Transcript Chapter 1, Heizer/Render, 5th edition

Operations
Management
Capacity Planning
Supplement 7
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Outline
 CAPACITY
Defining Capacity
 Capacity and Strategy
 Capacity Considerations
 Managing Demand

 CAPACITY PLANNING
 BREAKEVEN ANALYSIS
Single-Product Case
 Multiproduct Case

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Outline - Continued
 APPLYING DECISION TREES TO CAPACITY
DECISIONS
 STRATEGY DRIVEN INVESTMENTS
Investment, Variable Cost, and Cash Flow
 Net Present Value

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Learning Objectives
When you complete this supplement, you should
be able to :
Identify or Define:
Capacity
Design Capacity
Effective Capacity
 Utilization



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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



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Facility Planning
Facility planning answers:
 How much long-range capacity is needed
 When more capacity is needed
 Where facilities should be located (location)
 How facilities should be arranged (layout)
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Capacity Planning Process
Forecast
Demand
Develop
Alternative
Plans
Quantitative
Factors
(e.g., Cost)
Compute
Rated
Capacity
Evaluate
Capacity
Plans
Qualitative
Factors
(e.g., Skills)
Compute
Needed
Capacity
Select Best
Capacity
Plan
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Implement
Best Plan
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Types of Planning Over a Time
Horizon
Long Range
Planning
Intermediate
Range Planning
Add Facilities
Add long lead time equipment
Sub-Contract
Add Equipment
Add Shifts
*Limited options exist
Add Personnel
Build or Use Inventory
*
Short Range
Planning
Modify Capacity
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*
Schedule Jobs
Schedule Personnel
Allocate Machinery
Use Capacity
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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.
Effective
capacity:
Capacity a firm can expect to receive given its
product mix, methods of scheduling,
maintenance, and standards of quality.
Utilization:
Actual output as a percent of design capacity.
Efficiency:
Actual output as a percent of effective capacity.
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Actual or Expected Output
Actual (or Expected) Output =
(Effective Capacity)(Efficiency)
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Utilization
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
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Efficiency
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
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Implications of Capacity Changes
Changes in:
•
Sales
•
Cash flow
•
Quality
•
Supply chain
•
Human resources
•
Maintenance
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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
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Cost Structure for a Roadside Motel
25 room
roadside motel
50 room
roadside motel
Economies of
Scale
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75 room
roadside motel
Diseconomies
of Scale
Number of Rooms
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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
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Approaches to Capacity
Expansion
Expected Demand
Expected Demand
New Capacity
Demand
Demand
New Capacity
Time in Years
Capacity leads demand with an incremental expansion
Time in Years
Capacity leads demand with a one-step expansion
Expected Demand
New Capacity
New Capacity
Demand
Demand
Expected Demand
Time in Years
Capacity lags demand with an incremental expansion
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Time in Years
Attempts to have an average capacity, with
an incremental expansion
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Approaches to Capacity
Expansion
Expected Demand
Demand
New Capacity
Time in Years
Capacity leads demand with an incremental expansion
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Approaches to Capacity
Expansion
Expected Demand
Demand
New Capacity
Time in Years
Capacity leads demand with a one-step expansion
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Approaches to Capacity
Expansion
Expected Demand
Demand
New Capacity
Time in Years
Capacity lags demand with an incremental expansion
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Approaches to Capacity
Expansion
Demand
New Capacity
Expected Demand
Time in Years
Attempts to have an average capacity, with an incremental
expansion
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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

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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
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Breakeven Chart
Total revenue line
Profit
Breakeven point
Total cost = Total revenue
Cost in Dollars
Total cost line
Variable cost
Loss
Fixed cost
Volume (units/period)
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Crossover Chart
Process A: low volume, high variety
Process B: Repetitive
Process C: High volume, low variety
Fixed cost - Process C
Fixed cost - Process B
Fixed cost - Process A
Process A
Process B
Lowest cost process
Process C
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Cost of Wrong Process Found Via
Breakeven Analysis
Variable
cost
$
Fixed cost
Variable
cost
$
Fixed cost
Low volume, high
variety process
Repetitive process
Variable
cost
$
Fixed cost
High volume, low
variety process
Total cost for low
volume high variety
Total cost for repetitive process
Total cost for high volume,
low variety process
B1
B2
B3
A
B
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Volume
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Decision Tree and Capacity Decision
-$14,000
Market favorable (0.4)
Market unfavorable (0.6)
$18,000
Market favorable (0.4)
Market unfavorable (0.6)
$13,000
Market favorable (0.4)
Market unfavorable (0.6)
$100,000
-$90,000
$60,000
-10,000
-5,000
$40,000
$0
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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
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Net Present Value
F = future value
P = present value
I = interest rate
N = number of years
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P
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F
(i  1)
N
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NPV in a More Convenient Form
Present value of $1.00
P
F
(i  1)
N
P  FX
1
where X 
(i  1 ) N
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Year
5%
1
0.952
0.943 0.935
0.857
2
0.907
0.890 0.873
0.857
3
0.864
0.840 0.816
0.794
4
0.823
0.792 0.763
0.735
5
0.784
0.747 0.713
0.681
6
0.746
0.705 0.666
0.630
7
0.711
0.665 0.623
0.583
8
0.677
0.627 0.582
0.540
9
0.645
0.592 0.544
0.500
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6%
7%
8%
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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
S  RX
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Year 5%
6%
7%
8%
1
0.952 0.943 0.935 0.926
2
1.859 1.833 1.808 1.783
3
2.723 2.673 2.624 2.577
4
3.546 3.465 3.387 3.312
5
4.329 4.212 4.100 3.993
6
5.076 4.917 4.766 4.623
7
5.786 5.582 5.389 5.206
8
6.843 6.210 5.971 5.747
9
7.108 6.802 7.024 6.247
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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
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Extras
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Managing Existing Capacity
Demand Management
Capacity Management
 Vary prices
 Vary staffing
 Change equipment
& processes
 Change methods
 Redesign the product for
faster processing
 Vary promotion
 Change lead times
(e.g., backorders)
 Offer complementary
products
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Complementary Products
Sales (Units)
5,000
4,000
3,000
2,000
1,000
0
Total
Snowmobiles
Jet Skis
J M M J S N J M M J S N J
Time (Months)
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