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
 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
© 2008 Prentice Hall, Inc. S7 – 2
 Planning Over a Time
Horizon

Long-range Add facilities

planning Add long lead time equipment *
Intermediate- Subcontract Add personnel
range Add equipment Build or use inventory
planning Add shifts

Schedule jobs
Short-range
planning
* Schedule personnel
Allocate machinery

Modify capacity Use capacity

* Limited options exist
Figure S7.1

© 2008 Prentice Hall, Inc. S7 – 3

 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

© 2008 Prentice Hall, Inc. S7 – 4

 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

© 2008 Prentice Hall, Inc. S7 – 5

 Bakery Example
Sara James Bakery has a plant for processing
breakfast rolls. Last week the facility produced
148,000 rolls. The effective capacity is 175,000
rolls.
The production line operates 7 days per week
with three 8-hour shifts per day.
The line was designed to process a nut-filled,
cinnamon-flavored, sugar coated Deluxe roll at
the rate of 1,200 per hour.
Determine the design capacity, utilization, and
efficiency for this plant when producing the
Deluxe roll.
© 2008 Prentice Hall, Inc. S7 – 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

© 2008 Prentice Hall, Inc. S7 – 7

 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 – 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

Utilization = 148,000/201,600 = 73.4%

© 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

Utilization = 148,000/201,600 = 73.4%

© 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%

Efficiency = 148,000/175,000 = 84.6%

© 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%

Efficiency = 148,000/175,000 = 84.6%

© 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
Efficiency = 84.6%
Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

= (175,000)(.75) = 131,250 rolls

© 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
Efficiency = 84.6%
Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

= (175,000)(.75) = 131,250 rolls

© 2008 Prentice Hall, Inc. S7 – 14

 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

© 2008 Prentice Hall, Inc. S7 – 15

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

© 2008 Prentice Hall, Inc. S7 – 16

 Economies and
Diseconomies of Scale
(dollars per room per night)
Average unit cost

25 - room 75 - room
roadside motel 50 - room roadside motel
roadside motel

Economies Diseconomies
of scale of scale
25 50 75
Number of Rooms
Figure S7.2
© 2008 Prentice Hall, Inc. S7 – 17
 Managing Demand
 Demand exceeds capacity
 Curtail demand by raising prices,
scheduling longer lead time
 Long term solution is to increase capacity
 Capacity exceeds demand
 Price reductions or agressive marketing
 Product changes
 Adjusting to seasonal demands
 Produce products with complementary
demand patterns
© 2008 Prentice Hall, Inc. S7 – 18
 Complementary Demand
Patterns

4,000 –
Sales in units

3,000 –

2,000 –

1,000 – Jet ski

engine
sales

JFMAMJJASONDJFMAMJJASONDJ
Time (months)
Figure S7.3

© 2008 Prentice Hall, Inc. S7 – 19

 Complementary Demand
Patterns

4,000 –
Sales in units

Snowmobile
3,000 – motor sales

2,000 –

1,000 – Jet ski

engine
sales

JFMAMJJASONDJFMAMJJASONDJ
Time (months)
Figure S7.3

© 2008 Prentice Hall, Inc. S7 – 20

 Complementary Demand
Patterns
Combining both
demand patterns
reduces the
variation
4,000 –
Sales in units

Snowmobile
3,000 – motor sales

2,000 –

1,000 – Jet ski

engine
sales

JFMAMJJASONDJFMAMJJASONDJ
Time (months)
Figure S7.3

© 2008 Prentice Hall, Inc. S7 – 21

 Tactics for Matching
Capacity to Demand
1. Making staffing changes (+/- employees)
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

© 2008 Prentice Hall, Inc. S7 – 22

 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 – 23

 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 – 24
 Break-Even Analysis
–
Total revenue line
900 –

800 –
Break-even point Total cost line
700 – Total cost = Total revenue
Cost in dollars

600 –

500 –

400 – Variable cost

300 –

200 –

100 – Fixed cost

–
| | | | | | | | | | | |
0 100 200 300 400 500 600 700 800 900 1000 1100
Figure S7.6
Volume (units per period)
© 2008 Prentice Hall, Inc. S7 – 25
 Break-Even Example
• Jimmy Stephens, Inc., has fixed
costs of $10,000 this period. Direct
labor is $ 1.50 per unit, and material
is $.75 per unit. The selling price is
$4.00 per unit.

© 2008 Prentice Hall, Inc. S7 – 26

 Break-Even Example
Fixed costs = $10,000 Material = $.75/unit
Direct labor = $1.50/unit Selling price = $4.00 per unit

F $10,000
BEP$ = =
1 - (V/P) 1 - [(1.50 + .75)/(4.00)]

© 2008 Prentice Hall, Inc. S7 – 27

 Break-Even Example
Fixed costs = $10,000 Material = $.75/unit
Direct labor = $1.50/unit Selling price = $4.00 per unit

F $10,000
BEP$ = =
1 - (V/P) 1 - [(1.50 + .75)/(4.00)]
$10,000
= = $22,857.14
.4375

F $10,000
BEPx = = = 5,714
P-V 4.00 - (1.50 + .75)

© 2008 Prentice Hall, Inc. S7 – 28

 Break-Even Example
50,000 –

Revenue
40,000 –
Break-even
point Total
30,000 –
Dollars

costs

20,000 –

Fixed costs
10,000 –

–
| | | | | |
0 2,000 4,000 6,000 8,000 10,000
Units

© 2008 Prentice Hall, Inc. S7 – 29

 Exercises
• Marty McDonald has a side business
packaging software in Wisconsin.
His annual fixed cost is $10,000,
variable cost is $ 8 per unit. The
selling price will be $ 12.50 per
package. What is the break-even
point in dollars? What is breakeven
in units?

© 2008 Prentice Hall, Inc. S7 – 30

© 2008 Prentice Hall, Inc. S7 – 31
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