Capacity Planning

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Chapter 5

• Capacity Planning

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Capacity Planning

• Capacity is the upper limit or ceiling on the
  load that an operating unit can handle.
• The basic capacity questions are
• What kind of capacity is needed?
• How much is needed?
• Bruce nuclear
• When is it needed?
• Banks may require you to adjust time line

What are the factors effecting our capacity of
BBA grads?
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Capacity

• Design capacity
• maximum obtainable output
• Effective capacity
• Maximum capacity given product mix, scheduling
  difficulties, and other doses of reality.
• Reduced by operational controllable factors
• Scheduling, maintenance
• Actual output
• rate of output actually achieved--cannot exceed
  effective capacity.
• Reduced by uncontrollable factors
• Machine breakdown, absenteeism, material shortage

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Efficiency and Utilization
Actual output Efficiency Effective
capacity Actual output Utilization
Design capacity
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Efficiency/Utilization Example

• Design capacity 200 phones/day
• Effective capacity 180 phones/day
• Actual output 160 phones/day
• Actual output 160
  units/day
• Efficiency 89
• Effective capacity 180
  units/ day
• Utilization Actual output
  160 units/day 80
• Design capacity
  200 units/day

Iridium
Managers should try and get Utilization
Efficiency
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Determinants of Effective Capacity

• Facilities
• Buildings, labour
• Products or services
• Standardize courses vs. customized curriculum
• Processes
• WWW, correspondence, distance ed., mass teaching
• Human considerations
• Skill level, course variety, driving distance,
  mornings
• Operations
• scheduling
• External forces
• Government funding, CA requirements, reputation

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Developing Capacity Alternatives

• Design flexibility into systems
• Lay underground fiber, fast network wiring
• Point in the product life cycle
• Take a big picture approach to capacity
  changes
• New Faculty parking, other dept., enrollment
  etc.
• Prepare to deal with capacity chunks
• Caused by new building
• Attempt to smooth out capacity requirements
• Complementary products, teach in summer
• Capacity cushion needed?
• Determine optimal level

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Class Exercise

• Your starting a business what capacity issues do
  you have to deal with? What is your design and
  effective capacities? How will you calculate
  your efficiency and utilization?

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Evaluating Alternatives
Production units have an optimal rate of output
for minimal cost.
Average cost per unit
Minimum cost
0
Rate of output
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Evaluating Alternatives

Minimum cost optimal operating rate are
functions of size of production unit.
Small plant
Average cost per unit
Medium plant
Large plant
0
Output rate
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Calculating Processing Requirements
A professor teaches 5 courses, average 40
students, 3 hours/week, 12 weeks per course, in a
year. How many professors does it take to meet
capacity requirements? (Ignore students in 3yr.
and elective courses)
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Calculating Processing Requirements

• Our SBE department is considering implementing a
  concurrent degree with the B.Ed. (i.e., get both
  degrees in 5 years). It is expected that there
  would be 35 new students if this option was
  implemented. If a professor teaches either 4
  (researching professor) or 6 (no research)
  courses, how many new professors do we need?
  Assume students take 5 courses per term and they
  would be all in the same class.
• Does the demand on resources change as they move
  into 3rd and 4th year

PR4 10/42.5 thus, 3 professors PR610/6 1
2/3, thus 2 professors
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Cost-Volume Relationships
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Cost-Volume Relationships
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Cost-Volume Relationships
Break even Quantity
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Break-Even Problem with Step Fixed Costs
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Break-Even Problem with Step Fixed Costs
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Step wise costs What are the break even point(s)

• The university has the potential to hire the
  following professors
• Prof. type Salary courses
• 1 researcher 75,000 4
• 1 non-research 60,000 6
• 1 non-research 60,000 6
• Assume that in each course there are 20 students
  for each research professor we have 20,000
  overhead, 10,000 for a non-researching
  professor there is a variable cost of 50 /
  student / course and that a student pays tuition
  of 440 which is matched (funded) by the
  provincial government.
• What are the break even point(s) in terms or of
  students?

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Solution

• QBE1(75k 20k)/(440x2-50) 114 students (no
  BE)
• QBE2(75k60k20k10k)/(440x2-50) 199 students
• QBE3(75k60k60k40k)/(440x2-50) 283 students

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Financial Analysis

• Payback Crude, widely used method for
  determining time until initial investment is
  realized. Inv6000, PB1000, T6
• Cash Flow (CF) - the difference between cash
  received from sales and other sources, and cash
  outflow for labor, material, overhead, and taxes.
  Student revenue Sept. provincial revenue end of
  year professor salary montly.
• Present Value (PV) - the sum, in current value,
  of all future cash flows of an investment
  proposal.
• Internal rate of return (IRR) equivalent
  interest rate based on future returns.