© 2008 Prentice Hall, Inc.S7 – 1 Operations Management Supplement 7 – Capacity Planning PowerPoint presentation to accompany Heizer/Render Principles of Operations Management, 7e Operations Management, 9e

© 2008 Prentice Hall, Inc.S7 – 2 Capacity  The 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

© 2008 Prentice Hall, Inc.S7 – 3 Modify capacity Use capacity Planning Over a Time Horizon Intermediate- range planning SubcontractAdd personnel Add equipmentBuild or use inventory Add shifts Short-range planning Schedule jobs Schedule personnel Allocate machinery * Long-range planning Add facilities Add long lead time equipment * * Limited options exist Figure S7.1

© 2008 Prentice Hall, Inc.S7 – 4 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

© 2008 Prentice Hall, Inc.S7 – 5 Capacity and Strategy  Capacity decisions impact all 10 decisions of operations management as well as other functional areas of the organization  Capacity decisions must be integrated into the organization’s mission and strategy

© 2008 Prentice Hall, Inc.S7 – 6 Capacity Considerations  Forecast demand accurately  Understand the technology and capacity increments  Find the optimum operating level (volume)  Build for change

© 2008 Prentice Hall, Inc.S7 – 7 Managing Demand  Demand exceeds capacity  Curtail demand by raising prices, scheduling longer lead time  Long term solution is to increase capacity  Capacity exceeds demand  Stimulate market  Product changes  Adjusting to seasonal demands  Produce products with complementary demand patterns

© 2008 Prentice Hall, Inc.S7 – 8 Tactics for Matching Capacity to Demand 1.Making staffing changes 2.Adjusting equipment  Purchasing additional machinery  Selling or leasing out existing equipment 3.Improving processes to increase throughput 4.Redesigning products to facilitate more throughput 5.Adding process flexibility to meet changing product preferences 6.Closing facilities

© 2008 Prentice Hall, Inc.S7 – 9 Demand and Capacity Management in the Service Sector  Demand management  Appointment, reservations  Capacity management  Full time, temporary, part-time staff

© 2008 Prentice Hall, Inc.S7 – 10 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 S7.6

© 2008 Prentice Hall, Inc.S7 – 11 Decision Trees and Capacity Decision Market unfavorable Market favorable Large plant Market favorable Market unfavorable Medium plant Market favorable Market unfavorable Small plant Do nothing