféExample: Good Eats Café

Decision Tree AnalysisDecision Tree AnalysisGood Eats Café is about to build a newGood Eats Café is about to build a new

restaurant. An architect has developedrestaurant. An architect has developed threethree

building designs building designs, each with a different, each with a differentseating capacity. Good Eats estimates that theseating capacity. Good Eats estimates that the

average number of customers per hour will beaverage number of customers per hour will be

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0, 100, or 120 with respective probabilities of 8

0, 100, or 120 with respective probabilities of 0.4, 0.2, and 0.4. The payoff 0.4, 0.2, and 0.4. The payoff tabletable showingshowing

the profits for the three designs is on the nextthe profits for the three designs is on the next

slide.slide.



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Payoff TablePayoff Table

Average Number of Customers Per Hour Average Number of Customers Per Hour

cc11

= 80= 80 cc22

= 100= 100 cc33

= 120= 120

Design A $10,000 $15,000 $14,000Design A $10,000 $15,000 $14,000

Design B $ 8,000 $18,000 $12,000Design B $ 8,000 $18,000 $12,000

Design C $ 6,000 $16,000 $21,000Design C $ 6,000 $16,000 $21,000

Payoff TablePayoff Table

Average Number of Customers Per Hour Average Number of Customers Per Hour

cc11

= 80= 80 cc22

= 100= 100 cc33

= 120= 120

Design A $10,000 $15,000 $14,000Design A $10,000 $15,000 $14,000

Design B $ 8,000 $18,000 $12,000Design B $ 8,000 $18,000 $12,000

Design C $ 6,000 $16,000 $21,000Design C $ 6,000 $16,000 $21,000




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Expected Value ApproachExpected Value ApproachCalculate the expected value for eachCalculate the expected value for each

decision. The decision tree on the nextdecision. The decision tree on the next

slide can assist in this calculation. Hereslide can assist in this calculation. Hered d 11,, d d 22,, d d 33 represent the decisionrepresent the decision

alternatives of designsA, B, C, andalternatives of designsA, B, C, and cc11,, cc22,,

cc33 represent the different average customer represent the different average customer volumes (80, 100, and 120) that mightvolumes (80, 100, and 120) that might

occur.occur.

Expected Value ApproachExpected Value ApproachCalculate the expected value for eachCalculate the expected value for each

decision. The decision tree on the nextdecision. The decision tree on the next

slide can assist in this calculation. Hereslide can assist in this calculation. Hered d 11,, d d 22,, d d 33 represent the decisionrepresent the decision

alternatives of designsA, B, C, andalternatives of designsA, B, C, and cc11,, cc22,,

cc33 represent the different average customer represent the different average customer volumes (80, 100, and 120) that mightvolumes (80, 100, and 120) that might

occur.occur.




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Expected Value For Each DecisionExpected Value For Each Decision

Choose the design with largestChoose the design with largest EVEV i.e. Design C.i.e. Design C.

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d d 11

d d 22

d d 33

EV = .4(10,000) + .2(15,000) + .4(14,000)EV = .4(10,000) + .2(15,000) + .4(14,000)

= $12,600= $12,600

EV = .4(8,000) + .2(18,000) + .4(12,000)EV = .4(8,000) + .2(18,000) + .4(12,000)= $11,600= $11,600

EV = .4(6,000) + .2(16,000) + .4(21,000)EV = .4(6,000) + .2(16,000) + .4(21,000)= $14,000= $14,000

DesignADesignA

Design BDesign B

Design CDesign C

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WrapWrap--Up:WorldUp:World--Class PracticeClass PracticeWrapWrap--Up:WorldUp:World--Class PracticeClass Practice

Outstanding longOutstanding long--range businessrange business plans plans

LongLong--range capacity studiesrange capacity studies

Justify investment on how itJustify investment on how it

positions their company to capture positions their company to capture

market sharemarket share Facility location decisions involveFacility location decisions involve

worldwide search for sitesworldwide search for sites



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End of Module-5End of Module-5

05 module05 facility capacity 98

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