Heizer omawe ch07_s

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S7 Capacity PlanningPowerPoint presentation toPowerPoint presentation to accompany Heizer, Render, accompany Heizer, Render, and Al-Zu’biand Al-Zu’biOperations Management, Operations Management, Arab World EditionArab World Edition

Original PowerPoint slides byJeff HeylAdapted by Zu’bi Al-Zu’bi

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OutlineOutline

Capacity Design and Effective Capacity Capacity and Strategy Capacity Considerations Managing Demand Demand and Capacity

Management in the Service Sector

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Outline – ContinuedOutline – Continued

Bottleneck Analysis and Theory of Constraints Process Times for Stations,

Systems, and Cycles Theory of Constraints Bottleneck Management

Break-Even Analysis Single-Product Case Multiproduct Case

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Outline – ContinuedOutline – Continued

Break-Even Analysis Assumptions Graphic Approach Algebraic Approach Single-Product Case Multiproduct Case

Reducing Risk with Incremental Changes

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Learning ObjectivesLearning Objectives

When you complete this supplement, you should be able When you complete this supplement, you should be able to:to:

1. Define capacity2. Determine design capacity, effective

capacity, and utilization3. Perform bottleneck analysis4. Compute break-even analysis

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Process StrategiesProcess Strategies

The objective of a process strategy is The objective of a process strategy is to build a production process that to build a production process that meets customer requirements and meets customer requirements and product specifications within cost product specifications within cost and other managerial constraintsand other managerial constraints

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CapacityCapacity

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

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Planning Over a Time HorizonPlanning Over a Time Horizon

Figure S7.1

Modify capacity Use capacity

Intermediate-range planning

Subcontract Add personnelAdd equipment Build or use inventory Add shifts

Short-range planning

Schedule jobsSchedule personnel Allocate machinery*

Long-range planning

Add facilitiesAdd long lead time equipment *

* Difficult to adjust capacity as limited options exist

Options for Adjusting Capacity

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Design and Effective CapacityDesign 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

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Utilization and EfficiencyUtilization and Efficiency

Utilization is the percent of design capacity Utilization is the percent of design capacity achievedachieved

Efficiency is the percent of effective capacity Efficiency is the percent of effective capacity achievedachieved

Utilization = Actual output/Design capacity

Efficiency = Actual output/Effective capacity

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Bakery ExampleBakery Example

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shifts

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

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

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

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

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Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shiftsEfficiency = 84.6%Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

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

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Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shiftsEfficiency = 84.6%Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

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

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Capacity and StrategyCapacity 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

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Capacity ConsiderationsCapacity Considerations

1. Forecast demand accurately

2. Understand the technology and capacity increments

3. Find the optimum operating size (volume)

4. Build for change

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Economies and Diseconomies of ScaleEconomies and Diseconomies of Scale

Economies of scale

Diseconomies of scale

25 - room roadside motel 50 - room

roadside motel

75 - room roadside motel

Number of Rooms25 50 75

Ave

rage

uni

t cos

t(d

olla

rs p

er ro

om p

er n

ight

)

Figure S7.2

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Managing DemandManaging 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

S7 - 20© 2011 Pearson Education

Complementary Demand PatternsComplementary 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

Sale

s in

uni

ts

Time (months)

Jet ski engine sales

Figure S7.3



4,000 –

3,000 –

2,000 –

1,000 –


Sale

s in

uni

ts

Time (months)

Snowmobile motor sales


Figure S7.3



4,000 –

3,000 –

2,000 –

1,000 –


Sale

s in

uni

ts

Time (months)

Combining both demand patterns reduces the variation

Snowmobile motor sales


Figure S7.3

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Tactics for Matching Capacity to DemandTactics for Matching Capacity to Demand1. Making staffing changes2. Adjusting equipment

Purchasing additional machinery Selling or leasing out existing equipment

3. Improving processes to increase throughput4. Redesigning products to facilitate more

throughput5. Adding process flexibility to meet changing

product preferences6. Closing facilities

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Demand and Capacity Management in Demand and Capacity Management in the Service Sectorthe Service Sector

Demand management

Appointment, reservations, FCFS rule

Capacity management

Full time, temporary, part-time staff

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Bottleneck Analysis and Theory of Bottleneck Analysis and Theory of ConstraintsConstraints

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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Process Times for Stations, Systems, and Process Times for Stations, Systems, and CyclesCycles

The system process timesystem process time is the process time of the bottleneck after dividing by the number of parallel operations

The system capacitysystem capacity is the inverse of the system process time

The process cycle timeprocess cycle time is the total time through the longest path in the system

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Process Times for Stations, Systems, and Process Times for Stations, Systems, and CyclesCycles

The process time of a stationprocess time of a station is the time to produce a unit at that single workstation

The process time of a systemprocess time of a system is the time of the longest process in the system … the bottleneck

The process cycle timeprocess cycle time is the time it takes for a product to go through the production process with no waiting

These two might be quite

different!

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A Three-Station Assembly A Three-Station Assembly LineLine

Figure S7.4

2 min/unit 4 min/unit 3 min/unit

A B C

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Capacity AnalysisCapacity Analysis

Two identical sandwich lines Lines have two workers and three operations All completed sandwiches are wrapped

Wrap

37.5 sec/sandwich

Order

30 sec/sandwich

Bread Fill Toast

15 sec/sandwich 20 sec/sandwich 40 sec/sandwich

Bread Fill Toast

15 sec/sandwich 20 sec/sandwich 40 sec/sandwich

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Capacity AnalysisCapacity Analysis Wrap

37.5 sec

Order

30 sec

Bread Fill Toast

15 sec 20 sec 40 sec

Bread Fill Toast

15 sec 20 sec 40 sec

Toast work station has the longest processing time – 40 seconds

The two lines each deliver a sandwich every 40 seconds so the process time of the combined lines is 40/2 = 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

Process cycle time is 30 + 15 + 20 + 40 + 37.5 = 142.5 seconds

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Standard process for cleaning teeth Cleaning and examining X-rays can happen

simultaneously

Checkout

6 min/unit

Check in

2 min/unit

DevelopsX-ray

4 min/unit 8 min/unit

DentistTakesX-ray

2 min/unit

5 min/unit

X-rayexam

Cleaning

24 min/unit

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All possible paths must be compared Cleaning path is 2 + 2 + 4 + 24 + 8 + 6 = 46

minutes X-ray exam path is 2 + 2 + 4 + 5 + 8 + 6 = 27

minutes Longest path involves the hygienist cleaning the

teeth Bottleneck is the hygienist at 24 minutes Hourly capacity is 60/24 = 2.5 patients Patient should be complete in 46 minutes

Checkout

6 min/unit

Check in

2 min/unit

DevelopsX-ray

4 min/unit 8 min/unit

DentistTakesX-ray

2 min/unit

5 min/unit

X-rayexam

Cleaning

24 min/unit

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Theory of ConstraintsTheory of Constraints

Five-step process for recognizing and managing limitations

Step 1:Step 1: Identify the constraintsStep 2:Step 2: Develop a plan for overcoming the

constraintsStep 3:Step 3: Focus resources on accomplishing Step 2Step 4:Step 4: Reduce the effects of constraints by

offloading work or expanding capabilityStep 5:Step 5: Once overcome, go back to Step 1 and find

new constraints

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Bottleneck ManagementBottleneck Management

1. Release work orders to the system at the pace of set by the bottleneck

2. Lost time at the bottleneck represents lost time for the whole system

3. Increasing the capacity of a non-bottleneck station is a mirage

4. Increasing the capacity of a bottleneck increases the capacity of the whole system

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Break-Even AnalysisBreak-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

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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

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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

AssumptionsAssumptions

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Profit corrid

or

Loss

corridor


Total revenue line

Total cost line

Variable cost

Fixed cost

Break-even pointTotal cost = Total revenue

–

900 –

800 –

700 –

600 –

500 –

400 –

300 –

200 –

100 –

–| | | | | | | | | | | |

0 100 200 300 400 500 600 700 800 900 10001100

Cos

t in

dolla

rs

Volume (units per period)Figure S7.5

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BEPx= break-even point in unitsBEP$= break-even point in dollarsP = price per unit (after all discounts)

x= number of units producedTR = total revenue = PxF= fixed costsV= variable cost per unitTC = total costs = F + Vx

TR = TCor

Px = F + Vx

Break-even point occurs whenBreak-even point occurs when

BEPx =F

P - V

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Break-Even AnalysisBreak-Even AnalysisBEPx= break-even point in unitsBEP$= break-even point in dollarsP = price per unit (after all discounts)

x= number of units producedTR = total revenue = PxF= fixed costsV= variable cost per unitTC = total costs = F + VxBEP$ = BEPx P

= P

=

=

F(P - V)/P

FP - V

F1 - V/P

Profit = TR - TC= Px - (F + Vx)= Px - F - Vx= (P - V)x - F

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Break-Even ExampleBreak-Even Example

Fixed costs = $10,000 Material = $.75/unitDirect labor = $1.50/unit Selling price = $4.00 per unit

BEP$ = =F1 - (V/P)

$10,0001 - [(1.50 + .75)/(4.00)]

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Fixed costs = $10,000 Material = $.75/unitDirect labor = $1.50/unit Selling price = $4.00 per unit

BEP$ = =F1 - (V/P)

$10,0001 - [(1.50 + .75)/(4.00)]

= = $22,857.14$10,000.4375

BEPx = = = 5,714FP - V

$10,0004.00 - (1.50 + .75)

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50,000 –

40,000 –

30,000 –

20,000 –

10,000 –

–| | | | | |0 2,000 4,000 6,000 8,000 10,000

Dol

lars

Units

Fixed costs

Total costs

Revenue

Break-even point

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BEP$ =F

∑ 1 - x (Wi)Vi

Pi

Multiproduct CaseMultiproduct Case

where V = variable cost per unitP = price per unitF = fixed costs

W = percent each product is of total dollar salesi = each product

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Multiproduct ExampleMultiproduct Example

Annual ForecastedItem Price Cost Sales UnitsSandwich $5.00 $3.00 9,000Drink 1.50 .50 9,000Baked potato 2.00 1.00 7,000

Fixed costs = $3,000 per month

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Sandwich $5.00 $3.00 .60 .40 $45,000 .621 .248Drinks 1.50 .50 .33 .67 13,500 .186 .125Baked 2.00 1.00 .50 .50 14,000 .193 .096 potato

$72,500 1.000 .469

Annual WeightedSelling Variable Forecasted % of Contribution

Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)

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Sandwich $5.00 $3.00 .60 .40 $45,000 .621 .248Drinks 1.50 .50 .33 .67 13,500 .186 .125Baked 2.00 1.00 .50 .50 14,000 .193 .096 potato

$72,500 1.000 .469

Annual WeightedSelling Variable Forecasted % of Contribution

Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)

BEP$ =F

∑ 1 - x (Wi)Vi

Pi

= = $76,759$3,000 x 12.469

Daily sales = = $246.02$76,759

312 days

.621 x $246.02$5.00 = 30.6 31

sandwichesper day

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Reducing Risk with Incremental ChangesReducing Risk with Incremental Changes

(a) Leading demand with incremental expansion

Dem

and

Expected demand

New capacity

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

Dem

and New

capacity Expected demand

(b) Capacity lags demand with incremental expansion

Dem

and

New capacity

Expected demand

Figure S7.6

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(a) Leading demand with incremental expansion

Expected demand

Figure S7.6

New capacity

Dem

and

Time (years)1 2 3

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(b) Capacity lags demand with incremental expansion

Expected demand

Figure S7.6

Dem

and

Time (years)1 2 3

New capacity

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

Expected demand

Figure S7.6

New capacity

Dem

and

Time (years)1 2 3

Business

Heizer omawe ch07_s