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Lecture 46 : Capacity Planning — Transcript

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0:01[Music]
0:22[Music]
0:25hello dear friends welcome back to nptl
0:28online course on Logistics and supply
0:29chain management so today we are going
0:32to discuss another very important
0:34concept which is capacity planning right
0:37so usually we when we talk about
0:39production operation management we'll
0:40talk about how we can manage the
0:42capacity within the production floor so
0:44that the you know we can utilize uh we
0:47can ensure the optimal utilization of
0:49the resources in terms of space in terms
0:52of raw material in terms of manpa in
0:54terms of machines whatever resources we
0:56are using right so how we can Ure Ure
1:00the maximum utilization of those
1:02resources so that the that capacity can
1:05be you know optimally utilized as per
1:08the demand from coming from the customer
1:11so uh under this session we'll discuss
1:14about how we can measure the capacity
1:17and uh when we talk about how
1:19efficiently and how how much we are
1:22utilizing the available space or
1:25available resources right and we'll talk
1:27about the types of capacity planning and
1:30then planning process and we'll see how
1:33we can evaluate uh different
1:35Alternatives capacity Alternatives when
1:37we talk about how we can manage
1:39short-term long-term medium-term
1:40capacity right and uh we'll end this
1:43with very small case study by using uh
1:46Break Even analysis how we can use that
1:48break even analysis to manage the
1:51capacity right so a cap capacity
1:53planning process involves determining
1:56how much production capacity is required
1:59to meet the changing demand for the
2:01products right so the point here is
2:04whatever we are delivering in the market
2:07in terms of product or Services the
2:09demand for that product or Services is
2:11not continuous right sometime it is
2:14maybe uh small fluctuations are only
2:17there and then a kind of we can say
2:19saturated Market but sometime if it is
2:22increasing then you have to increase
2:24your capacity as well your resources as
2:27well so that you can meet that
2:28increasing demand what you will do if
2:31the demand is declining right so you
2:33need to prepare for those Alternatives
2:36what can be the Alternatives and
2:38accordingly you need to evaluate those
2:40alternative so Point here is how we can
2:44balance the available resources to
2:46satisfy the customer demand so when we
2:49talk about if you talk about project
2:51right project management so if I uh we
2:54are talking about constructing a very
2:56big building right one one kind of
2:59project so so uh let's say that uh the
3:03production of that building or maybe uh
3:05you know the construction of that
3:07building will take all together three
3:09years right so it's not that at towards
3:12the end of those three years we'll try
3:15to evaluate or we'll start evaluating
3:16where we are so continuously maybe after
3:19every month we are evaluating where we
3:22are and where we were supposed to be
3:24right so uh so in that when we are
3:27evaluating that situation obviously
3:30uh three things are possible uh first is
3:33you are moving as per the plan which is
3:35you know in Practical situation will not
3:38happen right rarely happen the second
3:41outcome can be you are moving uh ahead
3:44of the planning so that means that is
3:47also not favorable condition because if
3:50you are moving ahead of the what you
3:52have planned that means you are
3:53deploying extra resources right so that
3:56is not that you if the particular work
3:59can be done by using five manp power and
4:02you are saying we we did that work same
4:04work utilizing seven manp power right so
4:08that that is not something we are saying
4:10that it is productive or efficient right
4:13so if we are moving ahead of the project
4:15that is also something dangerous for the
4:18project manager or if we are lacking
4:20behind the project so lacking behind so
4:23many reasons can be there right if you
4:25are falling short of resources can be
4:27one reason short shortage of man
4:30shortage of raw material shortage of
4:31machines so that is another uh thing
4:34right so uh this is how we we try to you
4:38know develop the capacity in terms of
4:41resources so that we can meet the
4:42customer Demand on time so same is the
4:45case when we are talk not talking about
4:48kind of project when we are talking
4:50about the production right we we are
4:52dealing with products where we are
4:54repetitively we are Manufacturing in
4:56numbers right so production capacity
4:58strategy plan planning and project
5:01planning go hand in hand because we try
5:04to evaluate uh at every step what are
5:07the requirements how the requirements
5:09from the customer are changing right
5:11because now maybe we are focused towards
5:14work how we can complete that how we are
5:16generating value and we are extracting
5:19value from the resources we are
5:21converting those values into you know
5:23some meaningful product or in uh
5:26services and then delivering uh another
5:29value to the End customer so maybe
5:32tomorrow we'll talk about resources will
5:34be main constraint right now also we we
5:37are also limited by the constants right
5:39so these constants in terms of resources
5:42so limited resources how we can
5:44optimally utilize so that is all we'll
5:47talk about the proper capacity planning
5:50so types of capacity planning if we
5:53divide uh in terms of time origon so
5:56longterm shortterm and medium-term
5:58longterm is obviously always the
6:01Strategic decision whether you are
6:03talking about hiring Workforce you are
6:05talking about setting up different
6:07facilities within your supply chain
6:09let's say uh now you are coming into
6:12Indian market Walmart is setting up
6:14their own distribution channel in Indian
6:16market so obviously they need stores
6:19storage house they need uh distribution
6:27centers they need all the
6:31Logistics operations right so all these
6:34for that they need to set up these
6:37facilities right they need to set up the
6:40hubs distribution hubs they need to set
6:41up the warehouses right and if they are
6:45producing something of their own so then
6:47production facilities should be there so
6:49this is uh obviously now at one point of
6:53time you'll not expand throughout the
6:56country right so what you will be
6:58thinking let's now EXP explore the
7:00central part of the country India right
7:03and then maybe we'll explore towards the
7:05northern region towards the Eastern
7:07Western or whatever your planning is
7:09whatever your product you are offering
7:11right so that means step by step you'll
7:14go for expansion and you have that
7:17strategy but this is long-term decision
7:19because if you are thinking setting up
7:21one facility in Kolkata as Distribution
7:24Center or Warehouse maybe that warehouse
7:27you will continue for rest of maybe next
7:3050 years or more than that and then if
7:33the demand is still increasing from the
7:35customer we will try to expand the
7:37capacity of the facility which you set
7:39up in Kolkata right so that is long-term
7:42decision shortterm how day routine
7:45decision you are dealing with if certain
7:48situation arises so this is a kind of
7:50reactive strategy how you will quickly
7:53meute that let's say you are falling
7:55short of because of absent absen ISM
7:57rate you are falling short of Manpower
8:00in one uh production line so then you
8:03have maybe two three extra people on the
8:05other production line or maybe the other
8:06production line is a little slow today
8:08because uh there is some problem with
8:10the raw material there's some problem
8:12with the machine whatever may be the
8:13reason so how you can deal with this you
8:16can ensure the other smooth supply of
8:18the other production line and so that at
8:21least one model one product you can
8:24continuously move in the market if you
8:26are struggling with the other one so how
8:28quickly you will react to that so this
8:30is how you are managing the capacity
8:32already you have resources Manpower
8:33within your production plant just you
8:35are moving Manpower from this maybe they
8:38are packaging product a earlier now they
8:40they will be packaging product V right
8:42because we need to move product B faster
8:45in the market medium-term planning so
8:48this is again scheduling forecasting
8:50utilization tracking and strategic
8:52planning let's say if we are having
8:55seasonal demand so maybe for 4 months 6
8:58months or over the year we we we can
9:00track the seasonal demand and then we
9:02know okay these this is now let's say
9:05the summer season and then after that
9:07maybe winter season will come so right
9:09now the demand for the winter product or
9:11maybe bullin are not that high so still
9:13we have time we can you know in that way
9:16utilize keep uh some uh ready inventory
9:19stock so that whenever there will be
9:21demand during the winter season we can
9:23move that in the market right so this
9:25some this is some uh uh medium-term uh
9:28uh Tech iCal kind of capacity planning
9:31you can expand the capacity build up
9:33some inventory and then later on
9:35Whenever there will be demand you can
9:36meet that so when we talk about how we
9:40can measure the facility uh capacity one
9:43concept is design capacity this is uh in
9:48ideal conditions you can say the maximum
9:50capacity if you will run 24 into 7 if
9:54the nature of the machine is that you
9:56can run without any stoppage right there
9:59is no halt is required so then whatever
10:02maximum units you can produce you can
10:04simply say this is the design capacity
10:06right the other concept is system
10:09capacity I will elaborate all these
10:11three with uh one example right so
10:15system capacity so then on the way some
10:18expected variations will be there right
10:21if we'll talk about uh machine so maybe
10:25we are changing one model to other model
10:27change over will take time so when
10:29initially we are producing maybe we'll
10:31produce some defects that also will not
10:33be part of production some maintenance
10:35downtime is there we need to uh do that
10:39routine maintenance then also you need
10:40to stop or if you are talking about
10:43Manpower some lunch break some snacks
10:45break coffee break tea break anything
10:47that is part of the that those are
10:50expected variations so your system
10:53capacity will be little lesser than your
10:55what you have designed then actual
10:57output all unexpected variations all the
11:00negatives positives will happen right
11:03sometimes maybe you will be very close
11:05to the system capacity sometimes we will
11:08be little away and reasons are obvious
11:11let's say today we got interrupted
11:13supply of raw material what you will do
11:15with the man you have Manpower but you
11:17don't have raw material so suddenly one
11:19machine broken down what you will do
11:22right so uh then uh absentismo
11:29because of some any any reason because
11:32of uh weekend is there or many reasons
11:36can be there so any these kind of
11:38unexpected variations right so then the
11:41actual output will be little lesser so
11:43if I'll say the design capacity will be
11:45highest then will be followed by the
11:48system capacity will be followed by the
11:50actual output whatever you are producing
11:53now let's take the example of this
11:56classroom now initially when I Kapur
11:59design designed this classroom might be
12:00they they thought that there will be one
12:02class right and obviously uh if I'll
12:06talk about this will be one examination
12:08Hall so they might have uh figured out
12:11that these many chairs we can easily set
12:13up here okay so uh roughly 90 students
12:17can sit here so the design capacity they
12:19thought was 90 now all throughout the
12:23years exams are not going on right so
12:26let us use this examination Hall to
12:29deliver the regular routine lectures as
12:31well now when I'm saying routine
12:33lectures we need one stage where the
12:35professors will set Stand and Deliver we
12:38need one board we need one uh projector
12:41all the equipments we need to install
12:43and then when I'm saying that these all
12:46in instruments when you are installing
12:48will take certain space so number of
12:51chairs will reduce maybe up to
12:5375 right and that stage you have
12:57prepared that will not be you cannot put
13:00chairs there right obviously and then
13:02you have to maintain some space between
13:04chairs and the stage right in between
13:07also you need to keep some space so this
13:10is now the effective capacity the actual
13:13output is any day you check the number
13:15of students may be 50 sometime 55 60
13:19maximum are turning up for the classes
13:21that means still if 60 are coming 50 V
13:24are producing less that means that much
13:27capacity those many chairs are remaining
13:32unutilized those 15 chairs are
13:34unutilized so this is happening in the
13:36rear World also when you are designing
13:38the capacity that is very high but when
13:41you'll put all the Practical constants
13:44there all the Practical setup will be
13:46there so obviously your actual output
13:49will drop
13:51further now uh we need to calculate the
13:54efficiency efficiency obviously whatever
13:57uh the effective capacity is not the
14:00design capacity right so obviously I
14:02cannot I can never put chairs on the
14:05stage so that should not be part that is
14:08part of design capacity but not part of
14:10uh uh effective capacity so efficiency
14:13we can calculate whatever we have
14:15available whatever we are producing the
14:17actual output divided by the effective
14:20capacity multip by 100 that is the
14:23percentage efficiently we are using that
14:25space right utilization is obviously the
14:29actual output and the design maximum
14:31capacity so later on you you uh designed
14:34the stage you put all those equipments
14:37required TV screen camera and all those
14:39things that is later on you added so
14:42this is how you can see utilization and
14:45efficiency will be uh you know little
14:47higher than utilization because
14:50utilization obviously will be very less
14:52compared to actual output and then you
14:54can find out effective capacity the
14:56design capacity minus allowances all
14:58this
14:59uh whatever Furniture you need to set up
15:01not only chairs are required right you
15:04need to set the desk also so that desk
15:06space Also you uh will be utilized so
15:10this is one example just you can go
15:12through the actual production was this
15:14effective capacity is this much now
15:17design capacity was we can produce 230
15:20units per hour right what if will run 7
15:24days all three shifts that means 7 into
15:273 into
15:30eight right so these many hours will be
15:33there 1 hour we are producing 230 units
15:35you multiply by 230 we should produce
15:3938,6 40 but how many we are actually
15:42producing actually we are producing this
15:44much and effective capacity is 28,000 so
15:48you can simply find out utilization is
15:5164.7% only efficiency is
15:5489.3% see utilization we can't do much
15:58wherever we are restricted by you know
16:00limited by that space we cannot utilize
16:03that but yes efficiency whatever
16:06available that capacity is we should try
16:10to reach somewhere 95% or more than that
16:13yes 100% cannot be there because change
16:16overs will be there breakdowns will be
16:18there so those all things will be part
16:20of that process
16:22right now types of capacity planning
16:25first is Workforce capacity planning so
16:28Workforce means we are talking about the
16:30man manpa see whenever we are talking
16:33about planning the resources in
16:35management we say we are using five M's
16:38as resources and those are
16:42Manpower
16:45money
16:48machine
16:51material and
16:54methods or technology right these are
16:57the resources we are
16:59always so we are limited with these
17:01resources we are limited with money we
17:04are limited with machine we are limited
17:06with raw material we are limited with
17:08the technology and obviously Manpower if
17:11obviously if 100 people are required all
17:13the time 100 will not be there some are
17:16leaving the organization permanently
17:18some are on means absentismo there some
17:22are dealing with some other problems so
17:24these situations will be there so right
17:26number of workers and hours productivity
17:29how we are calculating if we have five
17:32people for 8 hours so 40 hours we have
17:36so if one hour one person can produce
17:40this much so 40 hours how how much
17:42product we should produce right this is
17:44how we are calculating so product
17:46capacity planning right number of
17:49products or resources needed uh to
17:52fulfill the deliverables let's say you
17:54are saying that uh like the example here
17:58is pet store so that means pet store
18:01means you should get all the items
18:03related to your pet there only not only
18:06food you should get pet toys also you
18:08should get the equipment to you know
18:10maintain them you should get all the
18:13accessories required to handle your pets
18:15you should get even medicines if
18:18available right so those all resources
18:21I'm if I'm saying I'm automobile uh
18:24services provider right or maybe uh you
18:27can come and purchase the uh car as well
18:31right and I am providing all the
18:33financial support services all the after
18:36sale services so that means you should
18:38have all the accessories you should have
18:40insurance facilities within your
18:42facility you should have financing
18:44facility maybe the other party is there
18:47but you should have that facility right
18:49the bank has set up their office in your
18:52uh retail showroom but yes that should
18:55be there if you are promising that and
18:57then if you are saying after sales
18:59services are also there so whenever you
19:01are uh requiring the services for your
19:04vehicle you can go there and you can get
19:06the services and spare parts as well
19:08right accessories also we need so that
19:10means that one stop solution should be
19:12there for that particular uh industry or
19:15product you are talking about tool
19:17capacity planning so whatever Machinery
19:19Vehicles assembly line parts are
19:21required they should be there when when
19:24uh and in what sequence it is required
19:27right so this this this we'll talk about
19:29in the very next session when we'll talk
19:31about sequencing and scheduling right so
19:35these resources should be available
19:37resource capacity planning so here we
19:40try to maximize the capacity of the
19:43existing resources if you are having
19:45machine and that you can run 24 into 7
19:48so if you are running only 6 days or 5
19:51days you are not exploiting that for 24
19:54hours you are running only in one shift
19:56or two shift that means you are not
19:58fully utilizing so that reason may be
20:01you are only operating in 8 hour shift
20:04and maybe 7 days so rest of uh 16 hours
20:09you are not using that machine and the
20:11reason may be because that much demand
20:13is not
20:15there demand is one problem but yes that
20:1816 hours that machine is idle when we'll
20:21talk about the productivity of that
20:22machine obviously I will calculate
20:24productivity that you you you should
20:27produce 50,000 it items but you produced
20:30only 20,000 items right so that much
20:33capacity was there system capacity was
20:36there but you produce 30,000 less now
20:39when de the very next question comes
20:41demand is not there what we do by
20:43producing extra we can produce for other
20:46players maybe our competitors if they
20:49are also requiring the same kind of
20:51material component we can use that
20:54existing machine for 16 hours and this
20:57is how most of the organizations are
20:59doing right if you'll talk about the
21:01molding plants right where most of the
21:03plastic parts we are producing so maybe
21:06one molding plant is there which is uh
21:10you know producing the Plastic Products
21:12and then supplying to Flips within
21:14within inhouse right and then there are
21:17so many other competitors of uh Philips
21:20HS lnt
21:22ABB other other Usha other players are
21:25there so you are not able to utilize
21:28that uh machine capacity fully let us
21:32you know uh uh we can utilize the
21:35capacity and we can uh sell the those
21:38plastic components we can manufacture
21:39for other other competitors as well
21:43project capacity planning already I
21:45talked about how many resources are
21:47required how many machines are required
21:49Manpower are required initially we are
21:51estimating that this project should be
21:53completed in three years right so uh how
21:56much we have like we are uh using Gant
21:59chart we are having different activities
22:01A1 A2 A3 and xaxis we are having
22:05timeline and then we are saying that
22:07okay this a A1 activity should go up to
22:10this point A2 activity will start
22:12somewhere here will go up to this point
22:14b83 activity will start and will go up
22:16to this point now as the project
22:19progresses I will see up to fifth fifth
22:23week this much part of A1 should be
22:26covered and this much part of B1 should
22:28be covered let us check how much we have
22:30covered I will highlight whichever part
22:32I have covered and I'll see okay I'm
22:35lagging this much part right so still we
22:38are reaching we have reached here and we
22:41are lacking this much part that means we
22:43need to speed it up so what is the
22:45reason why we are lacking reason may be
22:48you are limited with the resources or
22:49you have the resources but you could not
22:51use optimally right that can be also the
22:54reason so capacity planning process uh
22:57here are few steps first is estimate
23:01capacity requirement what are your
23:03capacity requirements uh that will uh
23:06depend upon how much is going to be the
23:09demand you will forecast your demand
23:11obviously we have seen how you can
23:13forecast your demand you need to define
23:15the demand function whether demand is
23:17depending upon the population demand is
23:19depending upon their uh purchasing power
23:21their income the price of the product
23:23price of the complimentary Goods the
23:25quality of the product availability of
23:26the product so many factors are there
23:29but yes you have configured a demand
23:31function and you know this much per week
23:34per month 6 months every year I need to
23:37produce and this is moving like this the
23:40demand is moving like this so there is
23:42growth so it will go like this or it is
23:45moving like this or it is moving like it
23:48is coming down so you need to plan so uh
23:51that you need to estimate the ex uh
23:54capacity requirement once requirements
23:57are done evaluate the the existing
24:00capacity okay so this much is the
24:02capacity required and right now we have
24:05only three machines five are required so
24:07obviously we need to go for the other
24:10two machines but if we will be having
24:12five machines the fifth machine will be
24:15utilized only 30% 70% we won't be able
24:18to utilize so what we will do with that
24:2170% extra capacity right identify
24:24Alternatives then we need to find out
24:26different alternative let us not go for
24:28fifth machine fully we will have four
24:30machines only fifth we will that much
24:32part we can Outsource or purchase from
24:35some other vendor right so once we will
24:38be sure that this fifth machine capacity
24:41will also will utilize fully then we can
24:44purchase the fifth machine as well right
24:47then so many different alternative we'll
24:49talk about how we can find out those
24:51Alternatives conducting financial
24:53analysis also this this is what I was
24:55talking about if you bought a machine
24:57and the initial cost of that machine is
24:59very high right and you are utilizing
25:02only 30% part of that machine obviously
25:05there is no point of purchasing that
25:06machine right so you can see who are
25:09other players who are manufacturing
25:11those components and you can for the
25:13time being for six months or one year or
25:15so you can Define that okay we can uh
25:19purchase those components from that
25:21particular uh vendor assessment of
25:24qualitative issues of alternative this
25:26is also very very important let's say
25:28right now you are experiencing little
25:30high demand in your product so what
25:32you'll do you may Outsource or you may
25:36uh yes you may Outsource to some third
25:38party but your organization the
25:41employees attached with your
25:43organization may feel insecure because
25:46you are Outsourcing your function to
25:48some other organization whether you are
25:50planning to Outsource completely that
25:52may be the messages right organization
25:55culture if your organization culture is
25:57maybe you you you maintain the work
25:59hygiene you you maintain all the quality
26:02standards and then you are producing
26:04whatever you are producing right but the
26:07other company culture is they focus only
26:10on production so if that is the scenario
26:13then the cultural difference will be
26:14there and then how the supply chain
26:16stakeholders will take so if you are you
26:20know purchasing raw material for
26:21producing that product now earlier you
26:24were producing 50,000 items now the
26:26demand is for 75,000 you will still
26:29produce 50,000 item and 25,000 item you
26:32will Outsource now your vendors must be
26:35looking that for this 25,000 order they
26:38should Supply the raw material but
26:40because you Outsource to third party now
26:44you don't have control from where they
26:46are buying otherwise you should mention
26:48in your contract that from where we are
26:51getting the raw material you should also
26:52get the raw material from there only but
26:54yes that that again depends upon how you
26:57are negotiating with that finding best
26:59long-term alternative how we can balance
27:03the capacity with the requirements first
27:05alternative you increase the capacity
27:08how you how you can increase the
27:10capacity
27:11obviously you can have new equipments
27:15more machines more resources this is how
27:18you can increase the capacity right
27:20second is optimize existing capacity so
27:24existing fully you are not utilizing so
27:26how you can utilize F so maybe if we are
27:30saying that there is stage and during
27:32lectures we we require that stage where
27:35Professor can Stand and Deliver but
27:37during examination time that stage is
27:40not required but that is fixed stage so
27:43can we have that movable or temporary
27:45stage where the cost is not high
27:48whenever stage is required we'll uh take
27:50it on and then when it is not required
27:53we can remove that stage so that that
27:55extra 15 chairs we can set up right so
27:59uh Outsource production which I talked
28:01about if we are not sure that we will
28:04utilize like fully that capacity we can
28:06Outsource use flexible Workforce so this
28:10is also the concept that temporary you
28:13can Outsource or parttime worker but if
28:15you are a very good brand you IM your
28:18image is you are ethically very strong
28:21so hiring people for part-time is can be
28:25you know something go against your brand
28:27image age you cannot just hire people
28:30when required and fire when those are
28:32not required so that is again against if
28:35your culture is not supporting right but
28:38yes then many organization take this
28:40decision in different way Implement
28:42demand management strategies so you know
28:44that anyhow you cannot increase right
28:47now the capacity so let's increase the
28:50price so rationing you can do that
28:52earlier I was buying maybe uh two
28:54products I'll buy only one product
28:56because now the price is very high I'll
28:58wait for some time and then price will
29:00come down again I'll go for the purchase
29:03right so that also you can do develop
29:05contingency plan some inventory you can
29:07build up you can uh have some backup
29:10supplier so that uh those situation you
29:12can me and sometime you can come up with
29:15the new technology and fully automated
29:18when you are doing that obviously the uh
29:21output will increase the productivity
29:23will also increase implementing the best
29:26selected alternative these all altern
29:28are there whatever suiting the best to
29:30your organization culture to your manpa
29:32and your stakeholders are happy with
29:34your decision you will check the phib
29:36will all with all those stakeholders and
29:39then you will Implement you will do the
29:41cost benefit analysis as well right so
29:44then monitoring results then you will
29:46keep on monitoring the results and then
29:48somewhere you will realize okay now let
29:50us go for our own facility and then uh
29:54uh we'll not Outsource right that also
29:56can happen so this this is what I was
29:58talking about maybe your growth pattern
30:01is like this or it is declining so let
30:03us when it is declining we know that it
30:05will decline further let us introduce
30:07one new product so that we can utilize
30:10that capacity if it is cyclic demand for
30:13here we are having the maximum resources
30:15so during that downtime what we can do
30:18like during summer times two more than
30:21two months break is there in any uh
30:24educational institution so those big
30:27buildings all the lecture Halls all are
30:30vacant no one is utilizing that all the
30:33facilities it's not that that facility
30:35we are not U the equipment we are not
30:37utilizing the AC the machines the
30:39projectors and if we'll turn on after 2
30:413 months some some equipments may break
30:44down because we never operated for that
30:46long period so that can happen with
30:48Industries as well so how we can utilize
30:51during that time can we have some extra
30:54programs like mdps fdps training program
30:57within the campus and then people are
31:00coming temporarily staying here for 10
31:02days 20 days or 15 days or maybe maybe
31:04one month or two months so that that
31:06capacity also we can utilize and we are
31:08generating the revenue no fixed
31:10investment is required right only the
31:13logistics requirements are there so that
31:15we can meet and we can uh meet from the
31:18registration fee or whatever right and
31:20if it is stable that is the perfect
31:23position anyone imagine for that right
31:26so now evaluating these cap capacity
31:28alternative is very important and the
31:30basic tool which uh we can use is Break
31:33Even analysis how you can plan the
31:35capacity and some other public opinion
31:38your stakeholders how they are reacting
31:40to that we can go for that so this is
31:42Break Even analysis how we can use that
31:45break even analysis and break even
31:46analysis you know that there is one
31:49fixed cost to set up that plant there is
31:52uh one variable cost and if I'll add the
31:54fixed cost and variable cost that will
31:56be your total cost fixed cost plus
31:59variable cost and there will be some uh
32:01Revenue total revenue like this it will
32:03be right so now Break Even point is this
32:08point where our total revenue is
32:10exceeding the total cost that means this
32:14let's say this quantity is Break Even
32:16quantity right so uh here you you can
32:19write sales you can write profit
32:22whatever you are measuring market share
32:24that you you are measuring right so when
32:26you're this Revenue will take over your
32:30total cost that means that qu quantity
32:34this point this is the break even
32:35quantity so if you are producing less
32:38than this break even quantity that means
32:40if you are lying in this Zone it is
32:42better you should Outsource right you
32:45should manage your capacity by
32:47Outsourcing that product but if you are
32:50producing more than this break quantity
32:52you should produce inhouse because after
32:55that you will start generating the
32:57revenue this is is the profit
32:59region and this is the loss
33:02region right so this is the main concept
33:05of uh your uh uh Break Even analysis you
33:08can see total cost already I talked
33:10about the fixed cost plus variable cost
33:13and variable cost will be how much units
33:15you are producing and variable cost per
33:17unit total revenue will be how how many
33:20units we are producing and revenue per
33:23unit and this is the volume of output we
33:25are producing and we want that this
33:27output Q should be always greater than
33:31your break even uh quantity which is QV
33:35and then we'll get the profit right so
33:37this is how you can calculate the
33:38breaken point because at that point we
33:41are maintaining the equilibrium here
33:44your total cost is equal to total
33:47revenue so total revenue is this total
33:49cost is this you can equate this from
33:51this equation your quantity will be
33:54equal to break even quantity this is the
33:56break even quantity so uh this is the
33:59relation how you can find out breaken
34:01quantity fixed cost divided by R minus v
34:04r Revenue per unit V variable cost per
34:07unit so this is one example you can just
34:09find uh quickly go through if I need to
34:12find out this is one uh uh Pizza
34:15manufacturing unit so they just want to
34:18find out how many Pizza they should uh
34:20cook so that they will be on the profit
34:22side so this is the fixed cost this is
34:25revenue and variable cost per unit it is
34:27is defined here the data is given you
34:30can find out the breaken quantity is 800
34:32pza so minimum 800 they need to produce
34:36if they are expecting order less than
34:39that which is the case right now 700 so
34:41that means this is not profitable
34:43investment you should Outsource this
34:47right you should Outsource to some other
34:49restaurant who is already cooking the
34:51pizza and then you can channelize those
34:53700 orders from there right so other
34:56parameters also you can can calculate
34:58from here another decision uh make or
35:01buy this break analysis beautifully we
35:04can use like I told you that this is
35:07your fixed cost this is total cost which
35:10is your fixed cost plus variable cost
35:13and this is your total revenue
35:18right now this is the break even
35:22quantity so whether you should make or
35:25buy obviously if your quantity order
35:28whatever you are producing is less than
35:31this quantity means if this is loss
35:33reason this is profit reason if you are
35:36lying here you should
35:39Outsource and if you are ahead of this
35:42point you should produce in-house this
35:45is how simply you can make the decision
35:48no no controversy on that if you are
35:51producing now the point comes if you are
35:54producing less than that break even
35:56quantity to whom you will will Outsource
35:58because that person will also be below
36:01your break even quantity no because that
36:03person may be getting orders from other
36:07competitors as well for him he can
36:10achieve that breaken point uh quantity
36:12but because you are only producing for
36:15yourself so that order quantity is
36:18little lesser than the break point now
36:20this breakan quantity depends upon the
36:23uh you know the plant size also sometime
36:26what happens maybe you will get Break
36:28Even point so early sometime maybe you
36:31will get the break even Point little
36:33late the reason is because this is big
36:37size plant this is small size plant so
36:41if you your plant capacity is very high
36:44obviously break quantity will be very
36:46high if your plant capacity is low but
36:49your break quantity will be low now you
36:51have to make trade off between two why
36:53because if you'll set initially very low
36:56quantity low capacity of your plant what
36:59you will do if your capacity you have to
37:01make capacity double overnight the
37:03response is coming so so positive from
37:06the market what you will do with that
37:09right but the other point is if the
37:11customer will not react in the way you
37:13are thinking what you will do with the
37:16existing that big size plant so you have
37:18to make the tradeoff in between right so
37:21this is another you can see make if you
37:23are doing make in house so fixed cost
37:26for setting of that plant is this much
37:29variable cost per unit is this much and
37:31if you'll buy so you you have to spend
37:34$150 per unit now we have these many
37:37units to produce and you can see uh how
37:41we can find out the break even point you
37:43have fixed cost variable cost to buy and
37:46to make and this is the total your uh
37:50break quantity that is
37:523200 now if you'll make this inhouse
37:56this is the cost
37:58because this fixed assessment is
37:59required per unit you need to have $100
38:03uh per unit and 1,000 is the requirement
38:07now uh the one way is you can check
38:10easily uh because uh this is 2 260,000
38:14if you'll buy the uh cost will be
38:17150,000 so obviously you will go for
38:20buying that right and also you can check
38:24this quantity is 3200 and because you
38:26are producing only 1,000 that also you
38:30can compare with the your break even
38:33quantity it is less than that you should
38:36buy that because if you'll start
38:38producing so then you will be on the
38:40loss side so uh here I want to just
38:44elaborate a little bit on this uh Break
38:47Even Point how you can utilize this to
38:50manage the existing capacity of the
38:53plant let's say this is the quantity and
38:56the same break point I'm talking about
38:58I'm having plant a this is plant a so
39:02let's say this is the revenue and this
39:05is the total cost of the plant so this
39:07is
39:08obviously the break even point for uh
39:12the quantity for plant a now if I'll
39:16extend this obviously this much maximum
39:19I can produce because I'm running my
39:22plant only for 12
39:24hours right this is maximum I can
39:26produce but I'm feeling that still the
39:29demand is increasing so what I can do I
39:32can increase my
39:34capacity I can increase my capacity by
39:37doubling the shift so instead of
39:39operating for 12 hours now I'll operate
39:42in three shift all 24 hours I will
39:45operate my plant so if you are operating
39:48in extra shift obviously little higher
39:50cost will be there but yes profit will
39:52be still there because you are having
39:54that Revenue but this is the maximum if
39:57I I'm producing using this and uh this
40:00is 24 hours maximum capacity right now
40:05what still if still your demand is
40:07increasing so what you will do you will
40:09do some at this point you will invest
40:12into some fixed assets you will hire
40:15more machines more
40:17manpower you will maybe expand the
40:20capacity how you can expand the capacity
40:22maybe the the classroom I was talking
40:25about let us break this one wall and
40:27we'll include the next uh room also and
40:30in that way earlier we were having only
40:3290 capacity now we will be having one30
40:35capacity that also we can do so that
40:38fixed assessment asset uh requirement is
40:41there if you're going for more machines
40:43obviously fixed this may sometimes cover
40:46uh this your Revenue because this is
40:48total revenue line this is total cost
40:51line so that depends upon the nature of
40:53the industry whether your this this
40:56expanding this capacity will overcome
40:59the total revenue or will be still lower
41:01than that okay if it is lower than that
41:04at this point will start producing okay
41:07then uh your total revenue will also
41:09increase let's say after expending
41:12everything this is maximum we can
41:14produce for plant a right now there is
41:17no option we have explored the double
41:20shift all 24 hours 24 into 7 we are
41:23working we have expended the maximum
41:26available space whatever was available
41:28machines Manpower whatever we have done
41:30that now still the demand increasing so
41:33obviously now I need to set up one more
41:36uh production uh unit plant B and uh
41:40then I can uh again maybe this time the
41:44total cost will increase uh overcome the
41:47total
41:48revenue right because now plant a plus
41:51plant B is there so again plant a and
41:54plant B capacity will increase again you
41:57you can go for double shifting and all
41:59that will be there so this is how you
42:01can in utilize this break even analysis
42:04for maintaining your existing capacity
42:08right so uh these are the references you
42:11can go for further reading so that's all
42:13uh for this session on capacity planning
42:16thank you very much

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