1. Operations Management Capacity Design

2. Types of Planning Over a Time Horizon
Add Facilities
Schedule Jobs
Schedule Personnel
Allocate Machinery
Sub-Contract
Add Equipment
Add Shifts
Add Personnel
Build or Use Inventory
Long Range Planning
Intermediate Range Planning
Short Range Planning
Modify Capacity
Use Capacity

3. Definition and Measures of Capacity
Design
Capacity:
The maximum “throughput,” or number of units a facility can produce in a period of time.
Capacity a firm can expect to achieve given its product mix, methods of scheduling, maintenance, and standards of quality.
Effective capacity:
Utilization:
Actual output as a percent of design capacity.
This slide can be used to frame a discussion of capacity.
Points to be made might include:
- capacity definition and measurement is necessary if we are to develop a production schedule
- while a process may have “maximum” capacity, many factors prevent us from achieving that capacity on a continuous basis.
Students should be asked to suggest factors which might prevent one from achieving maximum capacity.
Efficiency:
Actual output as a percent of effective capacity.

4. Utilization
Measure of planned or actual capacity usage of a facility, work center, or machine
Actual Output
Utilization =
Design Capacity
It might be useful at this point to discuss typical equipment utilization rates for different process strategies if you have not done so before.

5. Efficiency
Measure of how well a facility or machine is performing when used
Actual output
Efficiency =
Effective Capacity
You might point out to students that this slide links capacity to work measurement (standard times).

6. Example Facility produces breakfast rolls
Last week, produced 148,000 rolls
Effective capacity is 175,000 rolls
Line operates 7 days a week with three 8-hour shifts per day
Line designed to produce 1200 rolls per hour
Determine
Design Capacity
Utilization
Efficiency
You might point out to students that this slide links capacity to work measurement (standard times).

7. Calculating actual output
Same facility adding one more line due to increase in demand for deluxe rolls
Effective capacity is 175,000 rolls of this line
Efficiency of this second line will be 75%
What is the expected output?
You might point out to students that this slide links capacity to work measurement (standard times).

8. Managing Demand
Demand exceeds capacity – curtail demand by raising prices, scheduling long lead times, etc
Capacity exceeds demand – stimulate demand through price reductions, aggressive marketing, etc
Adjusting to seasonal demands – offer products with complementary demand patterns – pdts for which demand is high for one when low for the other

9. Managing Capacity
Making staffing changes (increasing or decreasing the number of employees)
Adjusting equipment and processes – which might include purchasing additional machinery or selling or leasing out existing equipment
Improving methods to increase throughput; and/or
Redesigning the product to facilitate more throughput

10. Breakeven Analysis
Technique for evaluating process & equipment alternatives
Objective: Find the point ($ or units) at which total cost equals total revenue
Assumptions
Revenue & costs are related linearly to volume
All information is known with certainty

11. Break-Even Analysis
Fixed costs: costs that continue even if no units are produced: depreciation, taxes, debt, mortgage payments, salaries, etc
Variable costs: costs that vary with the volume of units produced: labor wages, materials, portion of utilities

12. Breakeven Chart Volume (units/period) Total revenue line Profit
Breakeven point
Total cost = Total revenue
Profit
Profit
Total cost line
Cost in Dollars
Variable cost
Loss
Fixed cost
Volume (units/period)

13. Crossover Chart Process A: low volume, high variety
Fixed cost - Process A
Fixed cost - Process B
Fixed cost - Process C
Total cost - Process C
Total cost - Process B
Total cost - Process A
Process A: low volume, high variety
Process B: Repetitive
Process C: High volume, low variety
Process C
Process B
Process A
Lowest cost process
This slide can be used to introduce the role of breakeven analysis in the process selection decision.

14. Break Even Contd.. BEPx= FC (units) P-V BEPrs.= FC (amount) 1-(V/P)
BEPrs.= FC (multi product)
∑[(1-Vi/Pi)*(Wi)]
P=Selling price, V=variable cost
FC=fixed cost

15. BEP Calc.
A company has fixed costs of 10000/- this period. Direct costs are 1.5/- per unit and material cost is 0.75/- per unit. The selling price is 4/- per unit. Calculate the BEPs.

16. BEP Calc. in multi product case
ITEM
PRICE
COST
FORECASTED SALES ANNUALLY
Sandwich
2.95
1.25
7000
Cola
0.80
0.30
Burger
1.55
0.47
5000
Tea
.75
0.25
Salad
2.85
1.00
3000

17. Item P V
V/P
1-(V/P)
Forecasted sales
% of sales
wghtd.contribution
sandwich
2.95
1.25
.42
.58
20650
.446
.259
Cola
0.80
.30
.38
.62
5600
.121
.075
Burger
1.55
.47
.70
7750
.167
.117
Tea
0.75
.25
.33
.67
3750
.081
.054
Salad
2.85
1.0
.35
.65
8550
.185
.120
46300
1.00
.625

18. BEPrs.= FC ∑[(1-Vi/Pi)*(Wi)]
If the fixed costs are 3500,
BEPrs.= FC ∑[(1-Vi/Pi)*(Wi)]
3500* = 67200
0.625

19. Decision trees application
A company is considering capacity expansion. it has 3 alternatives. the new facility would produce new type of product and currently the marketability of the product is unknown.
Types of plant favorable mkt unfavorable mkt.
Large plant 100 k -90k
Medium plant 60k -10k
Small plant 40k -5k
The probability of fav and unfav. Markets are 0.4 and 0.6 respectively.

20. EMV (large plant)=0.4(100k)+(.6)(-90k)=-14k
EMV (medium plant)=0.4(60k)+(.6)(-10k)=18k
EMV (small plant)=0.4(40k)+(.6)(-5k)=13k
Based on Expected market value, the company should build a medium plant

21. Net Present value
A co. having two capacity expansion alternatives A and B have useful lives of 4 years. Initial outlay for A is 25k and that for B is 26k. The cost of capital is 8%.the cash flow pattern is as follows.
year A B
1 10k 9k
2 9k 9k
3 8k 9k
4 7k 9k