Operations Management

Capacity Design

Capacity and Strategy

Capacity

decisions must be integrated into

the mission and strategy of organization

All

10 OM decisions as well as marketing

and finance are impacted by changes in capacity

Investments

in capacity not to be isolated

but a coordinated step to achieve organizations objective

Types of Planning Over a Time Horizon

Long Range Planning Intermediat e Range Planning Short Range Planning

Add Facilities Sub-Contract Add Equipment Add Shifts Add Personnel Build or Use Inventory

Schedule Jobs Schedule Personnel Allocate Machinery

Modify Capacity

Use Capacity
3

Definition and Measures of Capacity

Design Capacit y: The maximum throughput, or number of units a facility can produce in a period of time.

Effective Capacity a firm can expect to capacity achieve given its product mix, methods of scheduling, : maintenance, and standards of quality. Utilizati Actual output as a percent of design on: Efficienc y: capacity. Actual output as a percent of effective capacity.
4

Utilization
Measure of planned or actual capacity usage of a facility, work center, or machine Actual Output = Utilization Design Capacity

Efficiency
Measure of how well a facility or machine is performing when used Actual output Efficiency = Effective Capacity

Example
Facility produces breakfast rolls Last week, produced 148,000 rolls Effective capacity is 175,000 rolls Line operates 7 days a week with three 8-hour shifts per day Line designed to produce 1200 rolls per hour Determine
Design Capacity Utilization Efficiency

Calculating actual output

Same facility adding one more line due to increase in demand for deluxe rolls
Effective

capacity is 175,000 rolls of this

line
Efficiency What

of this second line will be 75%

is the expected output?

Requirements for Making Good Capacity Decisions

Forecast

demand accurately the technology and

Understand

capacity increments
Find

the optimal operating level

(volume)
Build

for change
9

Breakeven Analysis
Technique Objective:

for evaluating process & equipment alternatives 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
10

Break-Even Analysis
Fixed

costs: costs that continue

even if no units are produced: depreciation, taxes, debt, mortgage payments, salaries, etc
Variable

costs: costs that vary with

the volume of units produced: labor wages, materials, portion of utilities

11

Breakeven Chart
Total revenue line

Cost in Dollars

Breakeven point Total cost = Total revenue Variable cost Loss

Profit Profit Total cost line

Fixed cost

Volume (units/period)

12

Crossover Chart
Process A: low volume, high variety Process B: Repetitive A Process C: High volume, low variety s
st co P s ce ro

l ta To

-P os t lc sC ota T roces st - P al co Tot

ess r oc

Fixed cost - Process C Fixed cost - Process B Fixed cost - Process A

Process A

Process B

Process C

Lowest cost process

13

Break Even Contd..

BEPx=

FC

(units)

P-V BEPrs.= FC (amount) 1-(V/P) BEPrs.= FC (multi product) [(1-Vi/Pi)*(Wi)] P=Selling price, V=variable cost FC=fixed cost

BEP Calc.
A

company has fixed costs of 10000/- this period. Direct costs are 1.5/- per unit and material cost is 0.75/- per unit. The selling price is 4/- per unit. Calculate the BEPs.

BEP Calc. in multi product case

ITEM PRICE COST 1.25 0.30 0.47 0.25 1.00 FORECASTED SALES ANNUALLY 7000 7000 5000 5000 3000

Sandwic 2.95 h Cola Burger Tea Salad 0.80 1.55 .75 2.85

Item

V/P

1-(V/P) Foreca % of wghtd. sted sales contrib sales ution

sandwich 2.95 1.25 .42 Cola Burger Tea 0.80 .30 1.55 .47 0.75 .25 .38 .30 .33

.58 .62 .70 .67

20650 .446 .259 5600 7750 3750 .121 .075 .167 .117 .081 .054

 If

the fixed costs are 3500, BEPrs.= FC [(1-Vi/Pi)*(Wi)] 3500*12 0.625 = 67200

Decision trees application

A

company is considering capacity expansion. it has 3 alternatives. the new facility would produce new type of product and currently the marketability of the product is unknown. Types of plant favorable mkt. unfavorable mkt. Large plant 100 k -90k Medium plant 60k -10k Small plant 40k -5k The probability of fav and unfav. Markets are 0.4 and 0.6 respectively.

 EMV

(large plant)=0.4(100k)+(.6)(-90k)=-14k EMV (medium plant)=0.4(60k)+(.6)(-10k)=18k EMV (small plant)=0.4(40k)+(.6)(-5k)=13k

Based

on Expected market value, the company should build a medium plant

Net Present value

A

co. having two capacity expansion alternatives A and B have useful lives of 4 years. Initial outlay for A is 25k and that for B is 26k. The cost of capital is 8%.the cash flow pattern is as follows. year A B 1 10k 9k 2 9k 9k 3 8k 9k 4 7k 9k