1. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-1 Operations Management Capacity Planning Supplement 7

2. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-2 Outline  CAPACITY  Defining Capacity  Capacity and Strategy  Capacity Considerations  Managing Demand  CAPACITY PLANNING  BREAKEVEN ANALYSIS  Single-Product Case  Multiproduct Case

3. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-3 Outline - Continued  APPLYING DECISION TREES TO CAPACITY DECISIONS  STRATEGY DRIVEN INVESTMENTS  Investment, Variable Cost, and Cash Flow  Net Present Value

4. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-4 Learning Objectives When you complete this supplement, you should be able to : Identify or Define :  Capacity  Design Capacity  Effective Capacity  Utilization

5. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-5 Learning Objectives When you complete this supplement, you should be able to: Explain :  Capacity Considerations  Net Present Value Analysis  Breakeven Analysis  Financial Considerations  Strategy-Driven Investments

6. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-6  How much long-range capacity is needed  When more capacity is needed  Where facilities should be located (location)  How facilities should be arranged (layout) Facility planning answers: Facility Planning

7. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-7 Forecast Demand Compute Needed Capacity Compute Rated Capacity Evaluate Capacity Plans Implement Best Plan Qualitative Factors (e.g., Skills) Select Best Capacity Plan Develop Alternative Plans Quantitative Factors (e.g., Cost) Capacity Planning Process

8. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-8 Types of Planning Over a Time Horizon Add Facilities Add long lead time equipment 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 CapacityUse Capacity * * *Limited options exist

9. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-9 Definition and Measures of Capacity Capacity: The “throughput,” or number of units a facility can hold, receive, store, or produce in a period of time. Utilization: Actual output as a percent of design capacity. Effective capacity: Capacity a firm can expect to receive given its product mix, methods of scheduling, maintenance, and standards of quality. Efficiency: Actual output as a percent of effective capacity.

10. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-10 Actual or Expected Output Actual (or Expected) Output = (Effective Capacity)(Efficiency)

11. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-11 Measure of planned or actual capacity usage of a facility, work center, or machine Utilization Actual Output Design Capacity Planned hours to be used Total hours available = = Utilization

12. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-12 Measure of how well a facility or machine is performing when used Efficiency Actual output Effective Capacity Actual output in units Standard output in units Average actual time Standard time = = = Efficiency

13. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-13 Implications of Capacity Changes Changes in: Sales Cash flow Quality Supply chain Human resources Maintenance

14. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-14 Special Requirements for Making Good Capacity Decisions  Forecast demand accurately  Understanding the technology and capacity increments  Finding the optimal operating level (volume)  Build for change

15. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-15 Cost Structure for a Roadside Motel 25 room roadside motel 50 room roadside motel 75 room roadside motel Economies of Scale Diseconomies of Scale Number of Rooms Average Unit Cost (dollars per unit per night)

16. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-16 Strategies for Matching Capacity to Demand 1.Making staffing changes (increasing or decreasing the number of employees) 2.Adjusting equipment and processes – which might include purchasing additional machinery or selling or leasing out existing equipment 3.Improving methods to increase throughput; and/or 4.Redesigning the product to facilitate more throughput

17. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-17 Approaches to Capacity Expansion Expected Demand Time in Years Demand New Capacity Capacity leads demand with an incremental expansion Capacity leads demand with a one-step expansion Capacity lags demand with an incremental expansion Attempts to have an average capacity, with an incremental expansion

18. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-18 Approaches to Capacity Expansion Expected Demand Time in Years Demand New Capacity Capacity leads demand with an incremental expansion

19. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-19 Approaches to Capacity Expansion Expected Demand Time in Years Demand New Capacity Capacity leads demand with a one-step expansion

20. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-20 Approaches to Capacity Expansion Expected Demand Time in Years Demand New Capacity Capacity lags demand with an incremental expansion

21. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-21 Approaches to Capacity Expansion Expected Demand Time in Years Demand New Capacity Attempts to have an average capacity, with an incremental expansion

22. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-22 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  No time value of money

23. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-23 Break-Even Analysis  Fixed costs: costs that continue even if no units are produced: depreciation, taxes, debt, mortgage payments  Variable costs: costs that vary with the volume of units produced: labor, materials, portion of utilities

24. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-24 Breakeven Chart Fixed cost Variable cost Total cost line Total revenue line Profit Breakeven point Total cost = Total revenue Volume (units/period) Cost in Dollars Loss

25. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-25 Crossover Chart 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 CProcess BProcess A Lowest cost process

26. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-26 Cost of Wrong Process Found Via Breakeven Analysis Fixed cost $ Variable cost Fixed cost $ Variable cost Fixed cost $ Variable cost Low volume, high variety process Repetitive processHigh volume, low variety process A B Volume B1 B2 B3 Total cost for low volume high variety Total cost for repetitive process Total cost for high volume, low variety process

27. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-27 Decision Tree and Capacity Decision -$90,000 $60,000 -10,000 $40,000 Market favorable (0.4) Market unfavorable (0.6) Market favorable (0.4) Market unfavorable (0.6) Market favorable (0.4) Market unfavorable (0.6) $100,000 -5,000 $0 -$14,000 $18,000 $13,000 Large Plant Medium Plant Small Plant Do nothing

28. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-28 Strategy Driven Investment  Select investments as part of a coordinated strategic plan  Choose investments yielding competitive advantage  Consider product life cycles  Include a variety of operating factors in the financial return analysis  Test investments in light of several revenue projections

29. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-29 Net Present Value F = future value P = present value I = interest rate N = number of years

30. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-30 NPV in a More Convenient Form Year5%6%7%8% 10.9520.9430.9350.857 20.9070.8900.8730.857 30.8640.8400.8160.794 40.8230.7920.7630.735 50.7840.7470.7130.681 60.7460.7050.6660.630 70.7110.6650.6230.583 80.6770.6270.5820.540 90.6450.5920.5440.500 Present value of $1.00

31. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-31 Present Value of an Annuity (S)  X = Factor from Table  S = present value of a series of uniform annual receipts  R = receipts that are received every year for the life of the investment Year5%6%7%8% 10.9520.9430.9350.926 21.8591.8331.8081.783 32.7232.6732.6242.577 43.5463.4653.3873.312 54.3294.2124.1003.993 65.0764.9174.7664.623 75.7865.5825.3895.206 86.8436.2105.9715.747 97.1086.8027.0246.247

32. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-32 Limitations of Net Present Value  Investments with the same present value may have significantly different project lives and different salvage values  Investments with the same net present values may have different cash flows  We assume that we know future interest rates - which we do not  We assume that payments are always made at the end of the period - which is not always the case

33. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-33 Extras

34. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-34  Vary staffing  Change equipment & processes  Change methods  Redesign the product for faster processing Capacity Management  Vary prices  Vary promotion  Change lead times (e.g., backorders)  Offer complementary products Demand Management Managing Existing Capacity

35. PowerPoint presentation to accompany Heizer/Render - Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 S7-35 Complementary Products Time (Months) Sales (Units) Jet Skis Snow- mobiles Total 0 1,000 2,000 3,000 4,000 5,000 JMMJSNJMMJSNJ