2006 Prentice Hall, Inc. S7 – 1 Operations Management Supplement 7 – Capacity Planning 2006 Prentice Hall, Inc. PowerPoint presentation to accompany PowerPoint presentation to accompany Heizer/Render Heizer/Render Principles of Operations Management, 6e Principles of Operations Management, 6e Operations Management, 8e Operations Management, 8e
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PowerPoint presentation to accompanyPowerPoint presentation to accompany Heizer/Render Heizer/Render Principles of Operations Management, 6ePrinciples of Operations Management, 6eOperations Management, 8e Operations Management, 8e
The throughput, or the number of The throughput, or the number of units a facility can hold, receive, units a facility can hold, receive, store, or produce in a period of timestore, or produce in a period of time
Determines fixed costsDetermines fixed costs
Determines if demand will be Determines if demand will be satisfiedsatisfied
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 shifts’Efficiency 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, three-three- ‘ ‘88 hour shifts’ hour shifts’Efficiency Efficiency = 84.6%= 84.6%Efficiency of new line Efficiency of new line = 75%= 75%
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
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
BEPBEPxx == Break-even Break-even point in unitspoint in unitsBEPBEP$$ == Break-even Break-even point in dollarspoint in dollarsPP == Price per Price per unit (after all unit (after all discounts)discounts)
xx == Number of units Number of units producedproducedTRTR== Total revenue = PxTotal revenue = PxFF == Fixed costsFixed costsVV == Variable costsVariable costsTCTC== Total costs = F + VxTotal costs = F + Vx
TR = TCTR = TCoror
Px = F + VxPx = F + Vx
Break-even point Break-even point occurs whenoccurs when
BEPBEPxx == Break-even Break-even point in unitspoint in unitsBEPBEP$$ == 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 costsVariable costsTCTC== Total costs = F + VxTotal costs = F + Vx
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
Process, Volume, and VarietyProcess, Volume, and Variety
Process Focusprojects, job shops
(machine, print, carpentry)
Standard Register
Repetitive(autos, motorcycles)
Harley Davidson
Product Focus(commercial
baked goods, steel, glass)Nucor Steel
High VarietyHigh Varietyone or few one or few units per run, units per run, high varietyhigh variety(allows (allows customization)customization)
Changes in Changes in ModulesModulesmodest runs, modest runs, standardized standardized modulesmodules
Changes in Changes in Attributes Attributes (such as grade, (such as grade, quality, size, quality, size, thickness, etc.) thickness, etc.) long runs onlylong runs only
Mass Customization(difficult to achieve, but huge rewards)Dell Computer Co.
Poor Strategy Poor Strategy (Both fixed and (Both fixed and variable costs variable costs