Operations Management Capacity Design

1

Operations Management

Capacity Design

2

Types of Planning Over a Time Horizon

Add Facilities

Schedule Jobs Schedule Personnel Allocate Machinery

Sub-ContractAdd EquipmentAdd Shifts

Add PersonnelBuild or Use Inventory

Long Range Planning

Intermediate Range Planning

Short Range Planning

Modify Capacity Use Capacity

3

Definition and Measures of Capacity

DesignCapacity:

The maximum “throughput,” or number of units a facility can produce in a period of time.

Utilization: Actual output as a percent of design capacity.

Effective capacity:

Capacity a firm can expect to achieve given its product mix, methods of scheduling, maintenance, and standards of quality.

Efficiency: Actual output as a percent of effective capacity.

4

Measure of planned or actual capacity usage of a facility, work center, or machine

UtilizationActual Output

Design Capacity=

Utilization

5

Measure of how well a facility or machine is performing when used

EfficiencyActual output

Effective Capacity=

Efficiency

6

Facility produces breakfast rolls Last week, produced 148,000 rolls Effective capacity is 175,000 rolls Line operates 7 days a week with three

8-hour shifts per day Line designed to produce 1200 rolls per

hour Determine

Design Capacity Utilization Efficiency

Example

7

Same facility adding one more line due to

increase in demand for deluxe rolls

Effective capacity is 175,000 rolls of this

line

Efficiency of this second line will be 75%

What is the expected output?

Calculating actual output

8

Managing Demand

Demand exceeds capacity – curtail demand by raising prices, scheduling long lead times, etc

Capacity exceeds demand – stimulate demand through price reductions, aggressive marketing, etc

Adjusting to seasonal demands – offer products with complementary demand patterns – pdts for which demand is high for one when low for the other

9

Managing Capacity

1. Making staffing changes (increasing or decreasing the number of employees)

2. Adjusting equipment and processes – which might include purchasing additional machinery or selling or leasing out existing equipment

3. Improving methods to increase throughput; and/or

4. Redesigning the product to facilitate more throughput

10

Breakeven Analysis

Technique for evaluating process & equipment alternatives

Objective: Find the point ($ or units) at which total cost equals total revenue

Assumptions Revenue & costs are related linearly to

volume All information is known with certainty

11

Break-Even Analysis

Fixed costs: costs that continue

even if no units are produced:

depreciation, taxes, debt, mortgage

payments, salaries, etc

Variable costs: costs that vary with

the volume of units produced: labor

wages, materials, portion of utilities

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Breakeven Chart

Fixed cost

Variable cost

Total cost line

Total revenue line

ProfitBreakeven pointTotal cost = Total revenue

Volume (units/period)

Cost

in D

olla

rs

Loss

Profit

13

Crossover Chart

Fixed cost - Process A

Fixed cost - Process BFixed cost - Process C

Total cost - Process CTotal cost - Process B

Total co

st - P

roce

ss A

Process A: low volume, high varietyProcess B: Repetitive

Process C: High volume, low variety

Process CProcess BProcess A Lowest cost process

Break Even Contd..

BEPx= FC (units)P-V

BEPrs.= FC (amount)1-(V/P)

BEPrs.= FC (multi product)

∑[(1-Vi/Pi)*(Wi)]P=Selling price, V=variable costFC=fixed cost

BEP Calc.

A company has fixed costs of 10000/- this period. Direct costs are 1.5/- per unit and material cost is 0.75/- per unit. The selling price is 4/- per unit. Calculate the BEPs.

BEP Calc. in multi product case

ITEM PRICE COST FORECASTED SALES ANNUALLY

Sandwich

2.95 1.25 7000

Cola 0.80 0.30 7000

Burger 1.55 0.47 5000

Tea .75 0.25 5000

Salad 2.85 1.00 3000

Item P V V/P 1-(V/P)

Forecasted sales

% of sales

wghtd.contribution

sandwich

2.95

1.25

.42 .58 20650

.446 .259

Cola 0.80

.30 .38 .62 5600 .121 .075

Burger 1.55

.47 .30 .70 7750 .167 .117

Tea 0.75

.25 .33 .67 3750 .081 .054

Salad 2.85

1.0 .35 .65 8550 .185 .120

46300

1.00 .625

If the fixed costs are 3500,BEPrs.= FC

∑[(1-Vi/Pi)*(Wi)]

3500*12 = 672000.625

Decision trees application

A company is considering capacity expansion. it has 3 alternatives. the new facility would produce new type of product and currently the marketability of the product is unknown.

Types of plant favorable mkt. unfavorable mkt.

Large plant 100 k -90k Medium plant 60k -10k Small plant 40k -5k The probability of fav and unfav. Markets are

0.4 and 0.6 respectively.

EMV (large plant)=0.4(100k)+(.6)(-90k)=-14k

EMV (medium plant)=0.4(60k)+(.6)(-10k)=18k

EMV (small plant)=0.4(40k)+(.6)(-5k)=13k

Based on Expected market value, the company should build a medium plant

Net Present value

A co. having two capacity expansion alternatives A and B have useful lives of 4 years. Initial outlay for A is 25k and that for B is 26k. The cost of capital is 8%.the cash flow pattern is as follows.year A B1 10k 9k2 9k 9k3 8k 9k 4 7k 9k