S7 - 1 Course Title: Production and Operations Management Course Code: MGT 362 Course Book: Operations Management 10 th Edition. By Jay Heizer & Barry Render

S7 - 2 Chapter 7S: Capacity and Constraint Management

S7 - 3 Outline  Capacity  Design and Effective Capacity  Capacity and Strategy  Capacity Considerations  Managing Demand  Demand and Capacity Management in the Service Sector

S7 - 4 Outline – Continued  Bottleneck Analysis and Theory of Constraints  Process Times for Stations, Systems, and Cycles  Theory of Constraints  Bottleneck Management  Break-Even Analysis  Single-Product Case  Multiproduct Case

S7 - 5 Outline – Continued  Reducing Risk with Incremental Changes  Applying Expected Monetary Value to Capacity Decisions  Applying Investment Analysis to Strategy-Driven Investments  Investment, Variable Cost, and Cash Flow  Net Present Value

S7 - 6 Process Strategies The objective of a process strategy is to build a production process that meets customer requirements and product specifications within cost and other managerial constraints

S7 - 7 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

S7 - 8 Planning Over a Time Horizon Figure S7.1 Modify capacityUse capacity 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 * * Difficult to adjust capacity as limited options exist Options for Adjusting Capacity

S7 - 9 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

S 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

S 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

S 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

S 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%

S 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%

S 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%

S 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%

S 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

S 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

S 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

S Capacity Considerations 1.Forecast demand accurately 2.Understand the technology and capacity increments 3.Find the optimum operating level (volume) 4.Build for change

S Economies and Diseconomies of Scale Economies of scale Diseconomies of scale 25 - room roadside motel 50 - room roadside motel 75 - room roadside motel Number of Rooms Average unit cost (dollars per room per night) Figure S7.2

S 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 complementary demand patterns

S Complementary Demand Patterns 4,000 – 3,000 – 2,000 – 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) Jet ski engine sales Figure S7.3

S Complementary Demand Patterns 4,000 – 3,000 – 2,000 – 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) Snowmobile motor sales Jet ski engine sales Figure S7.3

S Complementary Demand Patterns 4,000 – 3,000 – 2,000 – 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) Combining both demand patterns reduces the variation Snowmobile motor sales Jet ski engine sales Figure S7.3