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S7 - 1© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 Capacity and Constraint Management PowerPoint presentation to accompany Heizer and Render Operations Management, 10e Principles of Operations Management, 8e PowerPoint slides by Jeff Heyl

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S7 - 2© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

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S7 - 3© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

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S7 - 4© 2011 Pearson Education, Inc. publishing as Prentice Hall Planning Over a Time Horizon Figure S7.1 Modify capacityUse capacity Intermediate- range planning SubcontractAdd personnel Add equipmentBuild 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

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S7 - 5© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

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S7 - 6© 2011 Pearson Education, Inc. publishing as Prentice Hall Utilization and Efficiency Utilization is the percent of design capacity achieved Efficiency is the percent of effective capacity achieved Utilization = Actual output/Design capacity Efficiency = Actual output/Effective capacity

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S7 - 7© 2011 Pearson Education, Inc. publishing as Prentice Hall 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 organizations mission and strategy

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S7 - 8© 2011 Pearson Education, Inc. publishing as Prentice Hall Capacity Considerations 1.Forecast demand accurately 2.Understand the technology and capacity increments 3.Find the optimum operating level (volume) 4.Build for change

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S7 - 9© 2011 Pearson Education, Inc. publishing as Prentice Hall Economies and Diseconomies of Scale Economies of scale Diseconomies of scale 25 - room roadside motel 50 - room roadside motel 75 - room roadside motel Number of Rooms 255075 Average unit cost (dollars per room per night) Figure S7.2

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S7 - 10© 2011 Pearson Education, Inc. publishing as Prentice Hall Managing Demand Demand exceeds capacity 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

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S7 - 11© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

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S7 - 12© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

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S7 - 13© 2011 Pearson Education, Inc. publishing as Prentice Hall 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) Combining both demand patterns reduces the variation Snowmobile motor sales Jet ski engine sales Figure S7.3

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S7 - 14© 2011 Pearson Education, Inc. publishing as Prentice Hall Tactics for Matching Capacity to Demand 1.Making staffing changes 2.Adjusting equipment Purchasing additional machinery Selling or leasing out existing equipment 3.Improving processes to increase throughput 4.Redesigning products to facilitate more throughput 5.Adding process flexibility to meet changing product preferences 6.Closing facilities

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S7 - 15© 2011 Pearson Education, Inc. publishing as Prentice Hall Demand and Capacity Management in the Service Sector Demand management Appointment, reservations, FCFS rule Capacity management Full time, temporary, part-time staff

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S7 - 16© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

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S7 - 17© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

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S7 - 18© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

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S7 - 19© 2011 Pearson Education, Inc. publishing as Prentice Hall Break-Even Analysis 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 Assumptions

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S7 - 20© 2011 Pearson Education, Inc. publishing as Prentice Hall Profit corridor Loss corridor Break-Even Analysis Total revenue line Total cost line Variable cost Fixed cost Break-even point Total cost = Total revenue – 900 – 800 – 700 – 600 – 500 – 400 – 300 – 200 – 100 – – |||||||||||| 010020030040050060070080090010001100 Cost in dollars Volume (units per period) Figure S7.5

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S7 - 21© 2011 Pearson Education, Inc. publishing as Prentice Hall Break-Even Analysis BEP x =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 TR = TC or Px = F + Vx Break-even point occurs when BEP x = F P - V

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S7 - 22© 2011 Pearson Education, Inc. publishing as Prentice Hall Break-Even Analysis BEP x =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 $ = BEP x P = P = F (P - V)/P F P - V F 1 - V/P Profit= TR - TC = Px - (F + Vx) = Px - F - Vx = (P - V)x - F

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S7 - 23© 2011 Pearson Education, Inc. publishing as Prentice Hall 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 - [(1.50 +.75)/(4.00)]

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S7 - 24© 2011 Pearson Education, Inc. publishing as Prentice Hall 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 - [(1.50 +.75)/(4.00)] = = $22,857.14 $10,000.4375 BEP x = = = 5,714 F P - V $10,000 4.00 - (1.50 +.75)

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S7 - 25© 2011 Pearson Education, Inc. publishing as Prentice Hall Break-Even Example 50,000 – 40,000 – 30,000 – 20,000 – 10,000 – – |||||| 02,0004,0006,0008,00010,000 Dollars Units Fixed costs Total costs Revenue Break-even point

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S7 - 26© 2011 Pearson Education, Inc. publishing as Prentice Hall Break-Even Example BEP $ = F 1 - x (W i ) ViPiViPi Multiproduct Case whereV= variable cost per unit P= price per unit F= fixed costs W= percent each product is of total dollar sales i= each product

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S7 - 27© 2011 Pearson Education, Inc. publishing as Prentice Hall Reducing Risk with Incremental Changes (a)Leading demand with incremental expansion Demand Expected demand New capacity (c)Attempts to have an average capacity with incremental expansion Demand New capacity Expected demand (b)Capacity lags demand with incremental expansion Demand New capacity Expected demand Figure S7.6

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S7 - 28© 2011 Pearson Education, Inc. publishing as Prentice Hall Reducing Risk with Incremental Changes (a)Leading demand with incremental expansion Expected demand Figure S7.6 New capacity Demand Time (years) 123

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S7 - 29© 2011 Pearson Education, Inc. publishing as Prentice Hall Reducing Risk with Incremental Changes (b)Capacity lags demand with incremental expansion Expected demand Figure S7.6 Demand Time (years) 123 New capacity

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S7 - 30© 2011 Pearson Education, Inc. publishing as Prentice Hall Reducing Risk with Incremental Changes (c)Attempts to have an average capacity with incremental expansion Expected demand Figure S7.6 New capacity Demand Time (years) 123

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