Fundamentals of Operations Management BUS 3 – 140 Capacity Planning Oct 2, 2007

Page 2 2 Definitions * From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin Design capacity Maximum output rate or service capacity for which an operation, process, or facility is designed Effective capacity Design capacity minus allowances such as personal time, maintenance, and scrap Actual output Rate of output actually achieved--cannot exceed effective capacity.

Page 3 3 Measures of Capacity (Table 5.1) * From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

Page 4 4 Factors that Influence Effective Capacity (Table 5.2) FACILITIESPOLICY Design Location OPERATIONAL LayoutScheduling EnvironmentMaterials Management Quality assurance PRODUCT / SERVICES Maintenance policies DesignEquipment breakdowns Product or service MIX SUPPLY CHAINS PROCESS Quantity capabilities EXTERNAL FACTORS Quality capabilitiesProduct standards Safety regulations HUMAN FACTORS Unions Job ContentPollution control standards Job Design Training and Experience Motivation Compensation Learning Curve Absenteeism & labor turnover

Page 5 5 Strategic Considerations in Capacity Planning  Revenue  Cost  Technologies  Volumes  Markets  Acquisitions  Sourcing decisions  Expansion decisions  Capital equipment  Long time to Implement and then in place for a Long time

Page 6 6 Tactical Considerations in Capacity Planning

Page 7 7 Constraints Types of Constraints:  Resource  Material  Supplier/Vendor  Financial  Knowledge/Competence  Policy Anything that LIMITS a system in reaching its Goal

Page 8 8 Potential Bottleneck Operations (2 Examples) Operation 1 20/hr. Operation 2 10/hr. Operation 3 15/hr. 10/hr. Bottleneck Maximum output rate limited by bottleneck Machine #2 Bottleneck Operation Bottleneck Operation Machine #1 Machine #3 Machine #4 10/hr 30/hr 40 Units coming in every hour, but only 30 going out

Page 9 9 Bottleneck A Constraint that causes REVENUE to be Lost True Definition Unless more than 10 units per hour can be SOLD, the Operations are Imbalanced but not a true bottleneck Operation 1 20/hr. Operation 2 10/hr. Operation 3 15/hr. 10/hr. IMBALANCE

Page Unique Elements of Service Capacity  The need to be near Customers  Cannot store “inventory” of services in advance of the requirement  Variability of Inputs and Outputs

Page Developing Capacity Alternatives Design flexibility into systems Add power and water lines for easier expansion Simplify facilities Three bedroom house when you have no kids Take stage of life cycle into account Take a “big picture” approach to capacity changes Correlation of different events (e.g. Increasing number of Hotel Rooms offered will increase need for Parking, Food, Housekeeping, etc..) Attempt to smooth out capacity requirements Influence demand so that load during peak times may be transferred of too-peak times Use same equipment for complementary products (e.g. Bicycles and “Body by Jake”)

Capacity Planning & Cost

Page Fixed and variable Costs Fixed Costs Remain CONSTANT regards of level of Volume Rent Manager salaries Insurance Overhead Variable Costs Vary directly with Volume of Output Total Material Cost Total Beware of ABSORBING OVERHEAD (amortizing Fixed Costs) as a justification for producing more than can be Sold

Page Breakeven Point Amount ($) 0 Q (volume in units) Total cost = VC + FC Total variable cost (VC) Fixed cost (FC) Q (volume in units) 0 Profit Total revenue Total cost Q (volume in units) 0 Break Even Point units Profit Total revenue Total cost  The volume of output at which total cost and total revenue are equal  Fixed Cost divided by Contribution Margin per unit Once the Breakeven Point is passed, Economies Of Scale result in accelerated Profits

Page Breakeven Exercise Page 194 of Book