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Principles of Operations Management, 5e, and Operations

Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-1
Operations
Management

Capacity Planning
Supplement 7
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Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-2
Outline
CAPACITY
Defining Capacity
Capacity and Strategy
Capacity Considerations
Managing Demand
CAPACITY PLANNING
BREAKEVEN ANALYSIS
Single-Product Case
Multiproduct Case


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Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-3
Outline - Continued
APPLYING DECISION TREES TO CAPACITY
DECISIONS
STRATEGY DRIVEN INVESTMENTS
Investment, Variable Cost, and Cash Flow
Net Present Value
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Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-4
Learning Objectives
When you complete this supplement, you should
be able to :
Identify or Define:
Capacity
Design Capacity
Effective Capacity
Utilization
PowerPoint presentation to accompany Heizer/Render -
Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-5
Learning Objectives
When you complete this supplement, you should
be able to:
Explain:
Capacity Considerations
Net Present Value Analysis
Breakeven Analysis
Financial Considerations
Strategy-Driven Investments
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Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-6
How much long-range capacity is needed
When more capacity is needed
Where facilities should be located (location)
How facilities should be arranged (layout)
Facility planning answers:
Facility Planning
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Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-7
Forecast
Demand
Compute
Needed
Capacity
Compute
Rated
Capacity
Evaluate
Capacity
Plans
Implement
Best Plan
Qualitative
Factors
(e.g., Skills)
Select Best
Capacity
Plan
Develop
Alternative
Plans
Quantitative
Factors
(e.g., Cost)
Capacity Planning Process
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Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-8
Types of Planning Over a Time
Horizon
Add Facilities
Add long lead time equipment
Schedule Jobs
Schedule Personnel
Allocate Machinery
Sub-Contract
Add Equipment
Add Shifts
Add Personnel
Build or Use Inventory

Long Range
Planning
Intermediate
Range Planning
Short Range
Planning
Modify Capacity Use Capacity
*
*
*Limited options exist
PowerPoint presentation to accompany Heizer/Render -
Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-9
Definition and Measures of Capacity
Capacity:

The throughput, or number of units a facility
can hold, receive, store, or produce in a period
of time.
Utilization: Actual output as a percent of design capacity.
Effective
capacity:
Capacity a firm can expect to receive given its
product mix, methods of scheduling,
maintenance, and standards of quality.
Efficiency: Actual output as a percent of effective capacity.
PowerPoint presentation to accompany Heizer/Render -
Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-10
Actual or Expected Output
Actual (or Expected) Output =

(Effective Capacity)(Efficiency)
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Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-11
Measure of planned or actual capacity usage of a
facility, work center, or machine
Utilization
Actual Output
Design Capacity
Planned hours to be used
Total hours available
=
=
Utilization
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Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-12
Measure of how well a facility or machine is
performing when used
Efficiency
Actual output
Effective Capacity
Actual output in units
Standard output in units
Average actual time
Standard time
=
=
=
Efficiency
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Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-13
Implications of Capacity Changes
Changes in:
Sales
Cash flow
Quality
Supply chain
Human resources
Maintenance
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Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-14
Special Requirements for Making
Good Capacity Decisions
Forecast demand accurately
Understanding the technology and capacity
increments
Finding the optimal operating level (volume)
Build for change
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Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-15
Cost Structure for a Roadside Motel
25 room
roadside motel
50 room
roadside motel
75 room
roadside motel
Economies of
Scale
Diseconomies
of Scale
Number of Rooms
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Principles of Operations Management, 5e, and Operations
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2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-16
Strategies for Matching Capacity
to Demand
1. Making staffing changes (increasing or
decreasing the number of employees)
2. Adjusting equipment and processes which
might include purchasing additional machinery
or selling or leasing out existing equipment
3. Improving methods to increase throughput;
and/or
4. Redesigning the product to facilitate more
throughput
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Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-17
Approaches to Capacity
Expansion
Expected Demand
Expected Demand
Expected Demand Expected Demand
Time in Years Time in Years
Time in Years
Time in Years
D
e
m
a
n
d

D
e
m
a
n
d

D
e
m
a
n
d

D
e
m
a
n
d

New Capacity
New Capacity
New Capacity
New Capacity
Capacity leads demand with an incremental expansion Capacity leads demand with a one-step expansion
Capacity lags demand with an incremental expansion
Attempts to have an average capacity, with
an incremental expansion
PowerPoint presentation to accompany Heizer/Render -
Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-18
Approaches to Capacity
Expansion
Expected Demand
Time in Years
D
e
m
a
n
d

New Capacity
Capacity leads demand with an incremental expansion
PowerPoint presentation to accompany Heizer/Render -
Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-19
Approaches to Capacity
Expansion
Expected Demand
Time in Years
D
e
m
a
n
d

New Capacity
Capacity leads demand with a one-step expansion
PowerPoint presentation to accompany Heizer/Render -
Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-20
Approaches to Capacity
Expansion
Expected Demand
Time in Years
D
e
m
a
n
d

New Capacity
Capacity lags demand with an incremental expansion
PowerPoint presentation to accompany Heizer/Render -
Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-21
Approaches to Capacity
Expansion
Expected Demand
Time in Years
D
e
m
a
n
d

New Capacity
Attempts to have an average capacity, with an incremental
expansion
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Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-22
Breakeven Analysis
Technique for evaluating process & equipment
alternatives
Objective: Find the point ($ or units) at which total
cost equals total revenue
Assumptions
Revenue & costs are related linearly to volume
All information is known with certainty
No time value of money
PowerPoint presentation to accompany Heizer/Render -
Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-23
Break-Even Analysis
Fixed costs: costs that continue even if no
units are produced: depreciation, taxes, debt,
mortgage payments
Variable costs: costs that vary with the volume
of units produced: labor, materials, portion of
utilities
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Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-24
Breakeven Chart
Fixed cost
Variable cost
Total cost line
Total revenue line
Profit
Breakeven point
Total cost = Total revenue
Volume (units/period)
C
o
s
t

i
n

D
o
l
l
a
r
s

Loss
PowerPoint presentation to accompany Heizer/Render -
Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-25
Crossover Chart
Fixed cost - Process A
Fixed cost - Process B
Fixed cost - Process C
Process A: low volume, high variety
Process B: Repetitive
Process C: High volume, low variety
Process C Process B Process A Lowest cost process
PowerPoint presentation to accompany Heizer/Render -
Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-26
Cost of Wrong Process Found Via
Breakeven Analysis
Fixed cost
$
Variable
cost
Fixed cost
$
Variable
cost
Fixed cost
$
Variable
cost
Low volume, high
variety process
Repetitive process High volume, low
variety process
A B
Volume
B1
B2
B3
Total cost for low
volume high variety
Total cost for repetitive process
Total cost for high volume,
low variety process
PowerPoint presentation to accompany Heizer/Render -
Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-27
Decision Tree and Capacity Decision
-$90,000
$60,000
-10,000
$40,000
Market favorable (0.4)
Market unfavorable (0.6)
Market favorable (0.4)
Market unfavorable (0.6)
Market favorable (0.4)
Market unfavorable (0.6)
$100,000
-5,000
$0
-$14,000
$18,000
$13,000
PowerPoint presentation to accompany Heizer/Render -
Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-28
Strategy Driven Investment
Select investments as part of a coordinated strategic
plan
Choose investments yielding competitive advantage
Consider product life cycles
Include a variety of operating factors in the financial
return analysis
Test investments in light of several revenue
projections
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Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-29
Net Present Value
F = future value
P = present value
I = interest rate
N = number of years
N
i
F
P
) 1 (

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Principles of Operations Management, 5e, and Operations
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2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-30
NPV in a More Convenient Form
N
N
) (i
FX P
i
F
P
1
1
X where

) 1 (

Year 5% 6% 7% 8%
1 0.952 0.943 0.935 0.857
2 0.907 0.890 0.873 0.857
3 0.864 0.840 0.816 0.794
4 0.823 0.792 0.763 0.735
5 0.784 0.747 0.713 0.681
6 0.746 0.705 0.666 0.630
7 0.711 0.665 0.623 0.583
8 0.677 0.627 0.582 0.540
9 0.645 0.592 0.544 0.500
Present value of $1.00
PowerPoint presentation to accompany Heizer/Render -
Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-31
Present Value of an Annuity (S)
X = Factor from Table
S = present value of a
series of uniform annual
receipts
R = receipts that are
received every year for
the life of the investment
RX S
Year 5% 6% 7% 8%
1 0.952 0.943 0.935 0.926
2 1.859 1.833 1.808 1.783
3 2.723 2.673 2.624 2.577
4 3.546 3.465 3.387 3.312
5 4.329 4.212 4.100 3.993
6 5.076 4.917 4.766 4.623
7 5.786 5.582 5.389 5.206
8 6.843 6.210 5.971 5.747
9 7.108 6.802 7.024 6.247
PowerPoint presentation to accompany Heizer/Render -
Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-32
Limitations of Net Present Value
Investments with the same present value may
have significantly different project lives and
different salvage values
Investments with the same net present values
may have different cash flows
We assume that we know future interest rates -
which we do not
We assume that payments are always made at
the end of the period - which is not always the
case
PowerPoint presentation to accompany Heizer/Render -
Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-33
Extras
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Principles of Operations Management, 5e, and Operations
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2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-34
Vary staffing
Change equipment
& processes
Change methods
Redesign the product for
faster processing
Capacity Management
Vary prices
Vary promotion
Change lead times
(e.g., backorders)
Offer complementary
products
Demand Management
Managing Existing Capacity
PowerPoint presentation to accompany Heizer/Render -
Principles of Operations Management, 5e, and Operations
Management, 7e
2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
S7-35
Complementary Products
Time (Months)
Sales (Units)
Jet Skis
Snow-
mobiles
Total
0
1,000
2,000
3,000
4,000
5,000
J M M J S N J M M J S N J