operations management capacity design
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1
Operations Management
Capacity Design
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Types of Planning Over a Time Horizon
Add Facilities
Schedule Jobs Schedule Personnel Allocate Machinery
Sub-ContractAdd EquipmentAdd Shifts
Add PersonnelBuild or Use Inventory
Long Range Planning
Intermediate Range Planning
Short Range Planning
Modify Capacity Use Capacity
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Definition and Measures of Capacity
DesignCapacity:
The maximum “throughput,” or number of units a facility can produce in a period of time.
Utilization: Actual output as a percent of design capacity.
Effective capacity:
Capacity a firm can expect to achieve given its product mix, methods of scheduling, maintenance, and standards of quality.
Efficiency: Actual output as a percent of effective capacity.
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Measure of planned or actual capacity usage of a facility, work center, or machine
UtilizationActual Output
Design Capacity=
Utilization
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Measure of how well a facility or machine is performing when used
EfficiencyActual output
Effective Capacity=
Efficiency
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Facility produces breakfast rolls Last week, produced 148,000 rolls Effective capacity is 175,000 rolls Line operates 7 days a week with three
8-hour shifts per day Line designed to produce 1200 rolls per
hour Determine
Design Capacity Utilization Efficiency
Example
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Same facility adding one more line due to
increase in demand for deluxe rolls
Effective capacity is 175,000 rolls of this
line
Efficiency of this second line will be 75%
What is the expected output?
Calculating actual output
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Managing Demand
Demand exceeds capacity – curtail demand by raising prices, scheduling long lead times, etc
Capacity exceeds demand – stimulate demand through price reductions, aggressive marketing, etc
Adjusting to seasonal demands – offer products with complementary demand patterns – pdts for which demand is high for one when low for the other
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Managing Capacity
1. Making staffing changes (increasing or decreasing the number of employees)
2. Adjusting equipment and processes – which might include purchasing additional machinery or selling or leasing out existing equipment
3. Improving methods to increase throughput; and/or
4. Redesigning the product to facilitate more throughput
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Breakeven Analysis
Technique for evaluating process & equipment alternatives
Objective: Find the point ($ or units) at which total cost equals total revenue
Assumptions Revenue & costs are related linearly to
volume All information is known with certainty
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Break-Even Analysis
Fixed costs: costs that continue
even if no units are produced:
depreciation, taxes, debt, mortgage
payments, salaries, etc
Variable costs: costs that vary with
the volume of units produced: labor
wages, materials, portion of utilities
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Breakeven Chart
Fixed cost
Variable cost
Total cost line
Total revenue line
ProfitBreakeven pointTotal cost = Total revenue
Volume (units/period)
Cost
in D
olla
rs
Loss
Profit
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Crossover Chart
Fixed cost - Process A
Fixed cost - Process BFixed cost - Process C
Total cost - Process CTotal cost - Process B
Total co
st - P
roce
ss A
Process A: low volume, high varietyProcess B: Repetitive
Process C: High volume, low variety
Process CProcess BProcess A Lowest cost process
Break Even Contd..
BEPx= FC (units)P-V
BEPrs.= FC (amount)1-(V/P)
BEPrs.= FC (multi product)
∑[(1-Vi/Pi)*(Wi)]P=Selling price, V=variable costFC=fixed cost
BEP Calc.
A company has fixed costs of 10000/- this period. Direct costs are 1.5/- per unit and material cost is 0.75/- per unit. The selling price is 4/- per unit. Calculate the BEPs.
BEP Calc. in multi product case
ITEM PRICE COST FORECASTED SALES ANNUALLY
Sandwich
2.95 1.25 7000
Cola 0.80 0.30 7000
Burger 1.55 0.47 5000
Tea .75 0.25 5000
Salad 2.85 1.00 3000
Item P V V/P 1-(V/P)
Forecasted sales
% of sales
wghtd.contribution
sandwich
2.95
1.25
.42 .58 20650
.446 .259
Cola 0.80
.30 .38 .62 5600 .121 .075
Burger 1.55
.47 .30 .70 7750 .167 .117
Tea 0.75
.25 .33 .67 3750 .081 .054
Salad 2.85
1.0 .35 .65 8550 .185 .120
46300
1.00 .625
If the fixed costs are 3500,BEPrs.= FC
∑[(1-Vi/Pi)*(Wi)]
3500*12 = 672000.625
Decision trees application
A company is considering capacity expansion. it has 3 alternatives. the new facility would produce new type of product and currently the marketability of the product is unknown.
Types of plant favorable mkt. unfavorable mkt.
Large plant 100 k -90k Medium plant 60k -10k Small plant 40k -5k The probability of fav and unfav. Markets are
0.4 and 0.6 respectively.
EMV (large plant)=0.4(100k)+(.6)(-90k)=-14k
EMV (medium plant)=0.4(60k)+(.6)(-10k)=18k
EMV (small plant)=0.4(40k)+(.6)(-5k)=13k
Based on Expected market value, the company should build a medium plant
Net Present value
A co. having two capacity expansion alternatives A and B have useful lives of 4 years. Initial outlay for A is 25k and that for B is 26k. The cost of capital is 8%.the cash flow pattern is as follows.year A B1 10k 9k2 9k 9k3 8k 9k 4 7k 9k
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