© 2006 prentice hall, inc.s7 – 1 operations management supplement 7 – capacity planning © 2006...

© 2006 Prentice Hall, Inc. S7 – 1

Operations ManagementOperations ManagementSupplement 7 – Capacity PlanningSupplement 7 – Capacity Planning

© 2006 Prentice Hall, Inc.

PowerPoint presentation to accompanyPowerPoint presentation to accompany Heizer/Render Heizer/Render Principles of Operations Management, 6ePrinciples of Operations Management, 6eOperations Management, 8e Operations Management, 8e


CapacityCapacity

The throughput, or the number of The throughput, or the number of units a facility can hold, receive, units a facility can hold, receive, store, or produce in a period of timestore, or produce in a period of time

Determines fixed costsDetermines fixed costs

Determines if demand will be Determines if demand will be satisfiedsatisfied

Three time horizonsThree time horizons


Modify capacityModify capacity Use capacityUse capacity

Planning Over a Time Planning Over a Time HorizonHorizon

Intermediate-Intermediate-range range planningplanning

Subcontract Add personnelAdd equipment Build or use inventory Add shifts

Short-range Short-range planningplanning

Schedule jobsSchedule personnel Allocate machinery*

Long-range Long-range planningplanning

Add facilitiesAdd long lead time equipment *

** Limited options existLimited options exist

Figure S7.1Figure S7.1


Design and Effective Design and Effective CapacityCapacity

Design capacity is the maximum Design capacity is the maximum theoretical output of a systemtheoretical output of a system Normally expressed as a rateNormally expressed as a rate

Effective capacity is the capacity a Effective capacity is the capacity a firm expects to achieve given current firm expects to achieve given current operating constraintsoperating constraints Often lower than design capacityOften lower than design capacity


Utilization and EfficiencyUtilization and Efficiency

Utilization is the percent of design capacity Utilization is the percent of design capacity achievedachieved

Efficiency is the percent of effective capacity Efficiency is the percent of effective capacity achievedachieved

Utilization = Actual Output/Design CapacityUtilization = Actual Output/Design Capacity

Efficiency = Actual Output/Effective CapacityEfficiency = Actual Output/Effective Capacity


Bakery ExampleBakery Example

Actual production last week = Actual production last week = 148,000148,000 rolls rollsEffective capacity = Effective capacity = 175,000175,000 rolls rollsDesign capacity = Design capacity = 1,2001,200 rolls per hour rolls per hourBakery operates Bakery operates 77 days/week, days/week, 3 –3 – ‘ ‘88 hour shifts’ hour shifts’

Design capacity Design capacity = (7 x 3 x 8) x (1,200) = 201,600= (7 x 3 x 8) x (1,200) = 201,600 rolls rolls





Utilization Utilization = 148,000/201,600 = 73.4%= 148,000/201,600 = 73.4%






Efficiency Efficiency = 148,000/175,000 = 84.6%= 148,000/175,000 = 84.6%



Actual production last week = Actual production last week = 148,000148,000 rolls rollsEffective capacity = Effective capacity = 175,000175,000 rolls rollsDesign capacity = Design capacity = 1,2001,200 rolls per hour rolls per hourBakery operates Bakery operates 77 days/week, days/week, 3 –3 – ‘ ‘88 hour shifts’ hour shifts’Efficiency Efficiency = 84.6%= 84.6%Efficiency of new line Efficiency of new line = 75%= 75%

Expected Output = Expected Output = ((Effective CapacityEffective Capacity)()(EfficiencyEfficiency))

= (175,000)(.75) = 131,250= (175,000)(.75) = 131,250 rolls rolls



Actual production last week = Actual production last week = 148,000148,000 rolls rollsEffective capacity = Effective capacity = 175,000175,000 rolls rollsDesign capacity = Design capacity = 1,2001,200 rolls per hour rolls per hourBakery operates Bakery operates 77 days/week, days/week, three-three- ‘ ‘88 hour shifts’ hour shifts’Efficiency Efficiency = 84.6%= 84.6%Efficiency of new line Efficiency of new line = 75%= 75%

Expected Output = Expected Output = ((Effective CapacityEffective Capacity)()(EfficiencyEfficiency))

= (175,000)(.75) = 131,250= (175,000)(.75) = 131,250 rolls rolls


Managing DemandManaging Demand

Demand exceeds capacityDemand exceeds capacity Curtail demand by raising prices, Curtail demand by raising prices,

scheduling longer lead timescheduling longer lead time

Long term solution is to increase capacityLong term solution is to increase capacity

Capacity exceeds demandCapacity exceeds demand Stimulate marketStimulate market

Product changesProduct changes

Adjusting to seasonal demandsAdjusting to seasonal demands Produce products with complimentary Produce products with complimentary

demand patternsdemand patterns


Economies and Economies and Diseconomies of ScaleDiseconomies of Scale

Economies Economies of scaleof scale

Diseconomies Diseconomies of scaleof scale

25 - Room 25 - Room Roadside MotelRoadside Motel 50 - Room 50 - Room

Roadside MotelRoadside Motel

75 - Room 75 - Room Roadside MotelRoadside Motel

Number of RoomsNumber of Rooms2525 5050 7575

Av

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(do

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Capacity ConsiderationsCapacity Considerations

Forecast demand accuratelyForecast demand accurately

Understanding the technology Understanding the technology and capacity incrementsand capacity increments

Find the optimal operating level Find the optimal operating level (volume)(volume)

Build for changeBuild for change


Approaches to Capacity Approaches to Capacity ExpansionExpansion

(a)(a) Leading demand with Leading demand with incremental expansionincremental expansion

Dem

and

Dem

and

Expected Expected demanddemand

New New capacitycapacity

(b)(b) Leading demand with Leading demand with one-step expansionone-step expansion

Dem

and

Dem

and



(d)(d) Attempts to have an average Attempts to have an average capacity with incremental capacity with incremental expansionexpansion

Dem

and

Dem

and New New

capacitycapacity Expected Expected demanddemand

(c)(c) Capacity lags demand with Capacity lags demand with incremental expansionincremental expansion

Dem

and

Dem

and





Break-Even AnalysisBreak-Even Analysis

Technique for evaluating process Technique for evaluating process and equipment alternativesand equipment alternatives

Objective is to find the point in Objective is to find the point in dollars and units at which cost dollars and units at which cost equals revenueequals revenue

Requires estimation of fixed costs, Requires estimation of fixed costs, variable costs, and revenuevariable costs, and revenue



Fixed costs are costs that continue Fixed costs are costs that continue even if no units are producedeven if no units are produced Depreciation, taxes, debt, mortgage Depreciation, taxes, debt, mortgage

paymentspayments

Variable costs are costs that vary Variable costs are costs that vary with the volume of units producedwith the volume of units produced Labor, materials, portion of utilitiesLabor, materials, portion of utilities

Contribution is the difference between Contribution is the difference between selling price and variable costselling price and variable cost



Costs and revenue are linear Costs and revenue are linear functionsfunctions Generally not the case in the real Generally not the case in the real

worldworld

We actually know these costsWe actually know these costs Very difficult to accomplishVery difficult to accomplish

There is no time value of moneyThere is no time value of money

AssumptionsAssumptions


Profit corri

dor

Loss

corridor

Break-Even AnalysisBreak-Even AnalysisTotal revenue lineTotal revenue line

Total cost lineTotal cost line

Variable costVariable cost

Fixed costFixed cost

Break-even pointBreak-even pointTotal cost = Total revenueTotal cost = Total revenue

–

900 900 –

800 800 –

700 700 –

600 600 –

500 500 –

400 400 –

300 300 –

200 200 –

100 100 –

–| | | | | | | | | | | |

00 100100 200200 300300 400400 500500 600600 700700 800800 900900 1000100011001100

Co

st in

do

llars

Co

st in

do

llars

Volume (units per period)Volume (units per period)Figure S7.5Figure S7.5



BEPBEPxx == Break-even Break-even point in unitspoint in unitsBEPBEP$$ == Break-even Break-even point in dollarspoint in dollarsPP == Price per Price per unit (after all unit (after all discounts)discounts)

xx == Number of units Number of units producedproducedTRTR== Total revenue = PxTotal revenue = PxFF == Fixed costsFixed costsVV == Variable costsVariable costsTCTC== Total costs = F + VxTotal costs = F + Vx

TR = TCTR = TCoror

Px = F + VxPx = F + Vx

Break-even point Break-even point occurs whenoccurs when

BEPBEPxx = =FF

P - VP - V



BEPBEPxx == Break-even Break-even point in unitspoint in unitsBEPBEP$$ == Break-even Break-even point in dollarspoint in dollarsPP == Price per Price per unit (after all unit (after all discounts)discounts)

xx == Number of units Number of units producedproducedTRTR== Total revenue = PxTotal revenue = PxFF == Fixed costsFixed costsVV == Variable costsVariable costsTCTC== Total costs = F + VxTotal costs = F + Vx

BEPBEP$$ = BEP= BEPx x PP

= P= P

==

= =

FF((P - VP - V))/P/P

FFP - VP - V

FF1 -1 - V/P V/P

ProfitProfit = TR - TC= TR - TC

= Px - = Px - ((F + VxF + Vx))

= Px - F - Vx= Px - F - Vx

= = ((P - VP - V))x - Fx - F


Break-Even ExampleBreak-Even Example

Fixed costs Fixed costs = $10,000= $10,000 Material Material = $.75= $.75/unit/unitDirect labor Direct labor = $1.50= $1.50/unit/unit Selling price Selling price = $4.00= $4.00 per unit per unit

BEPBEP$$ = == =FF

1 - (1 - (V/PV/P))$10,000$10,000

1 - [(1.50 + .75)/(4.00)]1 - [(1.50 + .75)/(4.00)]



Fixed costs Fixed costs = $10,000= $10,000 Material Material = $.75= $.75/unit/unitDirect labor Direct labor = $1.50= $1.50/unit/unit Selling price Selling price = $4.00= $4.00 per unit per unit

BEPBEP$$ = == =FF

1 - (1 - (V/PV/P))$10,000$10,000

1 - [(1.50 + .75)/(4.00)]1 - [(1.50 + .75)/(4.00)]

= = $22,857.14= = $22,857.14$10,000$10,000

.4375.4375

BEPBEPxx = = = 5,714= = = 5,714FF

P - VP - V$10,000$10,000

4.00 - (1.50 + .75)4.00 - (1.50 + .75)



BEPBEP$$ ==FF

∑∑ 1 - x (1 - x (WWii))VVii

PPii

Multiproduct CaseMultiproduct Case

wherewhere VV = variable cost per unit= variable cost per unitPP = price per unit= price per unitFF = fixed costs= fixed costs

WW = percent each product is of total dollar sales= percent each product is of total dollar salesii = each product= each product


Multiproduct Case DerivationMultiproduct Case Derivation


Multiproduct ExampleMultiproduct Example

Annual ForecastedAnnual ForecastedItemItem PricePrice CostCost Sales UnitsSales Units

SandwichSandwich $2.95$2.95 $1.25$1.25 7,0007,000Soft drinkSoft drink .80.80 .30.30 7,0007,000Baked potatoBaked potato 1.551.55 .47.47 5,0005,000TeaTea .75.75 .25.25 5,0005,000Salad barSalad bar 2.852.85 1.001.00 3,0003,000

Fixed costs Fixed costs = $3,500= $3,500 per month per month





Sandwich $2.95 $1.25 .42 .58 $20,650 .446 .259Soft drink .80 .30 .38 .62 5,600 .121 .075Baked 1.55 .47 .30 .70 7,750 .167 .117 potatoTea .75 .25 .33 .67 3,750 .081 .054Salad bar 2.85 1.00 .35 .65 8,550 .185 .120

$46,300 1.000 .625

Annual WeightedSelling Variable Forecasted % of Contribution

Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)







Sandwich $2.95 $1.25 .42 .58 $20,650 .446 .259Soft drink .80 .30 .38 .62 5,600 .121 .075Baked 1.55 .47 .30 .70 7,750 .167 .117 potatoTea .75 .25 .33 .67 3,750 .081 .054Salad bar 2.85 1.00 .35 .65 8,550 .185 .120

$46,300 1.000 .625

Annual WeightedSelling Variable Forecasted % of Contribution

Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)

BEP$ =F

∑ 1 - x (Wi)Vi

Pi

= = $67,200$3,500 x 12

.625

Daily sales = = $215.38

$67,200312 days

.446 x $215.38$2.95 = 32.6 33

sandwichesper day


Decision Trees and Decision Trees and Capacity DecisionCapacity Decision

-$14,000

$13,000

$18,000

-$90,000-$90,000Market unfavorable (.6)Market unfavorable (.6)

Market favorable (.4)Market favorable (.4)$100,000$100,000

Large plant

Large plant

Market favorable (.4)Market favorable (.4)

Market unfavorable (.6)Market unfavorable (.6)

$60,000$60,000

-$10,000-$10,000

Medium plantMedium plant

Market favorable (.4)Market favorable (.4)

Market unfavorable (.6)Market unfavorable (.6)

$40,000$40,000

-$5,000-$5,000

Small plant

Small plant

$0$0

Do nothing

Do nothing


Strategy-Driven InvestmentStrategy-Driven Investment

Operations may be responsible Operations may be responsible for return-on-investment (ROI)for return-on-investment (ROI)

Analyzing capacity alternatives Analyzing capacity alternatives should include capital should include capital investment, variable cost, cash investment, variable cost, cash flows, and net present valueflows, and net present value


Net Present Value (NPV)Net Present Value (NPV)

wherewhere FF = future value= future valuePP = present value= present valueii = interest rate= interest rate

NN = number of years= number of years

P =P =FF

(1 +(1 + i i))NN


NPV Using FactorsNPV Using Factors

P = = FXP = = FXFF

(1 +(1 + i i))NN

wherewhere XX == a factor a factor from Table S7.1 defined as from Table S7.1 defined as = 1/(1 += 1/(1 + i i))NN and F = future and F = future valuevalue

YearYear 5%5% 6%6% 7%7% …… 10%10%

11 .952.952 .943.943 .935.935 .909.90922 .907.907 .890.890 .873.873 .826.82633 .864.864 .840.840 .816.816 .751.75144 .823.823 .792.792 .763.763 .683.68355 .784.784 .747.747 .713.713 .621.621

Portion of Portion of Table S7.1Table S7.1


Present Value of an AnnuityPresent Value of an Annuity

An annuity is an investment which An annuity is an investment which generates uniform equal paymentsgenerates uniform equal payments

S = RXS = RX

wherewhere XX == factor from Table factor from Table S7.2S7.2

SS == present value of a present value of a series of uniform annual series of uniform annual receiptsreceipts

RR == receipts that are receipts that are received every year of the life of received every year of the life of the investmentthe investment



Portion of Table S7.2Portion of Table S7.2

YearYear 5%5% 6%6% 7%7% …… 10%10%

11 .952.952 .943.943 .935.935 .909.90922 1.8591.859 1.8331.833 1.8081.808 1.7361.73633 2.7232.723 2.6762.676 2.6242.624 2.4872.48744 4.3294.329 3.4653.465 3.3873.387 3.1703.17055 5.0765.076 4.2124.212 4.1004.100 3.7913.791


Process, Volume, and VarietyProcess, Volume, and Variety

Process Focusprojects, job shops

(machine, print, carpentry)

Standard Register

Repetitive(autos, motorcycles)

Harley Davidson

Product Focus(commercial

baked goods, steel, glass)Nucor Steel

High VarietyHigh Varietyone or few one or few units per run, units per run, high varietyhigh variety(allows (allows customization)customization)

Changes in Changes in ModulesModulesmodest runs, modest runs, standardized standardized modulesmodules

Changes in Changes in Attributes Attributes (such as grade, (such as grade, quality, size, quality, size, thickness, etc.) thickness, etc.) long runs onlylong runs only

Mass Customization(difficult to achieve, but huge rewards)Dell Computer Co.

Poor Strategy Poor Strategy (Both fixed and (Both fixed and variable costs variable costs

are high)are high)

Low Low VolumeVolume

Repetitive Repetitive ProcessProcess

High High VolumeVolume

VolumeVolumeFigure 7.1Figure 7.1

© 2006 prentice hall, inc.s7 – 1 operations management supplement 7 – capacity planning © 2006...

Documents

capacity capacity

rolls design capacity

rolls effective capacity

capacity demand

demand capacity

design capacity slide

capacity use capacity

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