© 2006 Prentice Hall, Inc.S7 – 1 Operations Management Supplement 7 – Capacity Planning © 2006 Prentice Hall, Inc. PowerPoint presentation to accompany Heizer/Render Principles of Operations Management, 6e Operations Management, 8e

© 2006 Prentice Hall, Inc.S7 – 2 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

© 2006 Prentice Hall, Inc.S7 – 3 Modify capacity Use capacity Planning Over a Time Horizon 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 * * Limited options exist Figure S7.1

© 2006 Prentice Hall, Inc.S7 – 4 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

© 2006 Prentice Hall, Inc.S7 – 5 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

© 2006 Prentice Hall, Inc.S7 – 6 Bakery Example Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, hour shifts Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

© 2006 Prentice Hall, Inc.S7 – 7 Bakery Example Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, hour shifts Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

© 2006 Prentice Hall, Inc.S7 – 8 Bakery Example Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, hour shifts Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls Utilization = 148,000/201,600 = 73.4%

© 2006 Prentice Hall, Inc.S7 – 9 Bakery Example Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, hour shifts Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls Utilization = 148,000/201,600 = 73.4%

© 2006 Prentice Hall, Inc.S7 – 10 Bakery Example Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, hour shifts Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls Utilization = 148,000/201,600 = 73.4% Efficiency = 148,000/175,000 = 84.6%

© 2006 Prentice Hall, Inc.S7 – 11 Bakery Example Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, hour shifts Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls Utilization = 148,000/201,600 = 73.4% Efficiency = 148,000/175,000 = 84.6%

© 2006 Prentice Hall, Inc.S7 – 12 Bakery Example Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, hour shifts Efficiency = 84.6% Efficiency of new line = 75% Expected Output = (Effective Capacity)(Efficiency) = (175,000)(.75) = 131,250 rolls

© 2006 Prentice Hall, Inc.S7 – 13 Bakery Example Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, hour shifts Efficiency = 84.6% Efficiency of new line = 75% Expected Output = (Effective Capacity)(Efficiency) = (175,000)(.75) = 131,250 rolls

© 2006 Prentice Hall, Inc.S7 – 14 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

© 2006 Prentice Hall, Inc.S7 – 15 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 complimentary demand patterns

© 2006 Prentice Hall, Inc.S7 – 16 Capacity Considerations  Forecast demand accurately  Understanding the technology and capacity increments  Find the optimal operating level (volume)  Build for change

© 2006 Prentice Hall, Inc.S7 – 17 Tactics for Matching Capacity to Demand 1.Making staffing changes 2.Adjusting equipment and processes  Purchasing additional machinery  Selling or leasing out existing equipment 3.Improving methods to increase throughput 4.Redesigning the product to facilitate more throughput

© 2006 Prentice Hall, Inc.S7 – 18 Complementary Demand Patterns 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 J Sales in units Time (months) By combining both, the variation is reduced Snowmobile sales Jet ski sales Figure S7.3

© 2006 Prentice Hall, Inc.S7 – 19 Approaches to Capacity Expansion (a)Leading demand with incremental expansion Demand Expected demand New capacity (b)Leading demand with one-step expansion Demand New capacity Expected demand (d)Attempts to have an average capacity with incremental expansion Demand New capacity Expected demand (c)Capacity lags demand with incremental expansion Demand New capacity Expected demand Figure S7.4

© 2006 Prentice Hall, Inc.S7 – 20 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

© 2006 Prentice Hall, Inc.S7 – 21 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

© 2006 Prentice Hall, Inc.S7 – 22 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 accomplish  There is no time value of money Assumptions

© 2006 Prentice Hall, Inc.S7 – 23 Profit corridor Loss corridor Break-Even Analysis Total revenue line Total cost line Variable cost Fixed cost Break-even point Total cost = Total revenue – – – – – – – – – – – |||||||||||| Cost in dollars Volume (units per period) Figure S7.5

© 2006 Prentice Hall, Inc.S7 – 24 Strategy-Driven Investment  Operations may be responsible for return-on-investment (ROI)  Analyzing capacity alternatives should include capital investment, variable cost, cash flows, and net present value