Operations Management

Capacity Planning

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

Planning Over a Time Horizon

Long-range planning Intermediaterange planning Short-range planning Modify capacity Add facilities Add long lead time equipment Subcontract Add equipment Add shifts

*
Add personnel Build or use inventory Schedule jobs Schedule personnel Allocate machinery Use capacity

* Limited options exist

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

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

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

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

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%

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%

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%

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%

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

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

Capacity Considerations
Forecast demand accurately
Understand the technology and capacity increments

Find the optimum operating level (volume)

Build for change

Economies and Diseconomies of Scale

Average unit cost (dollars per room per night)

25 - room roadside motel

50 - room roadside motel

75 - room roadside motel

Economies of scale

Diseconomies of scale

25

50 Number of Rooms

75

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

Complementary Demand Patterns

4,000 Sales in units 3,000 2,000 1,000 Jet ski engine sales Combining both demand patterns reduces the variation Snowmobile motor sales

JFMAMJJASONDJFMAMJJASONDJ Time (months)

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

Demand and Capacity Management in the Service Sector

Demand management
Appointment, reservations, FCFS rule

Capacity management
Full time, temporary, part-time staff

Approaches to Capacity Expansion

(a) Leading demand with incremental expansion
Demand New capacity Expected demand

(b) Leading demand with one-step expansion

Demand New capacity Expected demand

(c) Capacity lags demand with incremental expansion

Demand New capacity Expected demand

(d) Attempts to have an average capacity with incremental expansion

Demand New capacity Expected demand

Break-Even Analysis
900 800 700 Cost in dollars 600 Total revenue line

Break-even point Total cost = Total revenue

Total cost line

500
400 300 200 100
|

Variable cost

Fixed cost

| | | | | | | | | | | 0 100 200 300 400 500 600 700 800 900 1000 1100

Volume (units per period)

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

F BEPx = P-V

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

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)

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

Break-Even Example
50,000

40,000
30,000 20,000 10,000
| 0

Revenue Break-even point

Dollars

Total costs

Fixed costs

2,000

4,000

6,000 Units

8,000

10,000

Break-Even Example
Multiproduct Case
BEP$ = F

Vi 1x (Wi) Pi

where

V P F W i

= variable cost per unit = price per unit = fixed costs = percent each product is of total dollar sales = each product

Multiproduct Example
Fixed costs = $3,500 per month Item Sandwich Soft drink Baked potato Tea Salad bar 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

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 $2.95 .80 1.55 .75 2.85 $1.25 .30 .47 .25 1.00 .42 .38 .30 .33 .35 .58 .62 .70 .67 .65 $20,650 5,600 7,750 3,750 8,550 $46,300 .446 .121 .167 .081 .185 1.000 .259 .075 .117 .054 .120 .625

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 .80 1.55 .75 2.85 .30 .47 .38 .30 .33 .35 .62 .70 .67 .65 5,600 7,750 .121 .075 per day .167 .117 .054 .120 .625

.25 1.00

3,750 8,550 $46,300

.081 .185 1.000