1. © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S 7-1 Operations Management Capacity Planning Supplement 7

2. Operations Management Supplement 7 Capacity Planning PowerPoint presentation to accompany Heizer/Render Principles of Operations Management, 7e Operations Management, 9e

3. © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S 7-3 Capacity – Definition The throughput, or number of units a facility can hold, receive, store, or produce in a period of time.

4. © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S 7-4 Design and Effective Capacity Design capacity: The theoretical maximum output of a system in a given period. Utilization: Actual output / 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 / Effective capacity.

5. © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S 7-5 Requirements for Good Capacity Decisions Forecast demand accurately Understanding the technology and capacity increments Finding the optimal operating level (volume) Build for change – flexibility

6. © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S 7-6 Cost Structure for a Hospital 250 bed hospital 500 bed hospital 750 bed hospital Economies of Scale Diseconomies of Scale Average Unit Cost (dollars per patient) 250 500 750

7. © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S 7-7 Types of Planning Over a Time Horizon Add Facilities Add long lead time equipment Schedule Jobs Schedule Personnel Allocate Machinery Sub-Contract Add Equipment Add Shifts Add Personnel Build or Use Inventory Long Range Planning Intermediate Range Planning Short Range Planning Modify CapacityUse Capacity * * * Limited options exist

8. © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S 7-8 Vary staffing Subcontracting/ joint ventures Change equipment & processes Change methods Redesign the product for faster processing Capacity Management Vary prices Vary promotion Change lead times (e.g., backorders) Offer complementary products Demand Management Managing Capacity and Demand

9. © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S 7-9 Complementary Products Time (Months) Sales (Units) Jet Skis Snow-mobiles Total 0 1,000 2,000 3,000 4,000 5,000 JMMJSNJMMJSNJ

10. © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S 7-10 Approaches to Capacity Expansion Expected Demand Time in Years Demand New Capacity

11. © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S 7-11 Linking Capacity and Other Decisions Demand Expected Demand Time in Years New Capacity Competitive Priorities Quality Management Capital Intensity Resource Flexibility Inventory Scheduling

12. © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S 7-12 Breakeven Analysis (Revenue vs. Cost) A means of finding the point, in dollars and units, at which costs equal revenues Fixed cost Variable cost Total cost line Total revenue line Profit Volume (units/period) Cost in Dollars Loss Breakeven point Total cost = Total revenue BEP = F P – V X

13. © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S 7-13 Breakeven Analysis (Crossover Chart) A means of finding the point, in dollars and units, at which one alternative equals the other Fixed cost (A) Variable cost (A) B wins Cost in Dollars A wins Fixed cost (B) Variable cost (B) Volume (units/period) Breakeven point Total cost (A) = Total cost (B) BEP = Fixed cost Variable cost X

14. © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S 7-14 Crossover Chart Fixed cost - Process A Fixed cost - Process B Fixed cost - Process C Total cost - Process C Total cost - Process B Total cost - Process A Process A: low volume, high variety Process B: Repetitive Process C: High volume, low variety Process CProcess BProcess A Lowest cost process Breakeven Worksheet

15. © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S 7-15 Decision Tree and Capacity Decision –$90,000 $60,000 –$10,000 –$5,000 Market favorable (0.4) Market unfavorable (0.6) Market favorable (0.4) Market unfavorable (0.6) Market favorable (0.4) Market unfavorable (0.6) $100,000 $40,000 $0 – $14,000 $18,000 $13,000 Large Plant Medium Plant Small Plant Do nothing

16. © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S 7-16 Conclusions Capacity planning is crucial to an organization. The desirable amount of capacity utilization varies Capacity planning is crucial to an organization. The desirable amount of capacity utilization varies Capacity can be stated in terms of: Capacity can be stated in terms of: Output – useful for standardized products or services Output – useful for standardized products or services Input – useful for customized products or services Input – useful for customized products or services There are both economies of scale and diseconomies of scale There are both economies of scale and diseconomies of scale Capacity at the bottleneck limits the capacity of the entire system. Bottlenecks may float Capacity at the bottleneck limits the capacity of the entire system. Bottlenecks may float