session 2 - capacity planning

7/25/2019 Session 2 - Capacity Planning

1/15

M213M213OPERATIONS MANAGEMENTOPERATIONS MANAGEMENT

Capacity PlanningCapacity Planning


2/15

How much long-range capacity is needed

When more capacity is needed

Where facilities should be located

(location)

How facilities should be arranged (layout)

Facility planning answers:

Facility PlanningFacility Planning


3/15

Forecast

Demand

Compute

Needed

Capacity

Compute

Rated

Capacity

Evaluate

Capacity

Plans

Implement

Best Plan

Qualitative

Factors

(e.g., Skills)

Select Best

Capacity

Plan

Develop

Alternative

Plans

Quantitative

Factors

(e.g., Cost)

Capacity Planning ProcessCapacity Planning Process


4/15

Definition and Measures of CapacityDefinition and Measures of Capacity

Capacity: The throughput, or number of units a

facility can hold, receive, store, or

produce in a period of time.

Utilization: Actual output as a percent of design

capacity.

Effectivecapacity:

Capacity a firm can expect to receivegiven its product mix, methods ofscheduling, maintenance, andstandards of quality.

Efficiency: Actual output as a percent of effective

capacity.


5/15

Actual or Expected OutputActual or Expected Output

Actual (or Expected) Output= (Effective Capacity)(Efficiency)


6/15

UtilizationUtilization

Measure of planned or actual capacity

usage of a facility, work center, or

machine

UtilizationUtilizationActual Output

Design Capacity

Planned hours to be used

Total hours available

=

=


7/15

EfficiencyEfficiency

Measure of how well a facility or

machine is performing when used

EfficiencyEfficiencyActual output

Effective Capacity

Actual output in unitsStandard output in units

Average actual time

Standard time

=

=

=


8/15

Breakeven AnalysisBreakeven Analysis

Technique for evaluating process &

equipment alternatives

Objective: Find the point (currency or units)at which total cost equals total revenue

Assumptions

Revenue & costs are related linearly to volume All information is known with certainty

No time value of money


9/15

Breakeven AnalysisBreakeven Analysis

Fixed costsFixed costs: costs that continue even if no

units are produced: depreciation, taxes,

debt, mortgage payments Variable costsVariable costs: costs that vary with the

volume of units produced: labor, materials,

portion of utilities


10/15

Breakeven ChartBreakeven Chart

Fixed cost

Variable cost

Total cost line

Total revenue line

ProfitBreakeven pointTotal cost = Total revenue

Volume (units/period)

C

ostinC

urrency

Loss


11/15

Breakeven VolumeBreakeven Volume

BESBESFixed Cost

1 (Variable Cost/Selling Price)=

BEVBEVFixed Cost

Selling Price Variable Cost=

Breakeven SalesBreakeven Sales


12/15

Net Present ValueNet Present Value

This measure shows the profit of an investment

after funding costs have been deducted. It uses

the principle of discounting cash flows.

For example, if someone is offered $100 now or

$100 in one years time, they will choose to

receive $100 today, because if interest rates are

10% and the $100 is invested, in one year it willhave grown to $110. This is the concept of the

time value of money.


13/15

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

F= future value

P = present valuei = interest rate

N = number of years

N

i

F

P)1(


14/15

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

0.5830.6230.6650.7117

0.5400.5820.6270.6778

0.5000.5440.5920.6459

0.7350.7630.7920.8234

0.6810.7130.7470.7845

0.6300.6660.7050.7466

0.7940.8160.8400.86430.8570.8730.8900.9072

0.8570.9350.9430.9521

8%7%6%5%Year

N

i

FP

)1(

Present value of $1.00


15/15

Limitations of Net Present ValueLimitations of Net Present Value

Investments with the same present value mayhave significantly different project lives anddifferent salvage values

Investments with the same net present valuesmay have different cash flows

We assume that we know future interest rates -which we do not

We assume that payments are always made atthe end of the period - which is not always thecase

session 2 - capacity planning

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