Chapter 9 Capacity Decisions IDS 605 Spring 1999

Key Points: Capacity l Capacity = organizations ability to provide customer with goods and services they demand l Estimating capacity l System capacity vs. department capacity l Capacity decisions Transparency 9.1

Expanded Definition of Capacity 1. Managers need a yardstick to estimate capacity 2. Capacity = (max. rate of production/hour) X (number of hours) 3. Number of hours worked is affected: by overtime, second shift, preventive maintenance, and equipment failure 4. Rate of production is affected by: number of people assigned, equipment used and quality of materials 5. Capacity is a function of management decisions and ingenuity Transparency 9.2

Estimating Capacity Factors that Affect Production Rate 1. Change mix of products 2. Add people to production process 3. Increase motivation of production employees 4. Increase operating rate of machine 5. Improve quality of raw materials and work in process 6. Increase product yield Transparency 9.3

Product-Oriented Layout of Paper Mill (Exhibit 9.1) Transparency 9.4

Process-Oriented Layout of an Automotive Service Center Transparency 9.5 (Exhibit 9.2)

A Bottleneck in the Product Flow Transparency 9.6 (Exhibit 9.3)

Simple Steel Production Flow Transparency 9.8 (Exhibit 9.5)

Steel Production Flow: A Product Layout Transparency 9.9 (Exhibit 9.6)

Determining System Capacity Transparency 9.10 (Exhibit 9.7)

Rounding Out Capacity Transparency 9.11 (Exhibit 9.8)

7,000 6, , ,000 2, ,000 3,000 Chemical Corporation: A Product Layout (Slide 1 of 3) The numbers listed below the departments represent capacity in gallons per hour. The number of the arrows represent the number of parts (ratio) that must be combined to meet the needs of the next department. A B C D E FG H 1, Transparency 9.12a

Chemical Corporation: A Product Layout (Slide 2 of 3) G FD A BEH C 3,600 3,600 6,000 9,000 7,000 6,000 8,000 10,000 1,200 2,400 3,000 2,000 4,000 3,000 1,200 1,800 The numbers above the departments represent the production rate required to produce a system capacity of 9,000 gallons per hour. The bottleneck department is H Transparency 9.12b

Chemical Corporation: A Product Layout (Slide 3 of 3) G FD A BEH C 7,000 6,000 8,000 10,000 1,334 2,667 3,333 2,000 4,000 ????? 1,334 1,800 4,000 4,000 6,667 10, The System capacity can be increased by 1,000 gallons per hour if the capacity of department H is increased by 333 gallons per hour. If it happens, The bottleneck becomes department G. Transparency 9.12c

A Process Layout of a Medical Center (Exhibit 9.9) Transparency 9.13

Capacity Decisions l When to add capacity? l How much capacity to add? Where to add capacity? (Location decision, Chapter 10) l What type of capacity to add? (Process selection, Chapters 6&8) l Should capacity be reduced? Transparency 9.14

Capacity vs. Demand Transparency 9.15 (Exhibit 9.10)

Capacity, Demand and Production Rate Transparency 9.16 (Exhibit 9.11)

How Much Capacity to Add Transparency 9.17 (Exhibit 9.12)

Decision Tree for Capacity Decision Transparency 9.18 (Exhibit 9.13)

Calculations for Gross Profit (Slide 1 of 2) Transparency 9.19a (Exhibit 9.14) continues on next slide

Calculations for Gross Profit (Slide 2 of 2) Transparency 9.19b (Exhibit 9.14)

Decision Tree for Capacity Decision with Potential Competitor Transparency 9.20 (Exhibit 9.15)

Calculations for Gross Profit with Potential Competitor (Slide 1 of 2) Transparency 9.21a Operating Revenue ($000,000) Yrs. 1,2 ($10/unit)(200,000 units/yr.)(2 yrs.) Yr. 3 ($10/unit)(200,000 units/yr.)(.8) Yrs. 4,5 ($10/unit)(200,000 units/yr.)(.65)(2 yrs.) Yrs. 1,2 ($10/unit)(100,000 units/yr.)(2 yrs.) Yr. 3 ($10/unit)(200,000 units/yr.)(.8) Yrs. 4,5 ($10/unit)(200,000 units/yr.)(.65)(2 yrs.) Yrs. 1,2 ($10/unit)(100,000 units/yr.)(2 yrs.) Yrs. 3-5 ($10/unit)(200,000 units/yr.)(3 yrs.) = 4 = 1.6 = = 2 = 1.6 = = 2 = 6 8 Endpoint Number (Exhibit 9.16)

Operating Costs ($100,000) Yrs. 1,2 [($2.90/unit)(200,000 units/yr.) + $550,000/yr.](2 yrs.) Yr. 3 [($2.90/unit)(200,000 units/yr.)(.8) + $550,000/yr.] Yrs. 4,5 [($2.90/unit)(200,000 units/yr.)(.65) + $550,000/yr.](2 yrs.) Yrs. 1,2 [($3.70/unit)(100,000 units/yr.) + $400,000/yr.](2 yrs.) Yr. 3 [($3.70/unit)(200,000 units/yr.)(.8) + $800,000/yr.] Yrs. 4,5 [($3.70/unit)(200,000 units/yr.)(.65) + $800,000/yr.](2 yrs.) Yrs. 1,2 [($3.70/unit)(100,000 units/yr.) + $400,000/yr.](2 yrs.) Yrs. 3-5 [($3.70/unit)(200,000 units/yr.) + $800,000/yr.](3 yrs.) = 2.26 = = = 1.54 = = = 1.54 = Endpoint Number Calculations for Gross Profit with Potential Competitor (Slide 2 of 2) Transparency 9.21b Endpoint Number Gross Profit ($000,000) (Exhibit 9.16)

Plant Closings 1. Demand for product has declined 2. Shift capacity to another location 3. Build new facilities with new technology Transparency 9.22