2008 Prentice Hall, Inc. S7 – 1 Operations Management Supplement 7 – Supplement 7 – Capacity Planning Capacity Planning PowerPoint presentation to accompany PowerPoint presentation to accompany Heizer/Render Heizer/Render Principles of Operations Management, 7e Principles of Operations Management, 7e Operations Management, 9e Operations Management, 9e
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PowerPoint presentation to accompany PowerPoint presentation to accompany Heizer/Render Heizer/Render Principles of Operations Management, 7ePrinciples of Operations Management, 7eOperations Management, 9e Operations Management, 9e
Design and Effective CapacityDesign and Effective Capacity Capacity and StrategyCapacity and Strategy Capacity ConsiderationsCapacity Considerations Managing DemandManaging Demand Demand and Capacity Demand and Capacity
Management in the Service Management in the Service SectorSector
Applying Investment Analysis to Applying Investment Analysis to Strategy-Driven InvestmentsStrategy-Driven Investments Investment, Variable Cost, and Investment, Variable Cost, and
Cash FlowCash Flow Net Present ValueNet Present Value
Learning ObjectivesLearning ObjectivesWhen you complete this supplement, When you complete this supplement, you should be able to:you should be able to:
capacity, and utilizationcapacity, and utilization3.3. Compute break-even analysisCompute break-even analysis4.4. Apply decision trees to capacity Apply decision trees to capacity
decisionsdecisions5.5. Compute net present valueCompute net present value
Design and Effective Design and Effective CapacityCapacity
Design capacity is the maximum Design capacity is the maximum theoretical output of a systemtheoretical output of a system Normally expressed as a rateNormally expressed as a rate
Effective capacity is the capacity a Effective capacity is the capacity a firm expects to achieve given current firm expects to achieve given current operating constraintsoperating constraints Often lower than design capacityOften lower than design capacity
Actual production last week = Actual production last week = 148,000148,000 rolls rollsEffective capacity = Effective capacity = 175,000175,000 rolls rollsDesign capacity = Design capacity = 1,2001,200 rolls per hour rolls per hourBakery operates Bakery operates 77 days/week, days/week, 3 -3 - 88 hour shifts hour shiftsEfficiency Efficiency = 84.6%= 84.6%Efficiency of new line Efficiency of new line = 75%= 75%
Actual production last week = Actual production last week = 148,000148,000 rolls rollsEffective capacity = Effective capacity = 175,000175,000 rolls rollsDesign capacity = Design capacity = 1,2001,200 rolls per hour rolls per hourBakery operates Bakery operates 77 days/week, days/week, 3 -3 - 88 hour shifts hour shiftsEfficiency Efficiency = 84.6%= 84.6%Efficiency of new line Efficiency of new line = 75%= 75%
Capacity decisions impact all 10 Capacity decisions impact all 10 decisions of operations decisions of operations management as well as other management as well as other functional areas of the organizationfunctional areas of the organization
Capacity decisions must be Capacity decisions must be integrated into the organization’s integrated into the organization’s mission and strategymission and strategy
Tactics for Matching Tactics for Matching Capacity to DemandCapacity to Demand
1.1. Making staffing changesMaking staffing changes2.2. Adjusting equipmentAdjusting equipment
Purchasing additional machineryPurchasing additional machinery Selling or leasing out existing equipmentSelling or leasing out existing equipment
3.3. Improving processes to increase throughputImproving processes to increase throughput4.4. Redesigning products to facilitate more Redesigning products to facilitate more
throughputthroughput5.5. Adding process flexibility to meet changing Adding process flexibility to meet changing
Technique for evaluating process Technique for evaluating process and equipment alternativesand equipment alternatives
Objective is to find the point in Objective is to find the point in dollars and units at which cost dollars and units at which cost equals revenueequals revenue
Requires estimation of fixed costs, Requires estimation of fixed costs, variable costs, and revenuevariable costs, and revenue
Break-Even AnalysisBreak-Even Analysis Fixed costs are costs that continue Fixed costs are costs that continue
even if no units are producedeven if no units are produced Depreciation, taxes, debt, mortgage Depreciation, taxes, debt, mortgage
paymentspayments Variable costs are costs that vary Variable costs are costs that vary
with the volume of units producedwith the volume of units produced Labor, materials, portion of utilitiesLabor, materials, portion of utilities Contribution is the difference between Contribution is the difference between
selling price and variable costselling price and variable cost
Break-Even AnalysisBreak-Even AnalysisBEPBEPxx == break-even break-even point in unitspoint in unitsBEPBEP$$ == break-even break-even point in dollarspoint in dollarsPP == price per price per unit (after all unit (after all discounts)discounts)
xx == number of units number of units producedproducedTRTR== total revenue = Pxtotal revenue = PxFF == fixed costsfixed costsVV == variable cost per unitvariable cost per unitTCTC== total costs = F + Vxtotal costs = F + Vx
TR = TCTR = TCoror
Px = F + VxPx = F + Vx
Break-even point Break-even point occurs whenoccurs when
Break-Even AnalysisBreak-Even AnalysisBEPBEPxx == break-even break-even point in unitspoint in unitsBEPBEP$$ == break-even break-even point in dollarspoint in dollarsPP == price per price per unit (after all unit (after all discounts)discounts)
xx == number of units number of units producedproducedTRTR== total revenue = Pxtotal revenue = PxFF == fixed costsfixed costsVV == variable cost per unitvariable cost per unitTCTC== total costs = F + Vxtotal costs = F + Vx
BEPBEP$$ = BEP= BEPx x PP
= P= P
==
= =
FF((P - VP - V))/P/P
FFP - VP - V
FF1 -1 - V/P V/P
ProfitProfit = TR - TC= TR - TC= Px - = Px - ((F + VxF + Vx))= Px - F - Vx= Px - F - Vx= = ((P - VP - V))x - Fx - F
Fixed costs Fixed costs = $10,000= $10,000 Material Material = $.75= $.75/unit/unitDirect labor Direct labor = $1.50= $1.50/unit/unit Selling price Selling price = $4.00= $4.00 per unit per unit
Fixed costs Fixed costs = $10,000= $10,000 Material Material = $.75= $.75/unit/unitDirect labor Direct labor = $1.50= $1.50/unit/unit Selling price Selling price = $4.00= $4.00 per unit per unit
Operations may be responsible Operations may be responsible for return-on-investment (ROI)for return-on-investment (ROI)
Analyzing capacity alternatives Analyzing capacity alternatives should include capital should include capital investment, variable cost, cash investment, variable cost, cash flows, and net present valueflows, and net present value
wherewhere XX == a factor a factor from Table S7.1 defined as from Table S7.1 defined as = 1/(1 += 1/(1 + i i))NN and F = future and F = future valuevalue
Present Value of an AnnuityPresent Value of an AnnuityAn annuity is an investment which An annuity is an investment which generates uniform equal paymentsgenerates uniform equal payments
S = RXS = RX
wherewhere XX == factor from Table factor from Table S7.2S7.2SS == present value of a present value of a series of uniform annual series of uniform annual receiptsreceiptsRR == receipts that are receipts that are received every year of the life of received every year of the life of the investmentthe investment