1. 7 3 Capacity Planning PowerPoint presentation to accompany
SUPPLEMENT
PowerPoint presentation to accompany
Heizer and Render
Operations Management, Global Edition, Eleventh Edition
Principles of Operations Management, Global Edition, Ninth Edition
PowerPoint slides by Jeff Heyl
© 2014 Pearson Education

2. OUTLINE Capacity Key Issues in Capacity Planning Bottleneck Analysis
- design capacity
- effective capacity
Key Issues in Capacity Planning
Bottleneck Analysis
Multi-Product Break-Even Analysis
Applying EMV to Capacity Planning Decisons
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3. 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
Determines if facilities remain idle
This slide provides some reasons that capacity is an issue. The following slides guide a discussion of capacity.
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4. Planning Over a Time Horizon
Modify capacity
Use capacity
Intermediate-range planning
Subcontract Add personnel
Add equipment Build or use inventory
Add shifts
Short-range planning
Schedule jobs
Schedule personnel
Allocate machinery *
Long-range planning
Add facilities
Add long lead time equipment
* Difficult to adjust capacity as limited options exist
Options for Adjusting Capacity
Figure S7.1
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5. 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
This slide can be used to frame a discussion of capacity.
Points to be made might include:
- capacity definition and measurement is necessary if we are to develop a production schedule
- while a process may have “maximum” capacity, many factors prevent us from achieving that capacity on a continuous basis.
Students should be asked to suggest factors which might prevent one from achieving maximum capacity.
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6. Utilization and Efficiency
Utilization is the percent of design capacity achieved
Utilization = Actual output/Design capacity
Efficiency is the percent of effective capacity achieved
Efficiency = Actual output/Effective capacity
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7. Bakery Example Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, hour shifts
Weekly Design capacity = (7 x 3 x 8) x (1,200)
= 201,600 rolls
It might be useful at this point to discuss typical equipment utilization rates for different process strategies if you have not done so before.
© 2011 Pearson Education, Inc. publishing as Prentice Hall

8. Bakery Example Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, hour shifts
Weekly Design capacity = (7 x 3 x 8) x (1,200)
= 201,600 rolls
It might be useful at this point to discuss typical equipment utilization rates for different process strategies if you have not done so before.
© 2011 Pearson Education, Inc. publishing as Prentice Hall

9. Bakery Example Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, hour shifts
Weekly Design capacity = (7 x 3 x 8) x (1,200)
= 201,600 rolls
It might be useful at this point to discuss typical equipment utilization rates for different process strategies if you have not done so before.
Utilization = 148,000/201,600 = 73.4%
© 2011 Pearson Education, Inc. publishing as Prentice Hall

10. Bakery Example Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, hour shifts
Weekly Design capacity = (7 x 3 x 8) x (1,200)
= 201,600 rolls
It might be useful at this point to discuss typical equipment utilization rates for different process strategies if you have not done so before.
Utilization = 148,000/201,600 = 73.4%
© 2011 Pearson Education, Inc. publishing as Prentice Hall

11. Bakery Example Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, hour shifts
Weekly Design capacity = (7 x 3 x 8) x (1,200)
= 201,600 rolls
It might be useful at this point to discuss typical equipment utilization rates for different process strategies if you have not done so before.
Utilization = 148,000/201,600 = 73.4%
Efficiency = 148,000/175,000 = 84.6%
© 2011 Pearson Education, Inc. publishing as Prentice Hall

12. Bakery Example Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, hour shifts
Weekly Design capacity = (7 x 3 x 8) x (1,200)
= 201,600 rolls
It might be useful at this point to discuss typical equipment utilization rates for different process strategies if you have not done so before.
Utilization = 148,000/201,600 = 73.4%
Efficiency = 148,000/175,000 = 84.6%
© 2011 Pearson Education, Inc. publishing as Prentice Hall

13. Bakery Example: Estimating Output of a New Facility
They are considering adding a second production line
and they plan to hire new employees and train them to
operate this new line
Effective capacity on this new line = 175,000 rolls which
is the same on the first line
However, due to new hires they expect that efficiency of this new line will be 75% rather than 84.6%
Expected Output = (Effective Capacity) * (Efficiency)
It might be useful at this point to discuss typical equipment utilization rates for different process strategies if you have not done so before.
= (175,000) * (.75) = 131,250 rolls
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14. İmportant Issues in Capacity Planning
Forecast demand accurately
Understand the technology and capacity increments
Find the optimum operating level (volume)
Build for change
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15. Optimum (Best) Operating Level and Size
Alternative 1: Purchase one large facility, requiring one large
initial investment
Alternative 2: Add capacity incrementally in smaller chunks as
needed
© Wiley 2010

16. Optimum (Best) Operating Level
The Best Operating Level is the output that results in the lowest average unit cost
Economies of Scale:
Where the cost per unit of output drops as volume of output increases
Spread the fixed costs of buildings & equipment over multiple units, allow bulk purchasing & handling of material
Diseconomies of Scale:
Where the cost per unit rises as volume increases
Often caused by congestion (overwhelming the process with too much work-in-process) and scheduling complexity

17. Managing Demand Demand exceeds capacity Capacity exceeds demand
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
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18. Complementary Demand Patterns
4,000 –
3,000 –
2,000 –
1,000 –
J F M A M J J A S O N D J F M A M J J A S O N D J
Sales in units
Time (months)
Jet ski engine sales
Figure S7.3
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19. Complementary Demand Patterns
4,000 –
3,000 –
2,000 –
1,000 –
J F M A M J J A S O N D J F M A M J J A S O N D J
Sales in units
Time (months)
Snowmobile motor sales
Jet ski engine sales
Figure S7.3
© 2011 Pearson Education, Inc. publishing as Prentice Hall

20. Complementary Demand Patterns
Combining both demand patterns reduces the variation
4,000 –
3,000 –
2,000 –
1,000 –
J F M A M J J A S O N D J F M A M J J A S O N D J
Sales in units
Time (months)
Snowmobile motor sales
Jet ski engine sales
Figure S7.3
© 2011 Pearson Education, Inc. publishing as Prentice Hall

21. Tactics for Matching Capacity to Demand
Making staffing changes
Adjusting equipment
Purchasing additional machinery
Selling or leasing out existing equipment
Improving processes to increase throughput
Redesigning products to facilitate more throughput
Adding process flexibility to meet changing product preferences
Closing facilities
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22. Demand and Capacity Management in the Service Sector
Demand management (scheduling customers)
Appointment, reservations, FCFS rule
Capacity management
(scheduling workforce)
Full time, temporary, part-time staff
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23. Bottleneck Analysis and Theory of Constraints
Each work area can have its own unique capacity
Capacity analysis determines the throughput capacity of workstations in a system
A bottleneck is a limiting factor or constraint
A bottleneck has the lowest effective capacity in a system
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25. Bottleneck Management
Release work orders to the system at the pace of set by the bottleneck
Lost time at the bottleneck represents lost time for the whole system
Increasing the capacity of a non-bottleneck station is a mirage
Increasing the capacity of a bottleneck increases the capacity of the whole system
© 2011 Pearson Education, Inc. publishing as Prentice Hall

26. Bottleneck Analysis and the Theory of Constraints
The bottleneck time is the time of the slowest workstation (the one that takes the longest) in a production system
The throughput time is the time it takes a unit to go through production from start to end
Figure S7.4
2 min/unit
4 min/unit
3 min/unit A B C

27. Capacity Analysis Two identical sandwich assembly lines
Each assembly line has two workers and two operations
All completed sandwiches are wrapped
Wrap/
Deliver
37.5 sec/sandwich
Order
30 sec/sandwich
Bread
Fill
15 sec/sandwich
20 sec/sandwich
Toaster

28. Capacity Analysis
Wrap/
Deliver
37.5 sec
Order
30 sec
Bread
Fill
15 sec
20 sec
Toaster
The two lines each deliver a sandwich every 20 seconds
At 37.5 seconds, wrapping and delivery has the longest processing time and is the bottleneck
Capacity per hour is 3,600 seconds/37.5 seconds/sandwich = 96 sandwiches per hour
Throughput time is = seconds

29. Capacity Analysis Example S4, pg.322
Standard process for cleaning teeth
Cleaning and examining X-rays can happen simultaneously
Customer
pays
6 min/unit
Checks in
2 min/unit
A Lab Ass
Develops X-ray
4 min/unit
8 min/unit
Dentist
re-processes
A Lab Ass.
Takes X-ray
5 min/unit
Examines
X-ray and
processes
Hygienist
Cleans
the teeth
24 min/unit
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30. Capacity Analysis All possible paths must be compared
Check out
6 min/unit
Check in
2 min/unit
Develops X-ray
4 min/unit
8 min/unit
Dentist
Takes X-ray
5 min/unit
X-ray exam
Cleaning
24 min/unit
All possible paths must be compared
Cleaning path is = 46 minutes, X-ray exam path is = 27 minutes
Longest path involves the hygienist cleaning the teeth, so the throughput time is 46 min. The patient will be out of door after 46 min.
Bottleneck is the hygienist at 24 minutes.
Hourly System capacity is (1/24)*60 min = 2.5 patients/per hour
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31. Break-Even Analysis
Technique for evaluating process and equipment alternatives
Objective is to find the point in dollars and units at which cost equals revenue
Requires estimation of fixed costs, variable costs, and revenue
This chart introduces breakeven analysis and the breakeven or crossover chart. As you discuss the assumptions upon which this techniques is based, it might be a good time to introduce the more general topic of the limitations of and use of models. Certainly one does not know all information with certainty, money does have a time value, and the hypothesized linear relationships hold only within a range of production volumes. What impact does this have on our use of the models?
© 2011 Pearson Education, Inc. publishing as Prentice Hall

32. 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
This chart introduces breakeven analysis and the breakeven or crossover chart. As you discuss the assumptions upon which this techniques is based, it might be a good time to introduce the more general topic of the limitations of and use of models. Certainly one does not know all information with certainty, money does have a time value, and the hypothesized linear relationships hold only within a range of production volumes. What impact does this have on our use of the models?
© 2011 Pearson Education, Inc. publishing as Prentice Hall

33. Break-Even Analysis Assumptions Costs and revenue are linear functions
Generally not the case in the real world
We actually know these costs
Very difficult to verify
Time value of money is often ignored
This chart introduces breakeven analysis and the breakeven or crossover chart. As you discuss the assumptions upon which this techniques is based, it might be a good time to introduce the more general topic of the limitations of and use of models. Certainly one does not know all information with certainty, money does have a time value, and the hypothesized linear relationships hold only within a range of production volumes. What impact does this have on our use of the models?
© 2011 Pearson Education, Inc. publishing as Prentice Hall

34. Total cost = Total revenue
Break-Even Analysis –
900 –
800 –
700 –
600 –
500 –
400 –
300 –
200 –
100 –
| | | | | | | | | | | |
Cost in dollars
Volume (units per period)
Total revenue line
Profit corridor
Loss corridor
Total cost line
Break-even point
Total cost = Total revenue
Variable cost
This chart introduces breakeven analysis and the breakeven or crossover chart. As you discuss the assumptions upon which this techniques is based, it might be a good time to introduce the more general topic of the limitations of and use of models. Certainly one does not know all information with certainty, money does have a time value, and the hypothesized linear relationships hold only within a range of production volumes. What impact does this have on our use of the models?
Fixed cost
Figure S7.5
© 2011 Pearson Education, Inc. publishing as Prentice Hall

35. Break-Even Analysis TR = TC F or BEPx = P - V Px = F + Vx
BEPx = 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 cost per unit
TC = total costs = F + Vx
Break-even point occurs when
This chart introduces breakeven analysis and the breakeven or crossover chart. As you discuss the assumptions upon which this techniques is based, it might be a good time to introduce the more general topic of the limitations of and use of models. Certainly one does not know all information with certainty, money does have a time value, and the hypothesized linear relationships hold only within a range of production volumes. What impact does this have on our use of the models?
TR = TC or
Px = F + Vx
BEPx = F
P - V
© 2011 Pearson Education, Inc. publishing as Prentice Hall

36. Break-Even Analysis BEP$ = BEPx P = P = Profit = TR - TC P - V
BEPx = 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 cost per unit
TC = total costs = F + Vx
BEP$ = BEPx P
= P = F
(P - V)/P
P - V
1 - V/P
Profit = TR - TC
= Px - (F + Vx)
= Px - F - Vx
= (P - V)x - F
This chart introduces breakeven analysis and the breakeven or crossover chart. As you discuss the assumptions upon which this techniques is based, it might be a good time to introduce the more general topic of the limitations of and use of models. Certainly one does not know all information with certainty, money does have a time value, and the hypothesized linear relationships hold only within a range of production volumes. What impact does this have on our use of the models?
© 2011 Pearson Education, Inc. publishing as Prentice Hall

37. Break-Even Example Fixed costs = $10,000 Material = $.75/unit
Direct labor = $1.50/unit Selling price = $4.00 per unit
BEP$ = = F
1 - (V/P)
$10,000
1 - [( )/(4.00)]
© 2011 Pearson Education, Inc. publishing as Prentice Hall

38. Break-Even Example Fixed costs = $10,000 Material = $.75/unit
Direct labor = $1.50/unit Selling price = $4.00 per unit
BEP$ = = F
1 - (V/P)
$10,000
1 - [( )/(4.00)]
= = $22,857.14
$10,000
.4375
BEPx = = = 5,714 F
P - V
$10,000
( )
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39. Break-Even Example Revenue Break-even point Total costs Fixed costs
50,000 –
40,000 –
30,000 –
20,000 –
10,000 – –
| | | | | |
0 2,000 4,000 6,000 8,000 10,000
Dollars
Units
Revenue
Break-even point
Total costs
Fixed costs
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40. Multiproduct Break-Even Analysis
Each product’s contribution is weighted by its proportion of sales
BEP$ = F
∑ x (Wi) Vi Pi
where Vi = variable cost per unit
Pi = price per unit
F = fixed costs
Wi = percent each product is of total dollar sales
i = each product
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41. Multiproduct Example Fixed costs = $3,000 per month ITEM PRICE COST
ANNUAL FORECASTED SALES UNITS
Sandwich
$5.00
$3.00
9,000
Drink
1.50
.50
Baked potato
2.00
1.00
7,000 1 2 3 4 5 6 7 8
ITEM (i)
SELLING PRICE (P)
VARIABLE COST (V)
(V/P)
1 - (V/P)
ANNUAL FORECASTED SALES $
% OF SALES
WEIGHTED CONTRIBUTION (COL 5 X COL 7)
Sandwich
$5.00
$3.00
.60
.40
$45,000
.621
.248
Drinks
1.50
0.50
.33
.67
13,500
.186
.125
Baked potato
2.00
1.00
.50
14,000
.193
.097
$72,500
1.000
.470

42. Multiproduct Example ∑ 1 - x (Wi) F BEP$ = Vi Pi
= = $76,759
$3,000 x 12
.469
Fixed costs = $3,000 per month
Annual Forecasted
Item Price Cost Sales Units
Sandwich $5.00 $3.00 9,000
Drink ,000
Baked potato ,000
Daily sales
= = $246.02
$76,759
312 days
Sandwich $5.00 $ $45,
Drinks ,
Baked ,
potato
$72,
Annual Weighted
Selling Variable Forecasted % of Contribution
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)
.621 x $246.02
$5.00
= 30.6  31
sandwiches
per day
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43. Reducing Risk with Incremental Changes
Figure S7.6
(a) Leading demand with incremental expansion
Demand
Expected demand
New capacity
(b) Leading demand with a one-step expansion
Demand
Expected demand
New capacity
(c) Lagging demand with incremental expansion
Demand
New capacity
Expected demand
(d) Attempts to have an average capacity with incremental expansion
Demand
New capacity
Expected demand
This slide probably requires some discussion or explanation. Perhaps the best place to start is the left hand column where capacity either leads or lags demand incrementally. As you continue to explain the options, ask students to suggest advantages or disadvantages of each.

44. Reducing Risk with Incremental Changes
(a) Leading demand with incremental expansion
Demand
Time (years) 1 2 3
New capacity
Expected demand
This slide probably requires some discussion or explanation. Perhaps the best place to start is the left hand column where capacity either leads or lags demand incrementally. As you continue to explain the options, ask students to suggest advantages or disadvantages of each.
Figure S7.6
© 2011 Pearson Education, Inc. publishing as Prentice Hall

45. Reducing Risk with Incremental Changes
(b) Leading demand with a one-step expansion
Figure S7.6
Demand
Time (years) 1 2 3
New capacity
Expected demand
This slide probably requires some discussion or explanation. Perhaps the best place to start is the left hand column where capacity either leads or lags demand incrementally. As you continue to explain the options, ask students to suggest advantages or disadvantages of each.

46. Reducing Risk with Incremental Changes
(c) Capacity lags demand with incremental expansion
Demand
Time (years) 1 2 3
New capacity
Expected demand
This slide probably requires some discussion or explanation. Perhaps the best place to start is the left hand column where capacity either leads or lags demand incrementally. As you continue to explain the options, ask students to suggest advantages or disadvantages of each.
Figure S7.6
© 2011 Pearson Education, Inc. publishing as Prentice Hall

47. Reducing Risk with Incremental Changes
(d) Attempts to have an average capacity with incremental expansion
Demand
Time (years) 1 2 3
New capacity
Expected demand
This slide probably requires some discussion or explanation. Perhaps the best place to start is the left hand column where capacity either leads or lags demand incrementally. As you continue to explain the options, ask students to suggest advantages or disadvantages of each.
Figure S7.6
© 2011 Pearson Education, Inc. publishing as Prentice Hall

48. Expected Monetary Value (EMV) and Capacity Decisions
Determine states of nature
Future demand
Market favorability
Analyzed using decision trees
Hospital supply company
Four alternatives
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49. Expected Monetary Value (EMV) and Capacity Decisions
-$90,000
Market unfavorable (.6)
Market favorable (.4)
$100,000
Large plant
Market favorable (.4)
Market unfavorable (.6)
$60,000
-$10,000
Medium plant
Market favorable (.4)
Market unfavorable (.6)
$40,000
-$5,000
Small plant $0
Do nothing
© 2011 Pearson Education, Inc. publishing as Prentice Hall

50. Expected Monetary Value (EMV) and Capacity Decisions
-$90,000
Market unfavorable (.6)
Market favorable (.4)
$100,000
Large plant
Market favorable (.4)
Market unfavorable (.6)
$60,000
-$10,000
Medium plant
Market favorable (.4)
Market unfavorable (.6)
$40,000
-$5,000
Small plant $0
Do nothing
Large Plant
EMV = (.4)($100,000) + (.6)(-$90,000)
EMV = -$14,000
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51. Expected Monetary Value (EMV) and Capacity Decisions
-$14,000
-$90,000
Market unfavorable (.6)
Market favorable (.4)
$100,000
Large plant
$18,000
Market favorable (.4)
Market unfavorable (.6)
$60,000
-$10,000
Medium plant
Market favorable (.4)
Market unfavorable (.6)
$40,000
-$5,000
Small plant $0
Do nothing
$13,000
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52. EMV Applied to Capacity Decision
Southern Hospital Supplies capacity expansion
EMV (large plant) = (.4)($100,000) + (.6)(–$90,000)
= –$14,000
EMV (medium plant) = (.4)($60,000) + (.6)(–$10,000)
= +$18,000
EMV (small plant) = (.4)($40,000) + (.6)(–$5,000)
= +$13,000
EMV (do nothing) = $0