heizer supp 07

© 2008 Prentice Hall, Inc. S7 – 1

Operations ManagementOperations ManagementSupplement 7 – Supplement 7 – Capacity PlanningCapacity Planning

PowerPoint presentation to accompany PowerPoint presentation to accompany Heizer/Render Heizer/Render Principles of Operations Management, 7ePrinciples of Operations Management, 7eOperations Management, 9e Operations Management, 9e


OutlineOutline

CapacityCapacity Design and Effective CapacityDesign and Effective Capacity

Capacity and StrategyCapacity and Strategy

Capacity ConsiderationsCapacity Considerations

Managing DemandManaging Demand

Demand and Capacity Demand and Capacity Management in the Service Management in the Service SectorSector


Outline – ContinuedOutline – Continued

Capacity PlanningCapacity Planning

Break-Even AnalysisBreak-Even Analysis Single-Product CaseSingle-Product Case

Multiproduct CaseMultiproduct Case

Applying Decision Trees to Applying Decision Trees to Capacity DecisionsCapacity Decisions


Outline – ContinuedOutline – Continued

Applying Investment Analysis to Applying Investment Analysis to Strategy-Driven InvestmentsStrategy-Driven Investments Investment, Variable Cost, and Investment, Variable Cost, and

Cash FlowCash Flow

Net Present ValueNet Present Value


Learning ObjectivesLearning Objectives

When you complete this supplement, When you complete this supplement, you should be able to:you should be able to:

1.1. Define capacityDefine capacity

2.2. Determine design capacity, effective Determine design capacity, effective capacity, and utilizationcapacity, and utilization

3.3. Compute break-even analysisCompute break-even analysis

4.4. Apply decision trees to capacity Apply decision trees to capacity decisionsdecisions

5.5. Compute net present valueCompute net present value


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 Determines fixed costsfixed costs

Determines if Determines if demand will demand will be satisfiedbe satisfied

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 shiftsEfficiency 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


Capacity and StrategyCapacity and Strategy

Capacity decisions impact all 10 Capacity decisions impact all 10 decisions of operations decisions of operations management as well as other management as well as other functional areas of the organizationfunctional areas of the organization

Capacity decisions must be Capacity decisions must be integrated into the organization’s integrated into the organization’s mission and strategymission and strategy


Capacity ConsiderationsCapacity Considerations

Forecast demand accuratelyForecast demand accurately

Understand the technology and Understand the technology and capacity incrementscapacity increments

Find the optimum Find the optimum operating level operating level (volume)(volume)

Build for changeBuild for change


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

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pe

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(do

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pe

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per

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Build In FlexibilityBuild In Flexibility

100% 100% –

80% 80% –

60% 60% –

40% 40% –

20% 20% –

0 0 –

Nis

san

Ch

rysl

er

Ho

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a

GM

To

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Fo

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Percent of North American Vehicles Percent of North American Vehicles Made on Flexible Assembly LinesMade on Flexible Assembly Lines



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 complementary Produce products with complementary

demand patternsdemand patterns


Complementary Demand Complementary Demand PatternsPatterns

4,000 4,000 –

3,000 3,000 –

2,000 2,000 –

1,000 1,000 –

J F M A M J J A S O N D J F M A M J J A S O N D JJ F M A M J J A S O N D J F M A M J J A S O N D J

Sal

es i

n u

nit

sS

ales

in

un

its

Time (months)Time (months)

Jet ski Jet ski engine engine salessales




4,000 4,000 –

3,000 3,000 –

2,000 2,000 –

1,000 1,000 –


Sal

es i

n u

nit

sS

ales

in

un

its


Snowmobile Snowmobile motor salesmotor sales





4,000 4,000 –

3,000 3,000 –

2,000 2,000 –

1,000 1,000 –


Sal

es i

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nit

sS

ales

in

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its


Combining both Combining both demand patterns demand patterns reduces the reduces the variationvariation

Snowmobile Snowmobile motor salesmotor sales




Tactics for Matching Tactics for Matching Capacity to DemandCapacity to Demand

1.1. Making staffing changesMaking staffing changes

2.2. Adjusting equipmentAdjusting equipment Purchasing additional machineryPurchasing additional machinery

Selling or leasing out existing equipmentSelling or leasing out existing equipment

3.3. Improving processes to increase throughputImproving processes to increase throughput

4.4. Redesigning products to facilitate more Redesigning products to facilitate more throughputthroughput

5.5. Adding process flexibility to meet changing Adding process flexibility to meet changing product preferencesproduct preferences

6.6. Closing facilitiesClosing facilities


Demand and Capacity Demand and Capacity Management in the Service SectorManagement in the Service Sector

Demand managementDemand management Appointment, reservations, FCFS ruleAppointment, reservations, FCFS rule

Capacity Capacity managementmanagement Full time, Full time,

temporary, temporary, part-time part-time staffstaff


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






(a)(a) Leading demand with incremental Leading demand with incremental expansionexpansion




Dem

and

Dem

and

Time (years)Time (years)11 22 33



(b)(b) Leading demand with one-step Leading demand with one-step expansionexpansion




Dem

and

Dem

and




(c)(c) Capacity lags demand with incremental Capacity lags demand with incremental expansionexpansion



Dem

and

Dem

and





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

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Co

st in

do

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Volume (units per period)Volume (units per period)Figure S7.6Figure S7.6



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 cost per unitvariable cost per unitTCTC== 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 cost per unitvariable cost per unitTCTC== 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)



50,000 50,000 –

40,000 40,000 –

30,000 30,000 –

20,000 20,000 –

10,000 10,000 –

–| | | | | |

00 2,0002,000 4,0004,000 6,0006,000 8,0008,000 10,00010,000

Do

llars

Do

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UnitsUnits

Fixed costsFixed costs

Total Total costscosts

RevenueRevenue

Break-even Break-even pointpoint



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 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

-$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



$40,000$40,000

-$5,000-$5,000

Small plant

Small plant

$0$0

Do nothing

Do nothing





Large plant

Large plant



$60,000$60,000

-$10,000-$10,000




$40,000$40,000

-$5,000-$5,000

Small plant

Small plant

$0$0

Do nothing

Do nothing

EMV = (.4)($100,000) + (.6)(-$90,000)

Large Plant

EMV = -$14,000



-$14,000

$13,000

$18,000



Large plant

Large plant



$60,000$60,000

-$10,000-$10,000




$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


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

While this works fine, it is

cumbersome for larger values of N


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



$7,000 $7,000 in receipts per for in receipts per for 55 years yearsInterest rate Interest rate = 6%= 6%

From Table S7.2From Table S7.2X X = 4.212= 4.212

S = RXS = RXS = S = $7,000(4.212) = $29,484$7,000(4.212) = $29,484


Present Value With Different Present Value With Different Future ReceiptsFuture Receipts

Investment A’s Investment A’s Cash FlowCash Flow

Investment B’s Investment B’s Cash FlowCash Flow YearYear Present Value Present Value

Factor at 8%Factor at 8%

$10,000$10,000 $9,000$9,000 11 .926.926

9,0009,000 9,0009,000 22 .857.857

8,0008,000 9,0009,000 33 .794.794

7,0007,000 9,0009,000 44 .735.735


Present Value With Different Present Value With Different Future ReceiptsFuture Receipts

YearYear Investment A’sInvestment A’sPresent ValuesPresent Values

Investment B’sInvestment B’sPresent ValuesPresent Values

11 $9,260 =$9,260 = (.926)($10,000)(.926)($10,000) $8,334 =$8,334 = (.926)($9,000)(.926)($9,000)

22 7,713 =7,713 = (.857)($9,000)(.857)($9,000) 7,713 =7,713 = (.857)($9,000)(.857)($9,000)

33 6,352 =6,352 = (.794)($8,000)(.794)($8,000) 7,146 =7,146 = (.794)($9,000)(.794)($9,000)

44 5,145 =5,145 = (.735)($7,000)(.735)($7,000) 6,615 =6,615 = (.735)($9,000)(.735)($9,000)

TotalsTotals $28,470$28,470 $29,808$29,808

Minus initial Minus initial investmentinvestment -25,000-25,000 -26,000-26,000

Net present Net present valuevalue $3,470$3,470 $3,808$3,808

heizer supp 07

Documents

bakery exampleactual

capacity lags

effective

market favorable

000 market

capacity expansion

000market

figure s7