WEEK 05A – CAPACITY PLANNING AND CONTROL (CHAPTER 7S) Definitions, capacity measurement, MRP II and capacity, utilization, efficiency, breakeven SJSU Bus David Bentley 1

Definition of Capacity Upper limit on the work load that an operating unit can handle during a given period of time Plant, production line, work center, work station, employee Also defined as “Rate of output” Contrast to common definition of capacity SJSU Bus David Bentley 2

Capacity Decisions Affect… Ability to meet customer demand Possible long term commitments Competitive capability Capital investment and operating costs SJSU Bus David Bentley 3

Capacity and Production Environments Operation Types Project > Intermittent > Assembly > Repetitive > Continuous flow> Time to Forecast Capacity Capacity & raw materials Capacity, RM & assemblies Capacity, RM & products SJSU Bus David Bentley 4

Capacity Considerations - 1 Definition: “Rate of output” Utilization (uses design capacity) Relates actual output to theoretical output Paid for 8 hours, producing parts 6.4 hours; utilization = 6.4 / 8 = 80% Efficiency (uses effective capacity) Relates actual output to expected output Expect production of 100 parts, actual = 90; efficiency = 90% SJSU Bus David Bentley 5

Capacity Considerations - 2 Design capacity Maximum output under normal conditions Effective capacity Design capacity minus allowances for certain efficiency losses Actual output Recorded output for a given time period SJSU Bus David Bentley 6

Utilization & Efficiency Utilization Actual output_ Design capacity Efficiency Actual output_ Effective capacity SJSU Bus David Bentley 7

Productivity Product of (utilization X efficiency) (.80)(.90) = 0.72 or 72% SJSU Bus David Bentley 8

Theory of Constraints Developed by Eliyahu Goldratt – “The Goal” Management of bottlenecks Attempts to schedule and feed work to maximize the rate of work flow Utilizes “transfer batches” = operation overlapping Optimized Production Technology (OPT) software SJSU Bus David Bentley 9

“The Goal” – Excellence in Manufacturing “ ‘The Goal’ is about the OPT principles of manufacturing. It’s about trying to understand what makes our world tick so that we can make it better. When we think logically and consistently about our problems we can determine the ‘cause and effect’ relationships between actions and results.” - from “The Goal” 1984 by Eliyahu M. Goldratt and Jeff Cox SJSU Bus David Bentley 10

Cost-Volume Relationships SJSU Bus David Bentley 11 Amount ($) 0 Q (volume in units) Total cost = VC + FC Total variable cost (VC) Fixed cost (FC) Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved

Cost-Volume Relationships SJSU Bus David Bentley 12 Amount ($) Q (volume in units) 0 Total revenue Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved

Cost-Volume Relationships SJSU Bus David Bentley 13 Amount ($) Q (volume in units) 0 BEP units Profit Total revenue Total cost Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved

Make or Buy Cost-volume or breakeven analysis Q BEP = FC / (Rev – v) Where FC = fixed cost, Rev = unit price (or revenue), v = unit variable cost Example: candle manufacture FC = $50, Rev = $1, v = $.75 Solution: Q BEP = 50 / (1 -.75) = 200 SJSU Bus David Bentley 14

Breakeven related problems Q BEP = FC / (Rev – v) Q X = (Profit + FC) / (Rev –v) Profit = Q (Rev – v) – FC Rev = [(Profit + FC) / Q] +v TR = Q × Rev SJSU Bus David Bentley 15

Break-even and Step Fixed Costs SJSU Bus David Bentley 16 Quantity FC + VC = TC Step fixed costs and variable costs. 1 machine 2 machines 3 machines Operations Management, Seventh Edition, by William J. Stevenson Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved

MRP II Capacity Planning Levels Long Range Long Range Resource Planning (LRRP) Intermediate Range Rough Cut Capacity Planning (RCCP) Short Range Capacity Requirements Planning (CRP) SJSU Bus David Bentley 17

Long Range Resource Planning (LRRP) Planning up to 5 years out Time intervals in quarters and years Broad categories of capacity Land Buildings (square feet) Equipment (by type) Labor (by broad skill set) Money, etc. SJSU Bus David Bentley 18

Rough Cut Capacity Planning (RCCP) 18 – 24 months Time intervals in weeks and months Critical resources needed to meet MPS Allows time to: Hire / layoff Develop subcontractors Negotiate supply contracts Buy and install equipment SJSU Bus David Bentley 19

Capacity Requirements Planning (CRP) Probably about 12 month horizon Time intervals in days and weeks Considers all internal resources needed to satisfy MRP May include vendor capacity Allows time to: Buy parts Exercise or call in subcontracting Hire or lay off temps Schedule overtime SJSU Bus David Bentley 20

Input-Output (I/O) Analysis Measures at a work center not only Output, but also Input Also looks at changes in backlog Used to trace upstream and identify problems in feeder work centers SJSU Bus David Bentley 21