 Product/Service design

 Demand Forecasting & Capacity Planning

 Facility Location & Layout
 Aggregate Planning
 Master Production Schedule & MRP
 Inventory Control
 Quality Control
 Scheduling
 Product/Service design
 Demand Forecasting & Capacity Planning
 Facility Location & Layout
 Aggregate Planning
 Master Production Schedule & MRP
 Inventory Control
 Quality Control
 Scheduling
 Capacity refers to a system’s potential for producing goods or
delivering services over a specified time interval
 Goal of capacity planning is to achieve a match between long-
term supply capabilities and the predicted level of long-term
demand
 Basic questions in capacity planning:
- What kind of capacity is needed? Strategic & Tactical issues

- How much is needed?

- When is it needed?
 Capacity often refers to an upper limit on the rate of
output
 In selecting a measure of capacity, it is important to
choose one that does not require updating (capacity of
$30 million a year)
 When only one product or service is involved, capacity
may be expressed in terms of that item
 When multiple products are involved, capacity is often
expressed in terms of inputs
 Input Measures of Output Measures
Type of Business
Capacity of Capacity
Car manufacturer Labor hours Cars per shift
Hospital Available beds Patients per month
Pizza parlor Labor hours Pizzas per day
Floor space in
Retail store Revenue per foot
square feet
No single measure of capacity will be appropriate in every
situation. Rather it must be tailored to the situation
 Design capacity:
◦ Maximum output rate under ideal conditions
 Effective capacity:
◦ Design capacity minus allowances such as personal
time, maintenance
 Actual output cannot exceed effective capacity and is
often less because of machine breakdowns,
absenteeism, shortage of materials, and quality
problems
 Actual output
Efficiency =
Effective Capacity

Actual output
Utilization =
Design Capacity
 Facilities – Location, Size, Provision for expansion etc.,

 Product and service factors – Design similarities

 Process & human factors – Quality considerations

 Policy factors – Overtime, second or third shifts

 Operational factors – Scheduling, inventory, purchasing

 Supply chain factors – Suppliers, warehousing, logistics

 External factors – Safety, Unions, Pollution control etc.,

1. Design flexibility into systems (capacity cushions)

2. Take stage of life cycle into account

3. Take a “big picture” approach to capacity changes

4. Prepare to deal with capacity “chunks”

5. Attempt to smooth out capacity requirements

6. Identify the optimal operating level

Percent of North American Vehicles Made on Flexible Assembly Lines

100% –

80% –

60% –

40% –
Chrysler

Toyota
Nissan

Honda

Ford
20% –
GM

0–
 (a) Leading demand with (b) Leading demand with
incremental expansion one-step expansion
New New
capacity capacity
Expected
Demand

Demand
Expected
demand demand

(c) Capacity lags demand with (d) Attempts to have an average

incremental expansion capacity with incremental
New
expansion
capacity New
Expected capacity Expected
Demand

Demand
demand demand
 Demand exceeds capacity
 Curtail demand by raising prices, scheduling
longer lead time
 Long term solution is to increase capacity

 Capacity exceeds demand

 Stimulate market
 Product changes
 Adjusting to seasonal demands
 Produce products with complementary demand
patterns
 4,000 –

3,000 –
Sales in units

2,000 –

1,000 –
Air-conditioners

JFMAMJJASONDJFMAMJJASONDJ
Time (months)
 4,000 –
Room heaters
3,000 –
Sales in units

2,000 –

1,000 –

Air-conditioners

JFMAMJJASONDJFMAMJJASONDJ
Time (months)
 Combining both demand
patterns reduces the variation

4,000 –
Room heaters
3,000 –
Sales in units

2,000 –

1,000 –

Air-conditioners

JFMAMJJASONDJFMAMJJASONDJ
Time (months)
 BOLis the output that results in the lowest average unit
cost
 Economies of Scale:
◦ Where the cost per unit of output drops as volume of output
increases
◦ Spread the fixed costs of buildings & equipment over multiple
units, allow bulk purchasing & handling of material
 Diseconomies of Scale:
◦ Where the cost per unit rises as volume increases
◦ Often caused by congestion (overwhelming the process with too
much work-in-process) and scheduling complexity
The three-step procedure for capacity planning
decisions:
1. Identify Capacity Requirements
2. Develop Capacity Alternatives
3. Evaluate Capacity Alternatives
 Cost-volume analysis
◦ Break-even point

 Financial analysis
◦ Cash flows
◦ Present value

 Decision theory
 Waiting-line analysis
 Simulation
 A manager has the option of purchasing one, two, or three
machines. Fixed costs and potential volumes are as
follows:
Number of Total annual Corresponding
machines fixed costs range of output
1 $ 9600 0 – 300
2 15,000 301 – 600
3 20,000 601 - 900

 Variable cost is $10 per unit, and revenue is $40 per unit
 If projected annual demand is between 580 and 660 units,
how many machines should the manager purchase?
20