Chapter 5 – Capacity Planning and Control Definitions, capacity measurement, MRP II and capacity, utilization, efficiency, breakeven Rev. 11/30/03 SJSU Bus. 140 - David Bentley

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 11/30/03 SJSU Bus. 140 - David Bentley

Capacity Decisions Affect… Ability to meet customer demand Possible long term commitments Competitive capability Capital investment and operating costs 11/30/03 SJSU Bus. 140 - David Bentley

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. 11/30/03 SJSU Bus. 140 - David Bentley

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% Rev. 11/30/03 SJSU Bus. 140 - David Bentley

Capacity Considerations - 2 Productivity Product of (utilization X efficiency) (.80)(.90) = 0.72 or 72% Rev. 11/30/03 SJSU Bus. 140 - David Bentley

SJSU Bus. 140 - David Bentley 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 Rev. 12/04/01 SJSU Bus. 140 - David Bentley

“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 12/04/01 SJSU Bus. 140 - David Bentley

Cost-Volume Relationships Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Cost-Volume Relationships Amount ($) Q (volume in units) Total cost = VC + FC Total variable cost (VC) Fixed cost (FC) 11/30/03 SJSU Bus. 140 - David Bentley

Cost-Volume Relationships Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Cost-Volume Relationships Amount ($) Q (volume in units) Total revenue 11/30/03 SJSU Bus. 140 - David Bentley

Cost-Volume Relationships Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Cost-Volume Relationships Amount ($) Q (volume in units) BEP units Profit Total revenue Total cost 11/30/03 SJSU Bus. 140 - David Bentley

SJSU Bus. 140 - David Bentley Make or Buy Cost-volume or breakeven analysis QBEP = FC / (p – v) Where FC = fixed cost, p = unit price (or revenue), v = unit variable cost Example: candle manufacture FC = $50, p = $1, v = $.75 Solution: QBEP = 50 / (1 - .75) = 200 Rev. 11/30/03 SJSU Bus. 140 - David Bentley

Break-even and Step Fixed Costs Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved Break-even and Step Fixed Costs Quantity FC + VC = TC Step fixed costs and variable costs. 1 machine 2 machines 3 machines 11/30/03 SJSU Bus. 140 - David Bentley

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. 11/30/03 SJSU Bus. 140 - David Bentley

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. 11/20/01 SJSU Bus. 140 - David Bentley

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. 11/20/01 SJSU Bus. 140 - David Bentley

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 Rev. 11/20/01 SJSU Bus. 140 - David Bentley

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 New 11/20/01 SJSU Bus. 140 - David Bentley