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Capacity Planning ABI301 Introduction • Capacity refers to an upper limit or ceiling on the load that an operating unit can handle. • The operating unit might be a plant, department, machine, store, or worker. • The importance of capacity : – It enables managers to quantify production capability in terms of inputs or outputs, – makes other decisions or plans related to those quantities. • • • • The basic questions in capacity planning are the following: 1. What kind of capacity is needed? 2. How much is needed? 3. When is it needed? Importance of Capacity Decisions 1. 2. 3. 4. 5. 6. Capacity decisions have a real impact on the ability of the organization to meet future demands for products and services; capacity essentially limits the rate of output possible. Capacity decisions affect operating costs. Ideally, capacity and demand requirements will be matched, which will tend to minimize operating costs. Capacity is usually a major determinant of initial cost. Typically, the greater the capacity of a productive unit, the greater its cost. Capacity decisions often involve long-term commitment of resources and the fact that, once they are implemented, it may be difficult or impossible to modify those decisions without incurring major costs. Capacity decisions can affect competitiveness. Capacity affects the ease of management. Defining and Measuring Capacity • It can be refined into three useful definitions of capacity: 1. Design capacity: the maximum output that can possibly be attained. 2. Effective capacity: the maximum possible output given a product mix, scheduling difficulties, machine maintenance, quality factors, and so on. 3. Actual Capacity: The actual production at specific time. Defining and Measuring Capacity • These different measures of capacity are useful in defining two measures of system effectiveness: efficiency and utilization. 1. Efficiency is the ratio of actual output to effective capacity. 2. Utilization is the ratio of actual output to design capacity. Example Determinants of Effective Capacity • Many decisions about system design have an impact on capacity. • The main factors relate to the following: 1. 2. 3. 4. 5. 6. Facilities Products or services Processes Human considerations Operations External forces Developing Capacity Alternatives • The alternative things that can be done to enhance capacity management: 1. Design flexibility into systems. 2. Differentiate between new and mature products or services. 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. COST–VOLUME ANALYSIS • Cost–volume analysis focuses on relationships between cost, revenue, and volume of output. • The purpose of cost–volume analysis is to estimate the income of an organization under different operating conditions. • One of the famous mathematical modeling using to identify capacity is break-even point (BEP) the volume of output at which total cost and total revenue are equal. COST–VOLUME (BEP) ASSUMPTIONS • Cost–volume analysis can be a valuable tool for comparing capacity alternatives if certain assumptions are satisfied: 1. One product is involved. 2. Everything produced can be sold. 3. The variable cost per unit is the same regardless of the volume. 4. Fixed costs do not change with volume changes, or they are step changes. 5. The revenue per unit is the same regardless of volume. 6. Revenue per unit exceeds variable cost per unit. Cost-Volume Equations Problem(1) • The efficiency of a productive unit is 60%. The unit produces an average of 20 forklift trucks per day. Determine the effective capacity of the unit. Problem(2) • The utilization of a machine is 50%. The machine has a design capacity of 70 units per hour and an effective capacity of 60 units per hour. Find the efficiency of the machine. Problem(2) - Continue