Operations management heizer 6e sup07

Operations
Management

Supplement 7 –
Capacity Planning
PowerPoint presentation to accompany
Heizer/Render
Principles of Operations Management, 6e
Operations Management, 8e

© 2006
Prentice
Hall, Inc. Hall, Inc.
©
2006
Prentice

S7 – 1


Outline
 Capacity
 Design and Effective Capacity
 Capacity and Strategy
 Capacity Considerations
 Managing Demand

 Capacity Planning

© 2006 Prentice Hall, Inc.

S7 – 2


Outline – Continued
 Breakeven Analysis
 Single-Product Case
 Multiproduct Case

 Applying Decision Trees to
Capacity Decisions

© 2006 Prentice Hall, Inc.

S7 – 3


Outline – Continued
 Applying Investment Analysis to
Strategy-Driven Investments
 Investment, Variable Cost, and
Cash Flow
 Net Present Value

© 2006 Prentice Hall, Inc.

S7 – 4


Learning Objectives
When you complete this supplement,

you should be able to:
Identify or Define:
 Capacity
 Design capacity
 Effective capacity
 Utilization
© 2006 Prentice Hall, Inc.

S7 – 5


Learning Objectives
When you complete this supplement,
you should be able to:
Describe or Explain:
 Capacity considerations
 Net present value analysis
 Break-even analysis
 Financial considerations
 Strategy-driven investments
© 2006 Prentice Hall, Inc.

S7 – 6


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
© 2006 Prentice Hall, Inc.

S7 – 7


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
© 2006 Prentice Hall, Inc.

S7 – 8


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
© 2006 Prentice Hall, Inc.

S7 – 9

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

© 2006 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

© 2006 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

© 2006 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%

© 2006 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%

© 2006 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
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%

© 2006 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
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%

© 2006 Prentice Hall, Inc.

S7 – 16

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

© 2006 Prentice Hall, Inc.

S7 – 17


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

© 2006 Prentice Hall, Inc.

S7 – 18

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

© 2006 Prentice Hall, Inc.

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 complimentary
demand patterns
© 2006 Prentice Hall, Inc.

S7 – 20


Average unit cost
(dollars per room per night)

Economies and
Diseconomies of Scale

25 - Room
Roadside Motel

Economies
of scale

25
© 2006 Prentice Hall, Inc.

50 - Room
Roadside Motel

75 - Room
Roadside Motel

Diseconomies
of scale

50
Number of Rooms

75
Figure S7.2
S7 – 21


Capacity Considerations
 Forecast demand accurately
 Understanding the technology
and capacity increments
 Find the optimal operating level
(volume)
 Build for change

© 2006 Prentice Hall, Inc.

S7 – 22


Tactics for Matching
Capacity to Demand
1. Making staffing changes
2. Adjusting equipment and processes
 Purchasing additional machinery
 Selling or leasing out existing equipment

3. Improving methods to increase
throughput
4. Redesigning the product to facilitate
more throughput

© 2006 Prentice Hall, Inc.

S7 – 23


Complementary Demand
Patterns
Sales in units

4,000 –

By combining
both, the
variation is
reduced

3,000 –

Snowmobile
sales

2,000 –
1,000 –

JFMAMJJASONDJFMAMJJASONDJ
Time (months)
© 2006 Prentice Hall, Inc.

Jet ski
sales

Figure S7.3
S7 – 24


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 S7.4
© 2006 Prentice Hall, Inc.

S7 – 25