Capacity Planning Chapter5 Feb 11

Virtual Company Tour

5-1

Quiz 2 Coverage & Schedule

5. Capacity Planning

a. Cost Volume Analysis

Session 9 (Feb 11)

6. Location Planning Session 10 (Feb 16)

7. Facilities Layout

a. Types of Manufacturing Process

b. Types of Layout

c. Line Balancing

d. Operations Sequence Analysis

Session 11 (Feb 16, 18)

8. Design of Work Systems

a. Principles of Work Design

b. Measurement of Work

c. Developing Standard Costs

9. Learning Curves

Session 12-14

(Feb 23, Mar 2, 4)

QUIZ 2 (15%) Session 15 (Mar 9, Mon)

5-2

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

5

Capacity Planning

For Products and

Services

Group Activity – Virtual Tour

Answer the ff. question:

Comment on the design capacity of

the Phaeton factory?

Comment on the utilization of the VW

Phaeton factory?

What justification can be given for the

utilization figure?

Video

5-4

../../Videos/Inside VW's Transparent Factory - The Edge - CNBC International - YouTube%5bvia torchbrowser.com%5d.mp4

5-5

Learning Objectives

Explain the importance of capacity

planning.

Discuss ways of defining and

measuring capacity.

Describe the determinants of

effective capacity.

Discuss the major considerations

related to developing capacity

alternatives.

5-6

Capacity Planning

Capacity is the upper limit or ceiling on the load that an operating unit can handle.

Capacity also includes

Equipment

Space

Employee skills

The basic questions in capacity handling are:

What kind of capacity is needed?

How much is needed?

When is it needed?

5-7

Capacity – DEA!

Design capacity

maximum output rate or service capacity an

operation, process, or facility is designed for

Effective capacity

Design capacity minus allowances such as

personal time, maintenance, and scrap

Actual output

rate of output actually achieved—cannot

exceed effective capacity

5-8

Efficiency and Utilization

Actual outputEfficiency =

Effective capacity

Actual outputUtilization =

Design capacity

Actual output is always the NUMERATOR

Both measures expressed as percentages

5-9

Actual output = 36 units/day Efficiency = = 90%

Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day = 72%

Design capacity 50 units/day

Example 1 – car wash business

Design capacity = 50 cars/day

Effective capacity = 40 cars/day

Actual output = 36 cars/day

S7 - 10© 2011 Pearson Education, Inc. publishing as Prentice Hall

Bakery Example

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls


Bakery Example




Bakery Example



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


Bakery Example



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


Bakery Example



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

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


Bakery Example



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

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


Bakery Example

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shiftsEfficiency = 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 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shiftsEfficiency = 84.6%Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

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

5-18

Calculating Processing Requirements

(Example 2)

ProductAnnual

Demand

Standardprocessing time

per unit (hr.)Processing time

needed (hr.)

#1

#2

#3

400

300

700

5.0

8.0

2.0

2,000

2,400

1,400 5,800

If annual capacity is 2000 hours, then we need three machines to

handle the required volume: 5,800 hours/2,000 hours = 2.90 machines

SAMPLE PROBLEM SOLVING

5-19

Problem # 1

P1. The Crystal Sparkle Co. produces glass tumblers. The plant is

designed to produce 400 tumblers per hour, and there is one eight-hour

shift per working day. However, the plant does not operate for the full

eight hours: the employees take two 15-minute breaks in each shift, one

in the first four hours and one in the second four hours, and the first

thirty minutes of the shift are spent raising the kilns to the required

temperature for firing glass. The plant usually produces about 10,000

tumblers per five-day workweek. Answer the following questions by

adjusting the data to one eight-hour shift.

a. What is the design capacity of the plant in tumblers, per shift?

b. What is the effective capacity in tumblers per shift?

c. What is the actual output in tumblers per shift?

d. What is the efficiency ratio?

e. What is the utilization ratio?

5-20

Solution

a. Design capacity = 8 hrs. x 400 tumblers = 3,200 tumblers per 8-hour shift.

b. Effective capacity = Design capacity - Nonproductive activities.

Design capacity - 8.0 hrs.

Less: Breaks -.5 hrs.

Heat-up - .5 hrs.

Net productive time: 8 - 0.5 - 0.5 = 7.0 hrs.

Effective capacity = 7 hrs. x 400 tumblers = 2,800 tumblers.

c. Actual output = 10,000/5 = 2,000 tumblers per 8-hour shift. (This is an average

output. In reality, there could be variation; some shifts could exceed 2,000

tumblers while others fall short.)

d. Efficiency = Actual output/Effective capacity = (2000)/2800 x 100 = 71.43%.

e. Utilization = Actual output/Design capacity = (2000)/3200 x 100 = 62.50%.

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Problem # 2

P2.The Goode and Cooke Company produces several models of frying pans.

There is little difference in the production time required for the various models;

the plant is designed to produce 160 frying pans per eight-hour shift, and there

are two shifts per working day. However, the plant does not operate for the full

eight hours: the employees take two 12-minute breaks in each shift, one in the

first four hours and one in the second four hours; two hours per week are

devoted to cleaning the factory and performing maintenance on the machines;

one four-hour period every four weeks is devoted to the meeting of the quality

circle. The plant usually produces about 3,500 frying pans per four-week period.

You may ignore holidays in solving this problem. Answer the following questions

by adjusting the data to a four-week time period.

a. What is the design capacity in frying pans?

b. What is the effective capacity in frying pans?

c. What is the actual output?

d. What is the efficiency?

e. What is the utilization?

f. Re-work the problem using a time period of one eight-hour shift.

5-22

Solution # 2

5-23

P2. a. Design capacity = 160 frying pans x 2 shifts x 20 working days = 6,400 frying pans per

four weeks.

b. 160/8 = 20 frying pans per hour.

8 hrs. x 2 shifts x 20 working days = 320 hrs. available.

Less

Breaks: (12 min. x 2 per shift x 2 shifts x 20 working days)/60 = 16 hrs.

Cleaning: 2 hrs. x 4 weeks 8 hrs.

Quality Circle 4 hrs.

Therefore, Net productive time is: 292 hrs.

Effective capacity = 292 hrs. x 20 frying pan per hour = 5,840 frying pans per four weeks.

c. Actual output = 3,500 frying pans.

d. Efficiency = Actual output/Effective Capacity = (100)(3500)/5840 = 59.93%.

e. Utilization = Actual output/Design capacity = (100)(3500)/6400 = 54.69%.

f. In terms of one 8-hour shift: Design capacity = 160 frying pans.

Effective capacity = 5840/40 = 146 frying pans.

The percentage answers will be the same as above.

Bottleneck OperationFigure 5.2

Machine #2Bottleneck

Operation

Machine #1

Machine #3

Machine #4

10/hr

10/hr

10/hr

10/hr

30/hr

Bottleneck operation: An operation

in a sequence of operations whose

capacity is lower than that of the

other operations

5-25

Bottleneck Operation

Operation 1

20/hr.

Operation 2

10/hr.

Operation 3

15/hr.10/hr.

Bottleneck

Maximum output rate

limited by bottleneck

5-26

Economies of Scale

Minimum cost & optimal operating rate are

functions of size of production unit.A

ve

rag

e c

os

t p

er

un

it

0

Smallplant Medium

plant Large

plant

Output rate

Figure 5.5


Economies and Diseconomies of Scale

Economies of scale

Diseconomies of scale

25 - room roadside motel 50 - room

roadside motel

75 - room roadside motel

Number of Rooms25 50 75

Ave

rag

e u

nit

co

st

(do

llars

per

roo

m p

er

nig

ht)

Figure S7.2

5-28

Evaluating Alternatives

Cost-volume analysis

Break-even point (BEP)

Financial analysis

Cash flow

Present value

Decision theory

Waiting-line analysis

Simulation


Break-Even AnalysisTotal revenue line

Total cost line

Variable cost

Fixed cost

Break-even pointTotal cost = Total revenue

–

900 –

800 –

700 –

600 –

500 –

400 –

300 –

200 –

100 –

–| | | | | | | | | | | |

0 100 200 300 400 500 600 700 800 900 10001100

Co

st

in d

ollars

Volume (units per period)Figure S7.5

5-30

Break-Even Problem with Step Fixed Costs

Quantity

Step fixed costs and variable costs

1 machine

2 machines

3 machines

Figure 5.7A

5-31

Break-Even Problem with Step Fixed Costs

$

TC

TC

TCBEP

2

BEP3

Quantity

1

2

3

Multiple break-even points

Figure 5.7B


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

TR = TC

or

Px = F + Vx

Break-even point occurs when

BEPx =F

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

= P

=

=

F

(P - V)/P

F

P - V

F

1 - V/P

Profit = TR - TC

= Px - (F + Vx)

= Px - F - Vx

= (P - V)x - F


Break-Even Example

Fixed costs = $10,000 Material = $.75/unit

Direct labor = $1.50/unit Selling price = $4.00 per unit

BEP$ = =F

1 - (V/P)

$10,000

1 - [(1.50 + .75)/(4.00)]


Break-Even Example

Fixed costs = $10,000 Material = $.75/unit

Direct labor = $1.50/unit Selling price = $4.00 per unit

BEP$ = =F

1 - (V/P)

$10,000

1 - [(1.50 + .75)/(4.00)]

= = $22,857.14$10,000

.4375

BEPx = = = 5,714F

P - V

$10,000

4.00 - (1.50 + .75)


Break-Even Example

50,000 –

40,000 –

30,000 –

20,000 –

10,000 –

–| | | | | |

0 2,000 4,000 6,000 8,000 10,000

Do

llars

Units

Fixed costs

Total costs

Revenue

Break-even point

Problem # 3

P3.The selling price of the product is $199.95. The variable costs per unit are:

Labor- $60.25

Raw material- $25.70

Purchased component- $21.50

Variable overhead- $17.50

The fixed costs total $300,000 per year. Perform a cost-volume (breakeven)

analysis of this company.

a. State total revenue as a formula, for any given volume of Q products.

b. State total cost as a formula, for any given volume of Q products.

c. State total profit as a formula, for any given volume of Q products.

d. What is the breakeven point in units of the product?

e. How much revenue is earned at the breakeven point?

f. How much profit is earned at the breakeven point?

g. Estimate the profit when 9,000 units of the product are sold in a year.

h. How many units must be sold for the company to make $900,000?

5-37

Solution # 3

5-38

P3. a. Total Revenue = R x Q = 199.95Q.

b. Total cost = FC + VC x Q = 300000 + (60.25 + 25.70 + 21.50 + 17.50)Q = 300000 +

124.95Q.

c. Profit per year = R x Q - (VC x Q + FC) = 199.95Q - 124.95Q - 300000 = 75Q - 300000.

d. QBEP = FC/(R - VC) = 300000/75 = 4,000 units.

e. Revenue at the break-even point = 4000(199.95) = $799,800.

f. Profit at the break-even point = $0. This is the definition of “breaking even”.

g. Profit at 9,000 units = 75(9000) - 300000 = $375,000.

h. Number of units = 75Q-300,000 = $900,000

Q = 16,000 units.

Problem # 4

5-39

P4. The Lade & Bach Company produces office chairs. The price of the chairs is $99.75 and the

variable cost per chair is $49.75. The following fixed costs are incurred:

Depreciation of plant and equipment per year $20,000

Property taxes per year $12,000

Manager’s salary and fringe benefits per month $5,200

Perform a breakeven analysis of this company:

a. State total revenue as a formula, for any given volume of Q products.

b. State total cost as a formula, for any given volume of Q products.

c. State total profit as a formula, for any given volume of Q products.

d. What is the breakeven point in units of the product?

e. How much revenue is earned at the breakeven point?

f. How much profit is earned at the breakeven point?

g. Estimate the profit when 1,500 chairs are produced in a year.

h. How many chairs must be sold for the company to make $75,000 in a year?

Solution # 4

5-40

P4. a. Total revenue = R x Q = 99.75Q.

b. Total cost = FC + VC x Q = 94400 + 49.75Q.

c. Profit per year = R x Q - (VC x Q + FC) = 99.75Q - (49.75Q + 94400) = 50Q - 94400.

d. QBEP = FC/(R - VC) = 94400/50 = 1,888 chairs.

e. Revenue at the break-even point = 99.75(1888) = $188,328.

f. Profit at the break-even point = $0.

g. Profit at 1,500 chairs = 50(1500) - 94400 = -$19,400, which is a net loss.

h. Number of chairs = 50Q – 94400 = $75,000

Q = 3,388 chairs.

5-41

Forecasting Capacity

Requirements

Long-term vs. short-term capacity needs

Long-term relates to overall level of capacity

such as facility size, trends, and cycles

Short-term relates to variations from

seasonal, random, and irregular fluctuations

in demand

5-42

Need to be near customers

Capacity and location are closely tied

Inability to store services

Capacity must be matched with timing of

demand

Degree of volatility of demand

Peak demand periods

Planning Service Capacity

5-43

In-House or Outsourcing

1. Available capacity

2. Expertise

3. Quality considerations

4. Nature of demand

5. Cost

6. Risk

Outsource: obtain a good or service

from an external provider

5-44

Developing Capacity Alternatives

1. Design flexibility into systems

2. Take stage of life cycle into account

3. Take a “big picture” approach to capacity

changes

Bottleneck operations

4. Prepare to deal with capacity “chunks”

5. Attempt to smooth out capacity

requirements

6. Identify the optimal operating level

Capacity Planning Chapter5 Feb 11

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