Capacity Planning
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Transcript Capacity Planning
Operations
Management
Supplement 7 –
Capacity Planning
PowerPoint presentation to accompany
Heizer/Render
Principles of Operations Management, 7e
Operations Management, 9e
© 2008 Prentice Hall, Inc.
S7 – 1
Outline
Capacity
Design and Effective Capacity
Capacity and Strategy
Capacity Considerations
Managing Demand
Demand and Capacity
Management in the Service
Sector
© 2008 Prentice Hall, Inc.
S7 – 2
Outline – Continued
Capacity Planning
Break-Even Analysis
Single-Product Case
Multiproduct Case
Applying Decision Trees to
Capacity Decisions
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S7 – 3
Outline – Continued
Applying Investment Analysis to
Strategy-Driven Investments
Investment, Variable Cost, and
Cash Flow
Net Present Value
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S7 – 4
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
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S7 – 5
Planning Over a Time
Horizon
Long-range
planning
Add facilities
Add long lead time equipment
Intermediaterange
planning
Subcontract
Add equipment
Add shifts
Short-range
planning
Add personnel
Build or use inventory
*
Modify capacity
*
Schedule jobs
Schedule personnel
Allocate machinery
Use capacity
* Limited options exist
Figure S7.1
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S7 – 6
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
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S7 – 7
Utilization and Efficiency
Utilization is the percent of design capacity
achieved
Utilization = Actual output/Design capacity
Efficiency is the percent of effective capacity
achieved
Efficiency = Actual output/Effective capacity
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S7 – 8
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, 3 - 8 hour shifts
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls
© 2008 Prentice Hall, Inc.
S7 – 9
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, 3 - 8 hour shifts
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls
© 2008 Prentice Hall, Inc.
S7 – 10
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, 3 - 8 hour shifts
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls
Utilization = 148,000/201,600 = 73.4%
© 2008 Prentice Hall, Inc.
S7 – 11
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, 3 - 8 hour shifts
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls
Utilization = 148,000/201,600 = 73.4%
© 2008 Prentice Hall, Inc.
S7 – 12
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, 3 - 8 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%
© 2008 Prentice Hall, Inc.
S7 – 13
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, 3 - 8 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%
© 2008 Prentice Hall, Inc.
S7 – 14
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, 3 - 8 hour shifts
Efficiency = 84.6%
Efficiency of new line = 75%
Expected Output = (Effective Capacity)(Efficiency)
= (175,000)(.75) = 131,250 rolls
© 2008 Prentice Hall, Inc.
S7 – 15
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, 3 - 8 hour shifts
Efficiency = 84.6%
Efficiency of new line = 75%
Expected Output = (Effective Capacity)(Efficiency)
= (175,000)(.75) = 131,250 rolls
© 2008 Prentice Hall, Inc.
S7 – 16
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
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S7 – 17
Capacity Considerations
Forecast demand accurately
Understand the technology and
capacity increments
Find the optimum
operating level
(volume)
Build for change
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S7 – 18
Average unit cost
(dollars per room per night)
Economies and
Diseconomies of Scale
25 - room
roadside motel
Economies
of scale
25
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50 - room
roadside motel
75 - room
roadside motel
Diseconomies
of scale
50
Number of Rooms
75
Figure S7.2
S7 – 19
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
© 2008 Prentice Hall, Inc.
S7 – 20
Tactics for Matching
Capacity to Demand
1. Making staffing changes
2. Adjusting equipment
Purchasing additional machinery
Selling or leasing out existing equipment
3. Improving processes to increase throughput
4. Redesigning products to facilitate more
throughput
5. Adding process flexibility to meet changing
product preferences
6. Closing facilities
© 2008 Prentice Hall, Inc.
S7 – 21
Demand and Capacity
Management in the Service Sector
Demand management
Appointment, reservations, FCFS rule
Capacity
management
Full time,
temporary,
part-time
staff
© 2008 Prentice Hall, Inc.
S7 – 22
Approaches to Capacity
Expansion
Expected
demand
Demand
(c) Capacity lags demand with
incremental expansion
New
capacity
Expected
demand
Demand
New
capacity
(b) Leading demand with
one-step expansion
New
capacity
Expected
demand
(d) Attempts to have an average
capacity with incremental
expansion
Demand
Demand
(a) Leading demand with
incremental expansion
New
capacity
Expected
demand
Figure S7.5
© 2008 Prentice Hall, Inc.
S7 – 23
Break-Even Analysis
Technique for evaluating process
and equipment alternatives
Objective is to find the point in
dollars and units at which cost
equals revenue
Requires estimation of fixed costs,
variable costs, and revenue
© 2008 Prentice Hall, Inc.
S7 – 24
Break-Even Analysis
Fixed costs are costs that continue
even if no units are produced
Depreciation, taxes, debt, mortgage
payments
Variable costs are costs that vary
with the volume of units produced
Labor, materials, portion of utilities
Contribution is the difference between
selling price and variable cost
© 2008 Prentice Hall, Inc.
S7 – 25
Break-Even Analysis
Assumptions
Costs and revenue are linear
functions
Generally not the case in the real
world
We actually know these costs
Very difficult to accomplish
There is no time value of money
© 2008 Prentice Hall, Inc.
S7 – 26
Break-Even Analysis
–
Total revenue line
900 –
800 –
Cost in dollars
700 –
Break-even point
Total cost = Total revenue
Total cost line
600 –
500 –
Variable cost
400 –
300 –
200 –
100 –
Fixed cost
|
|
|
|
|
|
|
|
|
|
|
–
0 100 200 300 400 500 600 700 800 900 1000 1100
|
Figure S7.6
© 2008 Prentice Hall, Inc.
Volume (units per period)
S7 – 27
Break-Even Analysis
BEPx = break-even point in
units
BEP$ = break-even point in
dollars
P = price per unit (after
all discounts)
x = number of units
produced
TR = total revenue = Px
F = fixed costs
V = variable cost per unit
TC = total costs = F + Vx
Break-even point
occurs when
TR = TC
or
Px = F + Vx
© 2008 Prentice Hall, Inc.
F
BEPx =
P-V
S7 – 28
Break-Even Analysis
BEPx = break-even point in
units
BEP$ = break-even point in
dollars
P = price per unit (after
all discounts)
x = number of units
produced
TR = total revenue = Px
F = fixed costs
V = variable cost per unit
TC = total costs = F + Vx
BEP$ = BEPx P
F
=
P
P-V
F
=
(P - V)/P
F
=
1 - V/P
Profit = TR - TC
= Px - (F + Vx)
= Px - F - Vx
= (P - V)x - F
© 2008 Prentice Hall, Inc.
S7 – 29
Break-Even Example
Fixed costs = $10,000
Direct labor = $1.50/unit
Material = $.75/unit
Selling price = $4.00 per unit
$10,000
F
BEP$ =
=
1 - [(1.50 + .75)/(4.00)]
1 - (V/P)
© 2008 Prentice Hall, Inc.
S7 – 30
Break-Even Example
Fixed costs = $10,000
Direct labor = $1.50/unit
Material = $.75/unit
Selling price = $4.00 per unit
$10,000
F
BEP$ =
=
1 - [(1.50 + .75)/(4.00)]
1 - (V/P)
$10,000
=
= $22,857.14
.4375
$10,000
F
BEPx =
=
= 5,714
4.00 - (1.50 + .75)
P-V
© 2008 Prentice Hall, Inc.
S7 – 31
Break-Even Example
50,000 –
Revenue
Dollars
40,000 –
Break-even
point
30,000 –
Total
costs
20,000 –
Fixed costs
10,000 –
|
–
0
© 2008 Prentice Hall, Inc.
|
|
2,000
4,000
|
6,000
Units
|
|
8,000
10,000
S7 – 32
Break-Even Example
Multiproduct Case
BEP$ =
where
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V
P
F
W
i
F
∑
Vi
1x (Wi)
Pi
= variable cost per unit
= price per unit
= fixed costs
= percent each product is of total dollar sales
= each product
S7 – 33
Multiproduct Example
Fixed costs = $3,500 per month
Item
Sandwich
Soft drink
Baked potato
Tea
Salad bar
© 2008 Prentice Hall, Inc.
Price
$2.95
.80
1.55
.75
2.85
Cost
$1.25
.30
.47
.25
1.00
Annual Forecasted
Sales Units
7,000
7,000
5,000
5,000
3,000
S7 – 34
Multiproduct Example
Fixed costs = $3,500 per month
Annual Forecasted
Item
Price
Cost
Sales Units
Sandwich
$2.95
$1.25
7,000
Soft drink
.80
.30
7,000
Baked potato
1.55
.47 Annual 5,000 Weighted
% of Contribution
Tea Selling Variable .75
.25Forecasted 5,000
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $
Sales (col 5 x col 7)
Salad bar
2.85
1.00
3,000
Sandwich
Soft drink
Baked
potato
Tea
Salad bar
© 2008 Prentice Hall, Inc.
$2.95
.80
1.55
$1.25
.30
.47
.42
.38
.30
.58
.62
.70
$20,650
5,600
7,750
.446
.121
.167
.259
.075
.117
.75
2.85
.25
1.00
.33
.35
.67
.65
3,750
8,550
$46,300
.081
.185
1.000
.054
.120
.625
S7 – 35
BEP Example
=
Multiproduct
V
∑ 1 - P x (W )
F
$
i
i
i
Fixed costs = $3,500 per month
$3,500
x Forecasted
12
Annual
=
= $67,200
.625
Item
Price
Cost
Sales Units
Sandwich
$2.95
$1.25
7,000
$67,200
Daily
Soft drink
.80
.30
7,000
=
= $215.38
sales
312 days
Baked potato
1.55
.47 Annual
5,000 Weighted
% of Contribution
Tea Selling Variable .75
.25Forecasted 5,000
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $
Sales (col 5 x col 7)
Salad bar
2.85
1.00
3,000
.446 x $215.38
= 32.6 .259
33
Sandwich
$2.95
$1.25
.42
.58
$20,650
.446
$2.95
sandwiches
Soft drink
Baked
potato
Tea
Salad bar
© 2008 Prentice Hall, Inc.
.80
1.55
.30
.47
.38
.30
.62
.70
5,600
7,750
.75
2.85
.25
1.00
.33
.35
.67
.65
3,750
8,550
$46,300
.121
.075
per
day
.167
.117
.081
.185
1.000
.054
.120
.625
S7 – 36
Decision Trees and
Capacity Decision
Market favorable (.4)
Market unfavorable (.6)
Market favorable (.4)
Medium plant
Market unfavorable (.6)
Market favorable (.4)
Market unfavorable (.6)
$100,000
-$90,000
$60,000
-$10,000
$40,000
-$5,000
$0
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S7 – 37
Decision Trees and
Capacity Decision
Market favorable (.4)
Market unfavorable (.6)
Market favorable (.4)
Medium plant
Large Plant
Market unfavorable (.6)
EMV = (.4)($100,000)
+ (.6)(-$90,000)
Market favorable (.4)
EMV = -$14,000
Market unfavorable (.6)
$100,000
-$90,000
$60,000
-$10,000
$40,000
-$5,000
$0
© 2008 Prentice Hall, Inc.
S7 – 38
Decision Trees and
Capacity Decision
-$14,000
Market favorable (.4)
Market unfavorable (.6)
$100,000
-$90,000
$18,000
Market favorable (.4)
Medium plant
Market unfavorable (.6)
$60,000
-$10,000
$13,000
Market favorable (.4)
Market unfavorable (.6)
$40,000
-$5,000
$0
© 2008 Prentice Hall, Inc.
S7 – 39
Strategy-Driven Investment
Operations may be responsible
for return-on-investment (ROI)
Analyzing capacity alternatives
should include capital
investment, variable cost, cash
flows, and net present value
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S7 – 40
Net Present Value (NPV)
F
P=
(1 + i)N
where
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F
P
i
N
= future value
= present value
= interest rate
= number of years
S7 – 41
Net Present Value (NPV)
F
P=
(1 + i)N
While
this works
where
F = future value
fine, it isP = present value
cumbersome for
interest rate
larger values iof= N
N = number of years
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S7 – 42
NPV Using Factors
F
P=
= FX
N
(1 + i)
where
Portion of
Table S7.1
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Year
1
2
3
4
5
X = a factor from Table S7.1
defined as = 1/(1 + i)N and
F = future value
5%
.952
.907
.864
.823
.784
6%
.943
.890
.840
.792
.747
7%
.935
.873
.816
.763
.713
…
10%
.909
.826
.751
.683
.621
S7 – 43
Present Value of an Annuity
An annuity is an investment which
generates uniform equal payments
S = RX
where
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X = factor from Table S7.2
S = present value of a series of
uniform annual receipts
R = receipts that are received every
year of the life of the investment
S7 – 44
Present Value of an Annuity
Portion of Table S7.2
Year
1
2
3
4
5
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5%
.952
1.859
2.723
4.329
5.076
6%
.943
1.833
2.676
3.465
4.212
7%
.935
1.808
2.624
3.387
4.100
…
10%
.909
1.736
2.487
3.170
3.791
S7 – 45
Present Value of an Annuity
$7,000 in receipts per for 5 years
Interest rate = 6%
From Table S7.2
X = 4.212
S = RX
S = $7,000(4.212) = $29,484
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S7 – 46
Present Value With Different
Future Receipts
Investment A’s
Cash Flow
Investment B’s
Cash Flow
Year
Present Value
Factor at 8%
$10,000
$9,000
1
.926
9,000
9,000
2
.857
8,000
9,000
3
.794
7,000
9,000
4
.735
© 2008 Prentice Hall, Inc.
S7 – 47
Present Value With Different
Future Receipts
Investment A’s
Present Values
Investment B’s
Present Values
1
$9,260 = (.926)($10,000)
$8,334 = (.926)($9,000)
2
7,713 = (.857)($9,000)
7,713 = (.857)($9,000)
3
6,352 = (.794)($8,000)
7,146 = (.794)($9,000)
4
5,145 = (.735)($7,000)
6,615 = (.735)($9,000)
Year
Totals
Minus initial
investment
Net present
value
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$28,470
$29,808
-25,000
-26,000
$3,470
$3,808
S7 – 48