© 2006 Prentice Hall, Inc.S7 – 1 Operations Management Supplement 7 – Capacity Planning © 2006 Prentice Hall, Inc. PowerPoint presentation to accompany Heizer/Render Principles of Operations Management, 6e Operations Management, 8e

© 2006 Prentice Hall, Inc.S7 – 2 Outline  Decision-making  Total cost, breakeven analysis  Capacity  Design and Effective Capacity  Capacity and Strategy  Capacity Considerations  Capacity Planning

© 2006 Prentice Hall, Inc.S7 – 3 Break-Even Analysis  Fixed costs are costs that continue even if no units are produced  Depreciation, taxes, debt, mortgage payments  Variable costs are costs that vary with the volume of units produced  Labor, materials, portion of utilities  Contribution is the difference between selling price and variable cost

© 2006 Prentice Hall, Inc.S7 – 4 Break-Even Analysis  Costs and revenue are linear functions  Generally not the case in the real world  We actually know these costs  Very difficult to accomplish  There is no time value of money Assumptions

© 2006 Prentice Hall, Inc.S7 – 5 Crossover Charts Fixed costs Variable costs $ High volume, low variety Process C Fixed costs Variable costs $ Repetitive Process B Fixed costs Variable costs $ Low volume, high variety Process A Fixed cost Process A Fixed cost Process B Fixed cost Process C Total cost V1V1V1V1 (2,857) V2V2V2V2 (6,666) 400,000300,000200,000 Volume$ Figure 7.6

© 2006 Prentice Hall, Inc.S7 – 6 Problem 1 A  A machine has fixed cost of $25,000 per month. For every unit produced on the machine, an additional cost of 20 cents per part is incurred. How much would it cost to use the machine to make 300,000 units in one month? Arithmetical approach: Total cost = Fixed Cost + (Variable Cost x Units produced)

© 2006 Prentice Hall, Inc.S7 – 7 Problem 1 A  Model A machine has fixed cost of $15,000 per month. For every unit produced on the machine, an additional cost of 20 cents per part is incurred. How much would each unit produced cost if we make  60,000 units and  84,000 units respectively?  Use Graphical approach:

© 2006 Prentice Hall, Inc.S7 – 8 Problem 1 A (Graphical Method)  Find out the maximum units and costs on problem (Why? Your graph must cover it)  Create a table to determine the line for variable cost (Total cost = $15,000 + $ 0.2 x V units)  Create scale x scale 1 square = 6000 units y scale 1 square = $1000  Draw x and y lines  Draw line for fixed curve  Add line for variable cost  Find total cost for all 60,000 and 84,000 units Units (V) 030,00060,00090,000120, x V

© 2006 Prentice Hall, Inc.S7 – 9 Problem 2  Before we could pay for the first machine we discovered that model B machine was on the market. It has fixed cost of $10,000 per month. For every unit produced on the machine, an additional cost of 70 cents per part is incurred. How much would each unit produced cost if we make  60,000 units and  84,000 units respectively? Use Graphical approach on same graph sheet

© 2006 Prentice Hall, Inc.S7 – 10 Problem 2 (Graphical Method)  Calculate the missing values!  Create a table to determine the line for variable cost (Total cost = $10,000 + $ 0.7 x V units)  Create scale x scale 1 square = 6000 units y scale 1 square = $1000  Draw x and y lines  Draw line for fixed curve  Add line for variable cost  Find total cost for all 60,000 and 84,000 units Units (V) 030,00060,00090,000120, x V 0

© 2006 Prentice Hall, Inc.S7 – 11 Problem 2 (Graphical Method)  Calculate the missing values!  Create a table to determine the line for variable cost (Total cost = $10,000 + $ 0.7 x V units)  Create scale x scale 1 square = 6000 units y scale 1 square = $1000  Draw x and y lines  Draw line for fixed curve  Add line for variable cost  Find total cost for all 60,000 and 84,000 units Units (V) 030,00060,00090,000120, x V 021,00042,00063,00084,000

© 2006 Prentice Hall, Inc.S7 – 12 Problem 2 (Graphical Method)  What have we learned about model A and model B machines?  What have we learned about the difference between production of more goods on same machines?  Which machine should we buy?

© 2006 Prentice Hall, Inc.S7 – 13 Problem 2 (Using Graph)  At which point (number of units) will both machines have the same total cost? Total cost 1 = Total cost 2  If we produce less than 10,000 units we use machine model B  For units higher than 10,000 units use model A  For units equal to 10,000 units which machine would we use? Use Graphical approach:

© 2006 Prentice Hall, Inc.S7 – 14 Problem 2 (Using Graph)  Breakeven analysis can be used to -compare cost of production to revenues -Compare cost of service agency to revenues

© 2006 Prentice Hall, Inc.S7 – 15 Profit corridor Loss corridor Break-Even Analysis Total revenue line Total cost line Variable cost Fixed cost Break-even point Total cost = Total revenue – – – – – – – – – – – |||||||||||| Cost in dollars Volume (units per period) Figure S7.5

© 2006 Prentice Hall, Inc.S7 – 16 Solution Problem 2 (Arithmetical approach)  At which point (number of units) will both machines have the same total cost? Arithmetical approach: Total cost 1 = Total cost 2 Fixed Cost 1 + (Variable Cost 1 x Units made 1 ) = Fixed Cost 2 + (Variable Cost 2 x Units made 2 )

© 2006 Prentice Hall, Inc.S7 – 17 Break-Even Analysis BEP x =Break-even point in units BEP $ =Break-even point in dollars P=Price per unit (after all discounts) x=Number of units produced TR=Total revenue = Px F=Fixed costs V=Variable costs TC=Total costs = F + Vx BEP $ = BEP x P = P ==F (P - V)/P F P - V F 1 - V/P Profit= TR - TC = Px - (F + Vx) = Px - F - Vx = (P - V)x - F

© 2006 Prentice Hall, Inc.S7 – 18 Break-Even Example 50,000 50,000 – 40,000 40,000 – 30,000 30,000 – 20,000 20,000 – 10,000 10,000 – – |||||| 02,0004,0006,0008,00010,000 Dollars Units Fixed costs Total costs Revenue Break-even point

© 2006 Prentice Hall, Inc.S7 – 19 Process Concepts (1)  Process Design: The first time creation of system ( i.e. activities, methods, tools, chronology and equipments) for the manufacture, servicing and delivery of a service or product to customers.

© 2006 Prentice Hall, Inc.S7 – 20 Process Concepts (2)  Process Control: The use of information technologies and other technologies to monitor and control the performance of a physical process.  Goal: Ensuring reliability, cost efficiency and quality of process.

© 2006 Prentice Hall, Inc.S7 – 21 Process Concepts (3)  Process Analysis: The use of analytical tools, math and statistical techniques to evaluate the strengths and weaknesses of existing physical processes.  Goal: Finding root causes of problems and identifying potential for improvements.

© 2006 Prentice Hall, Inc.S7 – 22 Process Concepts (4)  Process Redesign: The rethinking and recreation of existing processes to dramatically improve performance or outcomes.  Goal: Eliminating waste, bottlenecks and problems.

© 2006 Prentice Hall, Inc.S7 – 23 Process Concepts (5)  Process automation: The integration of computer technology into a process to eliminate manual processes and/or support human functions during process execution.  Goal: Eliminating waste, bottlenecks and problems.  Examples: Computer and numerical control (CNC), Auto. identification Systems, Vision Sys., Automated Guided Vehicles (AGI), Auto. Storage & Retrieval sys.

© 2006 Prentice Hall, Inc.S7 – 24 Process Cases  Hotel industry: Monitoring of workers. Controlling access to rooms. P. 222  Barbers shop case. P. 223

© 2006 Prentice Hall, Inc.S7 – 25 Capacity of Processes  When multiple activities are linked together, interesting capacity issues arise. Concept of bottleneck. Which stage is the bottleneck? Activity Times 60 mins 60 mins 45 mins 50 mins Batch sizes 10,000 units 6,000 units 8,000 units 10,000 units Effective capacity 80,000 48,000 85,333 96,000 units/day units/day units/day units/day

© 2006 Prentice Hall, Inc.S7 – 26 Cycle Time of Processes  Assume that both washer (activity 1) and dryer (activity 2) are full and that you have clothes that will fill the systems for a very long time. At which rate will dry clothes come out of the dryer (cycle time concept)? Laudromat X process. 1 2 Activity Times 60 mins 50 mins 1.____Mins finished 2.____Mins waiting 3.____Mins finished 4.____Mins waiting 5.____Mins finished 6.____Mins waiting ____Total time ____Total time ____Total loads ____Total loads ____ Cycle time ____ Cycle time Throughput = = 110 mins  Throughput : Time it takes for a flow unit to go through every stage of a process.

© 2006 Prentice Hall, Inc.S7 – 27 Time Flow of Process  Cycle time: Rate at which flow units emerge at end of a work stage or station 1 2Activity Times 60 mins 50 mins 1._50_Mins finished 2._10_Mins waiting 3._50_Mins finished 4._10_Mins waiting 5._50_Mins finished 6._10_Mins waiting 180_Mins Total time 180_Mins Total time _3_Total loads _3_Total loads _60 Mins_ Cycle time _60 Mins_ Cycle time Time 60mins 50mins Laudromat X example

© 2006 Prentice Hall, Inc.S7 – 28 Cycle Time of Processes  Cycle time assumes that a process is in steady state with inputs being processes for a long time. Cycle time is the time between successive outputs of a system at its steady state. Throughput is the time it takes a unit to move through a whole process.  What is the cycle time for this Office process? 2 3 Activity Times 30 mins 70 mins 40 mins 1.____Mins finished 2.____Mins waiting 3.____Mins finished 4.____Mins waiting 5.____Mins finished 6.____Mins waiting ____Total time ____Total time ____Total loads ____Total loads ____ Cycle time ____ Cycle time 1 Throughput = = 140 mins

© 2006 Prentice Hall, Inc.S7 – 29 Cycle Time of Redesigned Processes  What is the cycle time for the stages 2 and 3 of the redesigned office process? 2 3 Activity Times 30 mins 70 mins 1 Throughput = = 100 mins longest Throughput = = 60 mins shortest Activity Times 30 mins

© 2006 Prentice Hall, Inc.S7 – 30 Capacity  Determines throughput, or the number of units a facility can hold, receive, store, or produce in a period of time  Determines fixed costs  Determines if demand will be satisfied Capacity of an equipment or resource:

© 2006 Prentice Hall, Inc.S7 – 31 Design and Effective Capacity  Design capacity is the maximum theoretical output of a system  Normally expressed as a rate  Effective capacity is the capacity a firm expects to achieve given current operating constraints  Often lower than design capacity

© 2006 Prentice Hall, Inc.S7 – 32 Types of Constraints  Design capacity is limited by technology constraints  Effective capacity is limited by organizational and business constraints, e.g. funding, staffing level, layout  Actual capacity is limited by poor execution and management constraints, e.g. machine down time, errors, absenteeism

© 2006 Prentice Hall, Inc.S7 – 33 Class Problem 1  A CSS machine could produce 850 units per hour. The maximum theoretical time that it could be used each time is 16 hours per day (and 30 days per month). What is the theoretical (design) capacity that Sigma firm could get out of the machine? Arithmetical approach: Capacity = Production per period * Period used

© 2006 Prentice Hall, Inc.S7 – 34 Problem 2  Due to local labor union rules, Sigma employees operating the CSS machine can only work 7.5 hours per day. No shift work is allowed. The firm also operates 20 days per month. The machine can produce 850 units per hour. What is the effective output capacity that one could expect per month? Arithmetical approach:

© 2006 Prentice Hall, Inc.S7 – 35 Problem 2b  Alpha Inc. also bought the CSS machine. Its employees, operating the CSS machine, can work 9 hours per day. No shift work is allowed. The firm also operates 20 days per month. The machine can produce 850 units per hour. What is the effective output capacity that we could expect per month at Alpha? Arithmetical approach:

© 2006 Prentice Hall, Inc.S7 – 36 Problem 3  Due to process delays at Alpha, the employee operating the CSS machine only works 6.8 hours per day. She also needs to clean the machine often, hence the machine makes a maximum of 800 units per hour. The firm still operates 20 days per month. Also, the worker is at work 99% of the month. What is the actual output capacity that we could expect per month? Arithmetical approach:

© 2006 Prentice Hall, Inc.S7 – 37 Utilization and Efficiency Utilization is the percent of design capacity achieved Efficiency is the percent of effective capacity achieved Utilization = Actual Output/Design Capacity Efficiency = Actual Output/Effective Capacity

© 2006 Prentice Hall, Inc.S7 – 38 Problem 4  If the the actual monthly output is 107,712 units per month, effective capacity is 127,500 units per month and the design capacity is 408,000 per month. Calculate the utilization and efficiency of the CSS machine. Arithmetical approach: Utilization = Actual Output/Design Capacity Efficiency = Actual Output/Effective Capacity

© 2006 Prentice Hall, Inc.S7 – 39 Capacity Considerations  Forecast demand accurately  Understanding the technology and capacity increments  Find the optimal operating level (volume)  Build for change

© 2006 Prentice Hall, Inc.S7 – 40 Tactics for Matching Capacity to Demand 1.Making staffing changes 2.Adjusting equipment and processes  Purchasing additional machinery  Selling or leasing out existing equipment 3.Improving methods to increase throughput 4.Redesigning the product to facilitate more throughput