Capacity• “The upper limit on the load that an

operating unit can handle”

Importance of Long-Term Capacity• Impacts ability to meet future demands• Affects operating costs• Major determinant of initial costs• Affects competitiveness

Measuring Capacity• Design Capacity – “Maximum obtainable

output under ideal conditions”• Effective Capacity – “Maximum capacity

given delays, product mix, scheduling difficulties and other realities”

• Actual Output (AO) – “Rate of output actually that is actually achieved”- AO is always ≤ Effective Capacity

Efficiency and Utilization• Efficiency = –• Utilization =

Factors Influencing Capacity• 1) Facilities

- Floor space, layout• 2) Products or Services

- A limited menu in a restaurant• 3) Human

- Training, skills and experience• 4) Planning and Operational

- Quality control, inventory, shifts per day• 5) External

- Pollution standards, paper work

Capacity Planning Process• 1) Forecast demand 1-5 years ahead• 2) Determine capacity requirements• 3) Measure current capacity and decide

how to bridge the gap• * 3A) Generate feasible alternatives• * 3B) Evaluate alternatives considering

economic and non-economic aspect• * 3C) Choose the best alternative and

implement it

*3B) Considerations• Economic Considerations

- Cost, useful life, compatibility, revenue• Non-Economic Considerations

- Public opinion, employee P

*3B) Evaluation Techniques:• 1) Break-Even Analysis• 2) Payback Period• 3) Net Present Value

1) Break-Even Analysis (legend)• v = Variable Cost per Unit• r = Revenue per Unit• Q = Volume of Output• QBEP = Break Even Volume

1) Break-Even Analysis• TC = FC + VC• VC = Q * v• TR = Q * r• P = TR – TC• P = (Q * r) – (FC + Q * v)• QBEP = FC / (r – v)

2) Payback Period3) Net Present Value

Further Financial Analysis• Cash Flow = Cash Inflow – Cash Outflow• Present Value = Sum of the current values

of all future cash flows

CHAPTER 5 (Strategic Capacity Planning)

Optimal Operating Level• Is a function of size of production unit• (Different for small, medium, large plant)

Make or Buy Question• The quantity that one would be indifferent

between making or buying…• Q = or• FC + VC (Making) = FC + VC (Buying)

- “Making” is preferred when x >

Economies of Scale• Economies of Scale – Advantages related

to larger-scale production• * Examples include:

- Fixed costs spread over more units- Volume purchase discounts

Economies of Scale• Economies of Scale – Advantages related

to larger-scale production• * Examples include:

- Fixed costs spread over more units- Volume purchase discounts

Diseconomies of Scale• Diseconomies of Scale – Disadvantages

related to larger-scale production• * Examples include:

- Worker fatigue, equipment breakdown

• Step costs : costs that increase stepwise as potential volume increases.

• Plan : Form quality improvement teams, Define problem, Develop performance measures, Analyze problem, Determine possible causes

• Do : Implement solution• Study : Evaluate solution, Ensure

permanence• Act : Standardize solution, Recognize

problem

• Statistical quality control : Use of statistical techniques and sampling In monitoring and testing of quality of goods/services. Inspection : Appraisal of a good/service against a standard

+ Chapter 10

• Control Limits : The dividing lines for the value of sample statistics between concluding no process shift and a process shift, hence random and assignable variations

• Control Chart : A time-ordered plot of a sample statistic with limits

• Designing Control Chart :1 – Determine a sample size ‘n’2 – Collect 20-25 samples of the prescribed sample size3 – Establish preliminary control limits4 – Plot (or assess) sample statistics to see if any fall outside of the control limits5 – If there are no values outside of the control limits then you can make a statement as to random variation and no shift in process. If there are values outside of the control limits then you need to seek out the assignable cause, correct it, gather another set of data and re-evaluate

• Sample Range Control Chart : • UCLr = D4*R • LCLr = D3*R

(Sample Mean Control Chart

(Sample Mean Control Limits)

The control chart for sample range, used to monitor process dispersion or spread

• Individual Unit : Control Chart for individual unit, used to monitor single observations (n=1)

• UCLx = X + zσ• LCLx = X - zσ

Moving Range Control Limits : Control chart for moving range, i.e., the difference between consecutive observations, used to monitor the dispersion or spread when n=1. We can use the formula for the Sample Range Control Limit.

(C-Chart)

• Design Specification : A range of acceptable values established by engineering design or customer requirements.

• Cpk is equal to the smaller of : Upper design specification – Process Mean / 3σAndProcess Mean – Lower Design Specification / 3σ

• The Six Sigma Improvement Methodology DMAIC involves :

Define : Determine the customers and critical-to-quality proceduresMeasure : Identify and measure the quality problem, determine the baseline Sigma, and identify possible influencing factorsAnalyze : Test the influencing factors and identify the vital fewImprove : Select the solution method, prove its effectiveness, and implement itControl : Develop a process control plan

• Design Of Experiment : Performing experiments by changing levels of factors to measure their influence on output and identifying best levels for each factor.

+ Chapter 10 Supp

Average Outgoing Quality (AOQ) :• AOQ = Pac*P(N-n/N)

• Average Outgoing Quality Limit (AOQL) • AOQL = O.4*(1.25c + 1) / n

• Determine Acceptance Sampling Plan :• Step 1 : Determine what’s given and

what’s not - what you need to determine is the sampling plan (c and n)

• Step 2 : Determine c - First divide LTPD by AQL, then find the value for c by selecting the value in the table given from “LTPD/AQL” column that is equal or just greater than the ratio found.

• Step 3 : Determine sample size - compute the sample size in units to generate your sampling plan : c from table, n from table and AQL given in problem.