Rev. 11/30/03SJSU Bus David Bentley1 Chapter 5 – Capacity Planning and Control Definitions, capacity measurement, MRP II and capacity, utilization, efficiency, breakeven

11/30/03SJSU Bus David Bentley2 Definition of Capacity Upper limit on the work load that an operating unit can handle during a given period of time Plant, production line, work center, work station, employee Also defined as “Rate of output” Contrast to common definition of capacity

11/30/03SJSU Bus David Bentley3 Capacity Decisions Affect… Ability to meet customer demand Possible long term commitments Competitive capability Capital investment and operating costs

Rev. 11/30/03SJSU Bus David Bentley4 Capacity and Production Environments Operation Types Project > Job > Batch > Repetitive > Continuous flow> See Tables 5-1a and 5-1b Time to Forecast Capacity Capacity & raw materials Capacity, RM & assemblies Capacity, RM & products

Rev. 11/30/03SJSU Bus David Bentley5 Capacity Considerations - 1 Definition: “Rate of output” Utilization (uses design capacity) Relates actual output to theoretical output Paid for 8 hours, producing parts 6.4 hours; utilization = 6.4 / 8 = 80% Efficiency (uses effective capacity) Relates actual output to expected output Expect production of 100 parts, actual = 90; efficiency = 90%

02/20/06SJSU Bus David Bentley6 Capacity Considerations - 2 Design capacity Maximum output under normal conditions Effective capacity Design capacity minus allowances for certain efficiency losses Actual output Recorded output for a given time period

02/20/06SJSU Bus David Bentley7 Utilization & Efficiency Utilization Actual output_ Design capacity Efficiency Actual output_ Effective capacity

Rev. 02/20/06SJSU Bus David Bentley8 Productivity Product of (utilization X efficiency) (.80)(.90) = 0.72 or 72%

Rev. 12/04/01SJSU Bus David Bentley9 Theory of Constraints Developed by Eliyahu Goldratt – “The Goal” Management of bottlenecks Attempts to schedule and feed work to maximize the rate of work flow Utilizes “transfer batches” = operation overlapping Optimized Production Technology (OPT) software

12/04/01SJSU Bus David Bentley10 “The Goal” – Excellence in Manufacturing “ ‘The Goal’ is about the OPT principles of manufacturing. It’s about trying to understand what makes our world tick so that we can make it better. When we think logically and consistently about our problems we can determine the ‘cause and effect’ relationships between actions and results.” - from “The Goal” 1984 by Eliyahu M. Goldratt and Jeff Cox

11/30/03SJSU Bus David Bentley11 Cost-Volume Relationships Amount ($) 0 Q (volume in units) Total cost = VC + FC Total variable cost (VC) Fixed cost (FC) Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved

11/30/03SJSU Bus David Bentley12 Cost-Volume Relationships Amount ($) Q (volume in units) 0 Total revenue Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved

11/30/03SJSU Bus David Bentley13 Cost-Volume Relationships Amount ($) Q (volume in units) 0 BEP units Profit Total revenue Total cost Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved

Rev. 02/20/06SJSU Bus David Bentley14 Make or Buy Cost-volume or breakeven analysis Q BEP = FC / (Rev – v) Where FC = fixed cost, Rev = unit price (or revenue), v = unit variable cost Example: candle manufacture FC = $50, Rev = $1, v = $.75 Solution: Q BEP = 50 / (1 -.75) = 200

02/20/06SJSU Bus David Bentley15 Breakeven related problems Q BEP = FC / (Rev – v) Q X = (Profit + FC) / (Rev –v) Profit = Q (Rev – v) – FC Rev = [(Profit + FC) / Q] +v TR = Q × Rev

11/30/03SJSU Bus David Bentley16 Break-even and Step Fixed Costs Quantity FC + VC = TC Step fixed costs and variable costs. 1 machine 2 machines 3 machines Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved

Rev. 11/30/03SJSU Bus David Bentley17 MRP II Capacity Planning Levels Long Range Long Range Resource Planning (LRRP) Intermediate Range Rough Cut Capacity Planning (RCCP) Short Range Capacity Requirements Planning (CRP)

Rev. 11/20/01SJSU Bus David Bentley18 Long Range Resource Planning (LRRP) Planning up to 5 years out Time intervals in quarters and years Broad categories of capacity Land Buildings (square feet) Equipment (by type) Labor (by broad skill set) Money, etc.

Rev. 11/20/01SJSU Bus David Bentley19 Rough Cut Capacity Planning (RCCP) 18 – 24 months Time intervals in weeks and months Critical resources needed to meet MPS Allows time to: Hire / layoff Develop subcontractors Negotiate supply contracts Buy and install equipment

Rev. 11/20/01SJSU Bus David Bentley20 Capacity Requirements Planning (CRP) Probably about 12 month horizon Time intervals in days and weeks Considers all internal resources needed to satisfy MRP May include vendor capacity Allows time to: Buy parts Exercise or call in subcontracting Hire or lay off temps Schedule overtime

New 11/20/01SJSU Bus David Bentley21 Input-Output (I/O) Analysis Measures at a work center not only Output, but also Input Also looks at changes in backlog Used to trace upstream and identify problems in feeder work centers