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© 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
© 2006 Prentice Hall, Inc. S7 – 2
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
© 2006 Prentice Hall, Inc. S7 – 3
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
© 2006 Prentice Hall, Inc. S7 – 4
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
© 2006 Prentice Hall, Inc. S7 – 5
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%
© 2006 Prentice Hall, Inc. S7 – 6
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, 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
© 2006 Prentice Hall, Inc. S7 – 7
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
© 2006 Prentice Hall, Inc. S7 – 8
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
era
ge
un
it c
os
tA
ve
rag
e u
nit
co
st
(do
llars
pe
r ro
om
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nig
ht)
(do
llars
pe
r ro
om
per
nig
ht)
Figure S7.2Figure S7.2
© 2006 Prentice Hall, Inc. S7 – 9
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
© 2006 Prentice Hall, Inc. S7 – 10
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
New New capacitycapacity
Expected Expected demanddemand
(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
New New capacitycapacity
Expected Expected demanddemand
Figure S7.4Figure S7.4
© 2006 Prentice Hall, Inc. S7 – 11
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
© 2006 Prentice Hall, Inc. S7 – 12
Break-Even AnalysisBreak-Even Analysis
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
© 2006 Prentice Hall, Inc. S7 – 13
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
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do
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Volume (units per period)Volume (units per period)Figure S7.5Figure S7.5
© 2006 Prentice Hall, Inc. S7 – 14
Break-Even AnalysisBreak-Even Analysis
BEPBEPxx == Break-even Break-even point in unitspoint in unitsBEPBEP$$ == Break-even Break-even point in dollarspoint in dollarsPP == Price per Price per unit (after all unit (after all discounts)discounts)
xx == Number of units Number of units producedproducedTRTR== Total revenue = PxTotal revenue = PxFF == Fixed costsFixed costsVV == Variable costsVariable costsTCTC== Total costs = F + VxTotal costs = F + Vx
TR = TCTR = TCoror
Px = F + VxPx = F + Vx
Break-even point Break-even point occurs whenoccurs when
BEPBEPxx = =FF
P - VP - V
© 2006 Prentice Hall, Inc. S7 – 15
Break-Even AnalysisBreak-Even Analysis
BEPBEPxx == Break-even Break-even point in unitspoint in unitsBEPBEP$$ == 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$$ = BEP= BEPx x PP
= P= P
==
= =
FF((P - VP - V))/P/P
FFP - VP - V
FF1 -1 - V/P V/P
ProfitProfit = TR - TC= TR - TC
= Px - = Px - ((F + VxF + Vx))
= Px - F - Vx= Px - F - Vx
= = ((P - VP - V))x - Fx - F
© 2006 Prentice Hall, Inc. S7 – 16
Break-Even ExampleBreak-Even Example
Fixed costs Fixed costs = $10,000= $10,000 Material Material = $.75= $.75/unit/unitDirect labor Direct labor = $1.50= $1.50/unit/unit Selling price Selling price = $4.00= $4.00 per unit per unit
BEPBEP$$ = == =FF
1 - (1 - (V/PV/P))$10,000$10,000
1 - [(1.50 + .75)/(4.00)]1 - [(1.50 + .75)/(4.00)]
= = $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)
© 2006 Prentice Hall, Inc. S7 – 17
Break-Even ExampleBreak-Even Example
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
© 2006 Prentice Hall, Inc. S7 – 18
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
© 2006 Prentice Hall, Inc. S7 – 19
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
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)
Fixed costs Fixed costs = $3,500= $3,500 per month per month
© 2006 Prentice Hall, Inc. S7 – 20
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)
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