2. 6 – 2
Planning Capacity
Capacity is the maximum rate of output of
a process or system
Accounting, finance, marketing,
operations, purchasing, and human
resources all need capacity information to
make decisions
Capacity planning is done in the long-term
and the short-term
Questions involve the amount of capacity
cushion and expansion strategies
3. 6 – 3
Planning Capacity
Capacity planning
(long-term)
Economies and
diseconomies of scale
Capacity timing and sizing
strategies
Systematic approach to
capacity decisions
Constraint management
(short-term)
Theory of constraints
Identification and
management of
bottlenecks
Product mix decisions
using bottlenecks
Managing constraints in a
line process
Capacity management
4. 6 – 4
Measures of Capacity Utilization
Output measures of capacity: Small number of
standard product with high volume required.
Production of car.
Input measures of capacity: Small volume with
customized production. Production of furniture.
Utilization: the degree to which equipment, space, or
the workforce is currently being used, and is
measured as the ratio of average output rate to
maximum capacity.
Utilization = 100%
Average output rate
Maximum capacity
5. 6 – 5
Capacity and Scale
Economies of scale: Average unit cost can
be reduced by increasing output rate.
Spreading fixed costs
Reducing construction costs
Cutting costs of purchased materials
Finding process advantages
Diseconomies of scale: the average cost
per unit increases as the facility's size
increases
Complexity
Loss of focus
Inefficiencies
8. 6 – 8
Capacity Timing and Sizing
Planned unused
capacity
Time
Capacity
Forecast of capacity
required
Time between
increments
Capacity
increment
Figure 6.2 – Two Capacity Strategies
(a) Expansionist strategy: if demand is increasing and the time
between increments increases, the size of increment must also
increase
9. 6 – 9
Time
Capacity
Planned use of
short-term options
Time between
increments
Capacity
increment
Capacity Timing and Sizing
Forecast of capacity
required
Figure 6.2 – Two Capacity Strategies
(b) Wait-and-see strategy: to meet any shortfalls, relies on short-
term options, such as use of overtime, temporary workers,
subcontract, stock-out, and postponement of preventive
maintenance on equipment
16. 6 – 16
Solution
Available hours
= days per year × shift per day × hours per shift × (1 –
capacity cushion)
= 250 × 1 × 8 × (1 - 15%)
= 1700
Processing time (client X)
= processing time + set up time
= (2000 × .5) + (2000/20 × .25)
= 1025
Processing time (client Y)
= processing time + set up time
= (6000 × .7) + (6000/30 × .4)
= 4280
17. 6 – 17
Solution
Decision: The copy center require 4 machine to meet the customer
demand. Currently the center have three machine. So the copy
center require another one machine.
Capacity
requirement =
Processing and setup time
Hours available
1025 + 4280
1700
=
= 3.12
= 4 machine
18. 6 – 18
Estimating Capacity Requirements
SOLUTION
M =
[Dp + (D/Q)s]product 1 + [Dp + (D/Q)s]product 1 + … + [Dp + (D/Q)s]product n
N[1 – (C/100)]
=
[2,000(0.5) + (2,000/20)(0.25)]client X + [6,000(0.7) + (6,000/30)(0.40)]client Y
[(250 day/year)(1 shift/day)(8 hours/shift)][1.0 - (15/100)]
= = 3.12
5,305
1,700
Rounding up to the next integer gives a requirement of
four machines.
22. 6 – 22
Evaluating the Alternatives
EXAMPLE 6.2 (page 229)
Grandmother’s Chicken Restaurant is experiencing a boom in
business. The owner expects to serve 80,000 meals this year.
Although the kitchen is operating at 100 percent capacity, the
dining room can handle 105,000 diners per year.
Forecasted demand for the next five years is 90,000 meals for
next year, followed by a 10,000-meal increase in each of the
succeeding years.
One alternative is to expand both the kitchen and the dining
room now, bringing their capacities up to 130,000 meals per
year. The initial investment would be $200,000, made at the end
of this year (year 0).
The average meal is priced at $10, and the before-tax profit
margin is 20 percent. The 20 percent figure was arrived at by
determining that, for each $10 meal, $8 covers variable costs
and the remaining $2 goes to pretax profit.
What are the pretax cash flows from this project for the next
five years compared to those of the base case of doing
nothing?