CHAPTER 4: STRATEGIC CAPACITY PLANNING FOR PRODUCTS AND SERVICES DEFINING AND MEASURING CAPACITY Capacity: This is the

maximum output from a process in a given time. It is often refers to an upper limit on the rate of output. 1. Designed Capacity: This is the maximum output rate or service capacity an operation, process or facility is designed for. Designed capacity= productive capacity + non-productive capacity + wasted capacity Productive capacity: It is the capacity used to make good products. Non-productive capacity: Does not make products, but is used for other purposes, such as setting-up equipment, changing products, changeover of shifts, maintenance time for research and development , standby- plus other legal, contractual or management reasons why it cannot be used. These losses are largely unavoidable, planned losses.

Wasted or Idle capacity: Includes time spent on breakdowns, making units that are later scrapped, bringing faulty units up to standard, waiting for materials, waiting for other resources, or because there is not enough demand to keep facilities busy. These losses occur because of unplanned conditions, but they are largely avoidable by proper management. 2. Effective Capacity: It is the realistic limit that can be sustained over the long term. Effective Capacity= Design capacity - personal and other allowances. Output or Production: It is the total amount that is actually made. Productivity: Is the amount produced for each unit of resource used.

Utilization: It is the proportion of designed capacity that is actually used. It is the ratio of actual output to design capacity. Utilization = output/designed capacity Efficiency: it shows how well the available resources are used. It is the ratio of actual output to effective output. Efficiency= output/effective capacity Effectiveness: It shows how well an organization sets and achieves its goals.

Example: Suppose that a process is designed to make 100 units a day, but unavoidable conditions generally limit the output to 80 units a day. If the process makes 60 units in one day, we can say that: 1. 2. 3. 4. 5. Designed capacity= 100 units a day Effective capacity= 80 units a day Output= 60 units Utilization=60/100= 0.6 or 60% Efficiency= 60/80= 0.75 or 75%

WHY CAPACITY DECISIONS ARE STRATEGIC? Capacity decisions have a real impact on the ability of the organization for products and services; capacity essentially limits the rate of output possible. Having capacity to satisfy demand can often allow a company to take advantage of tremendous benefits. Capacity decisions affect operating costs. Capacity and demand requirements will be matched which will tend to minimize operating costs. Capacity is usually a determinant of initial cost. The greater the capacity of a productive unit, the greater its cost. Capacity decisions often involved long-term commitment of resources. Once they are implemented, those decisions may be difficult or impossible to modify without incurring major costs. Capacity decisions can affect competitiveness. If a firm has excess capacity or can quickly add capacity, that fact may serve as a barrier to entry by other firm. Capacity affects the ease of management. Having appropriate capacity makes management easier than when capacity is mismatched. Globalization has increased the importance and the complexity of capacity decisions. Farflung supply chains and distant markets add to the uncertainty about capacity needs. Capacity decisions often involve substantial financial and other resources. Therefore, it is necessary to plan for them in advance.

Capacity Management: is responsible for all aspects of operations capacity. Capacity Planning: is the more specific set of activities that match the long-term capacity of a process to the demand for its products.

DETERMINANTS OF EFFECTIVE CAPACITY Facilities: Design, location, layout and environment. Product and service factors: Design and product or service mix Process factors: Quantity and quality capabilities Human factors: Job content, job design, training and experience and motivation. Policy factors: Management policies regarding capacity options such as overtime or second or third shifts. Operational factors: Scheduling, materials management, quality assurance, maintenance policies, and equipment breakdowns. Supply chain factors: Suppliers, warehousing, transportation and distributors. External factors: Product standards, safety regulations, unions and pollution control standards.

STEPS IN CAPACITY PLANNING 1. Estimate future capacity requirements. Capacity planning decisions involve both long-term and short-term considerations. Long-term capacity needs require forecasting demand over a time horizon and then converting those forecasts into capacity requirements. Short-term capacity needs are less concerned with cycles or trends than with seasonal variations and other variations from average. 2. Evaluate existing capacity and facilities and identify gaps. Once capacity requirements have been determined, the organization must decide whether to produce a good or provide a service itself, or to outsource from another organization. Many organizations buy parts or contract out services for variety of reasons. Some of these are: Available capacity Expertise Quality considerations Nature of demand Cost Risks 3. Identify alternatives for meeting requirements. Developing capacity alternatives: Design Flexibility into systems. Take stage of life cycle into account. (growth phase, maturity phase and decline phase) Take a big-picture (i.e. systems) approach to capacity changes.

Prepare to deal with capacity chunks. Attempt to smooth out capacity requirements. Identify the optimal operating level.

4. Conduct financial analyses of each alternative. Evaluating alternatives: Cost-volume Analysis. Its purpose is to estimate the income of an organization under different operating conditions. Financial Analysis: Involves allocation of scarce funds. 3 most commonly used methods of financial analysis are: Payback: it is crude but widely used method that focuses on the length of time it will take for an investment to return its original cost. Present value: method that summarizes the initial cost of an investment, its estimated annual cash flows, and any expected salvage value in a single value called the equivalent current value, taking into account the time value of money. Internal rate of return: summarizes the initial cost, expected annual cash flows and estimated future salvage value of an investment proposal in an equivalent interest rate. 5. 6. 7. 8. Assess key qualitative issues for each alternative. Select the alternative to pursue that will be best in the long term Implement the selected alternative. Monitor results.

PREPARED BY: Dacasin, Ivy Rose E. Comaling. Honey Claire De Jesus, Czarina