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S7 – *

Operations Management

Supplement 7 –
Capacity Planning

PowerPoint presentation to accompany

Heizer/Render

Principles of Operations Management, 6e

Operations Management, 8e

S7 – *

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
Three time horizons

This slide provides some reasons that capacity is an issue. The following slides guide a discussion of capacity.

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Planning Over a Time Horizon

* Limited options exist

Figure S7.1

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

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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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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

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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, 3 - 8 hour shifts

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.

S7 – *

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, 3 - 8 hour shifts

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.

S7 – *

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, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

It might be useful at this point to discuss typical equipment utilization rates for different process strategies if you have not done so before.

S7 – *

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, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

It might be useful at this point to discuss typical equipment utilization rates for different process strategies if you have not done so before.

S7 – *

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, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

Efficiency = 148,000/175,000 = 84.6%

It might be useful at this point to discuss typical equipment utilization rates for different process strategies if you have not done so before.

S7 – *

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, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

Efficiency = 148,000/175,000 = 84.6%

It might be useful at this point to discuss typical equipment utilization rates for different process strategies if you have not done so before.

S7 – *

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, 3 - 8 hour shifts

Efficiency = 84.6%

Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

= (175,000)(.75) = 131,250 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.

S7 – *

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, 3 - 8 hour shifts

Efficiency = 84.6%

Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

= (175,000)(.75) = 131,250 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.

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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

You might point out to students that this slide links capacity to work measurement (standard times).

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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 complimentary demand patterns

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Capacity Considerations

Forecast demand accurately
Understanding the technology and capacity increments
Find the optimal operating level (volume)
Build for change

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Tactics for Matching Capacity to Demand

Making staffing changes
Adjusting equipment and processes
Purchasing additional machinery
Selling or leasing out existing equipment
Improving methods to increase throughput
Redesigning the product to facilitate more throughput

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Complementary Demand Patterns

Figure S7.3

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)

By combining both, the variation is reduced

Snowmobile sales

Jet ski sales

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Approaches to Capacity Expansion

Figure S7.4

(a) Leading demand with incremental expansion

Demand

Expected demand

New capacity

(b) Leading demand with one-step expansion

Demand

New capacity

Expected demand

Demand

(d) Attempts to have an average capacity with incremental expansion

New capacity

Expected demand

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.

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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?

S7 – *

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

S7 – *

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

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Break-Even Analysis

Figure S7.5

Profit corridor

Loss corridor

Total revenue line

Total cost line

Variable cost

Fixed cost

Break-even point

Total cost = Total revenue

–

900 –

800 –

700 –

600 –

500 –

400 –

300 –

200 –

100 –

–

| | | | | | | | | | | |

0 100 200 300 400 500 600 700 800 900 1000 1100

Cost in dollars

Volume (units per period)

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Strategy-Driven Investment

Operations may be responsible for return-on-investment (ROI)
Analyzing capacity alternatives should include capital investment, variable cost, cash flows, and net present value

This slide suggests that the process selection decision should be considered in light of the larger strategic initiative