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McGraw-Hill/Irwin
Learning Objectives
Explain the importance of capacity planning. Discuss ways of defining and measuring capacity. Describe the determinants of effective capacity. Discuss the major considerations related to developing capacity alternatives. Briefly describe approaches that are useful for evaluating capacity alternatives
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Capacity Planning
Capacity is the upper limit or ceiling on the load that an operating unit can handle. Capacity also includes
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Capacity
Design capacity
maximum output rate or service capacity an operation, process, or facility is designed for Design capacity minus allowances such as personal time, maintenance, and scrap rate of output actually achieved--cannot exceed effective capacity.
Effective capacity
Actual output
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Utilization =
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Efficiency/Utilization Example
Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 units/day
Actual output
Efficiency =
90% Effective capacity
Utilization =
72%
36 units/day 50 units/day =
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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
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#1 #2 #3
5 .0 8 .0 2 .0
2 ,0 0 0 2 ,4 0 0 1 ,4 0 0 5 ,8 0 0
If annual capacity is 2000 hours, then we need three machines to handle the required volume: 5,800 hours/2,000 hours = 2.90 machines
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1. 2. 3. 4. 5. 6.
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Bottleneck Operation
Figure 5.2
Machine #1 Machine #2
10/hr
Bottleneck operation: An operation in a sequence of operations whose capacity is lower than that of the other operations
10/hr
Bottleneck Operation
10/hr 10/hr
30/hr
Machine #3
Machine #4
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Bottleneck Operation
Bottleneck
Operation 1 20/hr.
Operation 2 10/hr.
Operation 3 15/hr.
10/hr.
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Economies of Scale
Economies 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
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Minimum cost
Rate of output
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Economies of Scale
Figure 5.5
Minimum cost & optimal operating rate are functions of size of production unit. Average cost per unit
Small
plant
Medium plant
Large plant
Output rate
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Evaluating Alternatives
Cost-volume analysis
Break-even point
Financial analysis
Cash flow Present value
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CostCost-Volume Relationships
Figure 5.6a
Amount ($)
CostCost-Volume Relationships
Figure 5.6b
Amount ($) 0
Q (volume in units)
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CostCost-Volume Relationships
Figure 5.6c
Amount ($) 0
3 machines 2 machines 1 machine Quantity Step fixed costs and variable costs.
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TC
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Financial Analysis
Cash Flow - the difference between cash received from sales and other sources, and cash outflow for labor, material, overhead, and taxes. Present Value - the sum, in current value, of all future cash flows of an investment proposal.
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Decision Theory
Helpful tool for financial comparison of alternatives under conditions of risk or uncertainty Suited to capacity decisions See Chapter 5 Supplement
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WaitingWaiting-Line Analysis
Useful for designing or modifying service systems Waiting-lines occur across a wide variety of service systems Waiting-lines are caused by bottlenecks in the process Helps managers plan capacity level that will be cost-effective by balancing the cost of having customers wait in line with the cost of additional capacity
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Video: Capacity
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