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**Capacity and Constraint Management**

PowerPoint presentation to accompany Heizer and Render Operations Management, 10e Principles of Operations Management, 8e PowerPoint slides by Jeff Heyl © 2011 Pearson Education, Inc. publishing as Prentice Hall

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Process Strategies The objective of a process strategy is to build a production process that meets customer requirements and product specifications within cost and other managerial constraints © 2011 Pearson Education, Inc. publishing as Prentice Hall

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Capacity The throughput, or the number of units a facility can hold, receive, store, or produce in a period of time Determines fixed costs Determines if demand will be satisfied Three time horizons This slide provides some reasons that capacity is an issue. The following slides guide a discussion of capacity. © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Planning Over a Time Horizon**

Modify capacity Use capacity Intermediate-range planning Subcontract Add personnel Add equipment Build or use inventory Add shifts Short-range planning Schedule jobs Schedule personnel Allocate machinery * Long-range planning Add facilities Add long lead time equipment * Difficult to adjust capacity as limited options exist Options for Adjusting Capacity Figure S7.1 © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Design and Effective Capacity**

Design capacity is the maximum theoretical output of a system Normally expressed as a rate Effective capacity is the capacity a firm expects to achieve given current operating constraints Often lower than design capacity This slide can be used to frame a discussion of capacity. Points to be made might include: - capacity definition and measurement is necessary if we are to develop a production schedule - while a process may have “maximum” capacity, many factors prevent us from achieving that capacity on a continuous basis. Students should be asked to suggest factors which might prevent one from achieving maximum capacity. © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Utilization and Efficiency**

Utilization is the percent of design capacity achieved Utilization = Actual output/Design capacity Efficiency is the percent of effective capacity achieved Efficiency = Actual output/Effective capacity © 2011 Pearson Education, Inc. publishing as Prentice Hall

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Capacity and Strategy Capacity decisions impact all 10 decisions of operations management as well as other functional areas of the organization Capacity decisions must be integrated into the organization’s mission and strategy You might point out to students that this slide links capacity to work measurement (standard times). © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Capacity Considerations**

Forecast demand accurately Understand the technology and capacity increments Find the optimum operating level (volume) Build for change © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Economies and Diseconomies of Scale**

Number of Rooms 25 50 75 (dollars per room per night) Average unit cost 25 - room roadside motel 75 - room roadside motel 50 - room roadside motel Economies of scale Diseconomies of scale Figure S7.2 © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Managing Demand Demand exceeds capacity Capacity exceeds demand**

Curtail demand by raising prices, scheduling longer lead time Long term solution is to increase capacity Capacity exceeds demand Stimulate market Product changes Adjusting to seasonal demands Produce products with complementary demand patterns © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Complementary Demand Patterns**

4,000 – 3,000 – 2,000 – 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 J Sales in units Time (months) Jet ski engine sales Figure S7.3 © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Complementary Demand Patterns**

4,000 – 3,000 – 2,000 – 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 J Sales in units Time (months) Snowmobile motor sales Jet ski engine sales Figure S7.3 © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Complementary Demand Patterns**

Combining both demand patterns reduces the variation 4,000 – 3,000 – 2,000 – 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 J Sales in units Time (months) Snowmobile motor sales Jet ski engine sales Figure S7.3 © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Tactics for Matching Capacity to Demand**

Making staffing changes Adjusting equipment Purchasing additional machinery Selling or leasing out existing equipment Improving processes to increase throughput Redesigning products to facilitate more throughput Adding process flexibility to meet changing product preferences Closing facilities © 2011 Pearson Education, Inc. publishing as Prentice Hall

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

Demand management Appointment, reservations, FCFS rule Capacity management Full time, temporary, part-time staff © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Bottleneck Analysis and Theory of Constraints**

Each work area can have its own unique capacity Capacity analysis determines the throughput capacity of workstations in a system A bottleneck is a limiting factor or constraint A bottleneck has the lowest effective capacity in a system © 2011 Pearson Education, Inc. publishing as Prentice Hall

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Break-Even Analysis Technique for evaluating process and equipment alternatives Objective is to find the point in dollars and units at which cost equals revenue Requires estimation of fixed costs, variable costs, and revenue This chart introduces breakeven analysis and the breakeven or crossover chart. As you discuss the assumptions upon which this techniques is based, it might be a good time to introduce the more general topic of the limitations of and use of models. Certainly one does not know all information with certainty, money does have a time value, and the hypothesized linear relationships hold only within a range of production volumes. What impact does this have on our use of the models? © 2011 Pearson Education, Inc. publishing as Prentice Hall

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Break-Even Analysis Fixed costs are costs that continue even if no units are produced Depreciation, taxes, debt, mortgage payments Variable costs are costs that vary with the volume of units produced Labor, materials, portion of utilities Contribution is the difference between selling price and variable cost This chart introduces breakeven analysis and the breakeven or crossover chart. As you discuss the assumptions upon which this techniques is based, it might be a good time to introduce the more general topic of the limitations of and use of models. Certainly one does not know all information with certainty, money does have a time value, and the hypothesized linear relationships hold only within a range of production volumes. What impact does this have on our use of the models? © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Break-Even Analysis Assumptions Costs and revenue are linear functions**

Generally not the case in the real world We actually know these costs Very difficult to verify Time value of money is often ignored This chart introduces breakeven analysis and the breakeven or crossover chart. As you discuss the assumptions upon which this techniques is based, it might be a good time to introduce the more general topic of the limitations of and use of models. Certainly one does not know all information with certainty, money does have a time value, and the hypothesized linear relationships hold only within a range of production volumes. What impact does this have on our use of the models? © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Total cost = Total revenue**

Break-Even Analysis – 900 – 800 – 700 – 600 – 500 – 400 – 300 – 200 – 100 – | | | | | | | | | | | | Cost in dollars Volume (units per period) Total revenue line Profit corridor Loss corridor Total cost line Break-even point Total cost = Total revenue Variable cost This chart introduces breakeven analysis and the breakeven or crossover chart. As you discuss the assumptions upon which this techniques is based, it might be a good time to introduce the more general topic of the limitations of and use of models. Certainly one does not know all information with certainty, money does have a time value, and the hypothesized linear relationships hold only within a range of production volumes. What impact does this have on our use of the models? Fixed cost Figure S7.5 © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Break-Even Analysis TR = TC F or BEPx = P - V Px = F + Vx**

BEPx = break-even point in units BEP$ = break-even point in dollars P = price per unit (after all discounts) x = number of units produced TR = total revenue = Px F = fixed costs V = variable cost per unit TC = total costs = F + Vx Break-even point occurs when This chart introduces breakeven analysis and the breakeven or crossover chart. As you discuss the assumptions upon which this techniques is based, it might be a good time to introduce the more general topic of the limitations of and use of models. Certainly one does not know all information with certainty, money does have a time value, and the hypothesized linear relationships hold only within a range of production volumes. What impact does this have on our use of the models? TR = TC or Px = F + Vx BEPx = F P - V © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Break-Even Analysis BEP$ = BEPx P = P = Profit = TR - TC P - V**

BEPx = break-even point in units BEP$ = break-even point in dollars P = price per unit (after all discounts) x = number of units produced TR = total revenue = Px F = fixed costs V = variable cost per unit TC = total costs = F + Vx BEP$ = BEPx P = P = F (P - V)/P P - V 1 - V/P Profit = TR - TC = Px - (F + Vx) = Px - F - Vx = (P - V)x - F This chart introduces breakeven analysis and the breakeven or crossover chart. As you discuss the assumptions upon which this techniques is based, it might be a good time to introduce the more general topic of the limitations of and use of models. Certainly one does not know all information with certainty, money does have a time value, and the hypothesized linear relationships hold only within a range of production volumes. What impact does this have on our use of the models? © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Break-Even Example Fixed costs = $10,000 Material = $.75/unit**

Direct labor = $1.50/unit Selling price = $4.00 per unit BEP$ = = F 1 - (V/P) $10,000 1 - [( )/(4.00)] © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Break-Even Example Fixed costs = $10,000 Material = $.75/unit**

Direct labor = $1.50/unit Selling price = $4.00 per unit BEP$ = = F 1 - (V/P) $10,000 1 - [( )/(4.00)] = = $22,857.14 $10,000 .4375 BEPx = = = 5,714 F P - V $10,000 ( ) © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Break-Even Example Revenue Break-even point Total costs Fixed costs**

50,000 – 40,000 – 30,000 – 20,000 – 10,000 – – | | | | | | 0 2,000 4,000 6,000 8,000 10,000 Dollars Units Revenue Break-even point Total costs Fixed costs © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**∑ 1 - x (Wi) Break-Even Example Multiproduct Case F BEP$ = Vi Pi**

where V = variable cost per unit P = price per unit F = fixed costs W = percent each product is of total dollar sales i = each product © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Reducing Risk with Incremental Changes**

(a) Leading demand with incremental expansion Demand Expected demand New capacity (b) Capacity lags demand with incremental expansion Demand New capacity Expected demand (c) Attempts to have an average capacity with incremental expansion Demand New capacity Expected demand This slide probably requires some discussion or explanation. Perhaps the best place to start is the left hand column where capacity either leads or lags demand incrementally. As you continue to explain the options, ask students to suggest advantages or disadvantages of each. Figure S7.6 © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Reducing Risk with Incremental Changes**

(a) Leading demand with incremental expansion Demand Time (years) 1 2 3 New capacity Expected demand This slide probably requires some discussion or explanation. Perhaps the best place to start is the left hand column where capacity either leads or lags demand incrementally. As you continue to explain the options, ask students to suggest advantages or disadvantages of each. Figure S7.6 © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Reducing Risk with Incremental Changes**

(b) Capacity lags demand with incremental expansion Demand Time (years) 1 2 3 New capacity Expected demand This slide probably requires some discussion or explanation. Perhaps the best place to start is the left hand column where capacity either leads or lags demand incrementally. As you continue to explain the options, ask students to suggest advantages or disadvantages of each. Figure S7.6 © 2011 Pearson Education, Inc. publishing as Prentice Hall

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**Reducing Risk with Incremental Changes**

(c) Attempts to have an average capacity with incremental expansion Demand Time (years) 1 2 3 New capacity Expected demand This slide probably requires some discussion or explanation. Perhaps the best place to start is the left hand column where capacity either leads or lags demand incrementally. As you continue to explain the options, ask students to suggest advantages or disadvantages of each. Figure S7.6 © 2011 Pearson Education, Inc. publishing as Prentice Hall

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