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    OM Capacity Planning

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    Dhairya Mehta
    The document discusses key concepts in operations management capacity planning including defining capacity, different time horizons for planning capacity, ways to express capacity, and factors that affect capacity such as demand forecasts, technology used, economies of scale, and capacity strategies. It provides examples to illustrate concepts like utilization, efficiency, and break-even analysis for single and multi-product systems. The document outlines different approaches for expanding capacity to match demand over time.

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    OM Capacity Planning

    Uploaded by

    Dhairya Mehta
    38 views29 pages
    The document discusses key concepts in operations management capacity planning including defining capacity, different time horizons for planning capacity, ways to express capacity, and factors that affect capacity such as demand forecasts, technology used, economies of scale, and capacity strategies. It provides examples to illustrate concepts like utilization, efficiency, and break-even analysis for single and multi-product systems. The document outlines different approaches for expanding capacity to match demand over time.

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    The document discusses key concepts in operations management capacity planning including defining capacity, different time horizons for planning capacity, ways to express capacity, and factors that affect capacity such as demand forecasts, technology used, economies of scale, and capacity strategies. It provides examples to illustrate concepts like utilization, efficiency, and break-even analysis for single and multi-product systems. The document outlines different approaches for expanding capacity to match demand over time.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    38 views29 pages

    OM Capacity Planning

    Uploaded by

    Dhairya Mehta
    The document discusses key concepts in operations management capacity planning including defining capacity, different time horizons for planning capacity, ways to express capacity, and factors that affect capacity such as demand forecasts, technology used, economies of scale, and capacity strategies. It provides examples to illustrate concepts like utilization, efficiency, and break-even analysis for single and multi-product systems. The document outlines different approaches for expanding capacity to match demand over time.

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    Operations Management

    Capacity Planning
    Capacity

     The throughput, or the number of


    units a facility can hold, receive,
    store, or produce in a period of time
     Affects production cost
     Affects response time
     Three time horizons
    Planning Over a Time Horizon

    Long-range Add facilities


    planning Add long lead time equipment

    Intermediate- Subcontract Add personnel


    range Add equipment Build or use inventory
    planning Add shifts

    Schedule jobs
    Short-range
    Schedule personnel
    planning
    Allocate machinery

    Modify capacity Use capacity


    Expressing Capacity
    Capacity can be expressed in many ways.

    •Output per unit time


    •Input per unit time
    •Level of resources available
    Types of Capacity
    Design capacity is the maximum
    theoretical output of a system
    Effective capacity is the capacity a
    firm expects to achieve given current
    operating constraints
     Often lower than design capacity
    Actual capacity is the capacity
    actually achieved
     Often lower than effective capacity
    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


    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 shifts of 8 hour each

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


    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%


    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%


    Capacity Considerations
    Capacity to be set up will depend upon:
     Demand forecast
     Technology used
     Economies of scale
     Capacity strategy
    adopted
    Economies of Scale
    Economies and Diseconomies
    of Scale
    (dollars per room per night)
    Average unit cost

    25 - room 75 - room
    roadside motel 50 - room roadside motel
    roadside motel

    Economies Diseconomies
    of scale of scale
    25 50 75
    Number of Rooms
    Approaches to Capacity
    Expansion
    (a) Excess capacity strategy :
    Leading demand with incremental
    expansion
    New
    capacity
    Demand

    Expected
    demand

    1 2 3
    Time (years)
    Approaches to Capacity
    Expansion
    (b) Excess capacity strategy:
    Leading demand with one-step
    expansion
    New
    capacity
    Expected
    Demand

    demand

    1 2 3
    Time (years)
    Approaches to Capacity
    Expansion
    (c) Shortage capacity strategy:
    Capacity lags demand with incremental
    expansion
    New
    capacity

    Expected
    Demand

    demand

    1 2 3
    Time (years)
    Approaches to Capacity
    Expansion
    (d) Attempts to have an average capacity
    with incremental expansion

    New
    capacity

    Expected
    Demand

    demand

    1 2 3
    Time (years)
    Figure S7.5
    Demand and Capacity Management in
    the Service Sector

     Demand management
     Appointment, reservations, FCFS rule
     Capacity
    management
     Full time,
    temporary,
    part-time
    staff
    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
    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
    Break-Even Analysis
    –
    Total revenue line
    900 –

    800 –
    Break-even point it Total cost line
    Total cost = Total revenue rof
    700 – P
    Cost in dollars

    600 –

    500 –
    Variable cost
    400 –

    300 –
    oss
    200 – L

    100 – Fixed cost


    | | | | | | | | | | | |
    –
    0 100 200 300 400 500 600 700 800 900 1000 1100
    Volume (units per period)
    Break-Even Analysis
    BEPx = break-even x = number of units
    point in units produced
    BEP$ = break-even TR= total revenue = Px
    point in dollars F = fixed costs
    P = price per V = variable cost per unit
    unit (after all TC= total costs = F + Vx
    discounts)

    BEP$ = BEPx P Profit = TR - TC


    F = Px - (F + Vx)
    = P-V P
    = Px - F - Vx
    F
    = (P - V)/P = (P - V)x – F
    F x = (Profit + F)/(P – V)
    = 1 - V/P F
    BEPx =
    P-V
    Break-Even Example

    Fixed costs = $10,000 Material = $.75/unit


    Direct labor = $1.50/unit Selling price = $4.00 per unit

    F $10,000
    BEP$ = =
    1 - (V/P) 1 - [(1.50 + .75)/(4.00)]
    $10,000
    = = $22,857.14
    .4375

    F $10,000
    BEPx = = = 5,714
    P-V 4.00 - (1.50 + .75)
    Break-Even Example

    50,000 –

    Revenue
    40,000 –
    Break-even
    point Total
    30,000 – costs
    Dollars

    20,000 –

    Fixed costs
    10,000 –

    | | | | | |
    0– 2,000 4,000 6,000 8,000 10,000
    Units
    Break-Even Example

    Multiproduct Case
    F
    BEP$ =
    ∑ 1-
    Vi
    Pi
    x (Wi)

    where V = variable cost per unit


    P = price per unit
    F = fixed costs
    W = percent each product is of total dollar sales
    i = each product
    Multiproduct Example

    Fixed costs = $3,500 per month

    No. of working days = 312

    Annual Forecasted
    Item Price Cost Sales Units
    Sandwich $2.95 $1.25 7,000
    Soft drink .80 .30 7,000
    Baked potato 1.55 .47 5,000
    Tea .75 .25 5,000
    Salad bar 2.85 1.00 3,000
    Multiproduct Example

    Fixed costs = $3,500 per month


    Annual Forecasted
    Item Price Cost Sales Units
    Sandwich $2.95 $1.25 7,000
    Soft drink .80 .30 7,000
    Baked potato 1.55 .47 Annual 5,000 Weighted
    Tea Selling Variable .75 .25Forecasted 5,000
    % of Contribution
    Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)
    Salad bar 2.85 1.00 3,000
    Sandwich $2.95 $1.25 .42 .58 $20,650 .446 .259
    Soft drink .80 .30 .38 .62 5,600 .121 .075
    Baked 1.55 .47 .30 .70 7,750 .167 .117
    potato
    Tea .75 .25 .33 .67 3,750 .081 .054
    Salad bar 2.85 1.00 .35 .65 8,550 .185 .120
    $46,300 1.000 .625
    Multiproduct Example
    BEP =
    F
    $

    ∑ 1 - VP x (W ) i
    i
    i
    Fixed costs = $3,500 per month
    $3,500
    Annualx Forecasted
    12
    = = $67,200
    Item Price Cost .625
    Sales Units
    Sandwich $2.95 $1.25 7,000
    Soft drink .80 Daily
    .30 $67,200
    7,000
    sales = = $215.38
    Baked potato 1.55 .47 312
    Annual days
    5,000 Weighted
    Tea Selling Variable .75 .25Forecasted 5,000
    % of Contribution
    Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)
    Salad bar 2.85 1.00
    .446 x $215.38 3,000
    Sandwich $2.95 $1.25 .42 .58 $20,650 = 32.6  .259
    .446 33
    $2.95 sandwiches
    Soft drink .80 .30 .38 .62 5,600 .121 .075
    per day
    Baked 1.55 .47 .30 .70 7,750 .167 .117
    potato
    Tea .75 .25 .33 .67 3,750 .081 .054
    Salad bar 2.85 1.00 .35 .65 8,550 .185 .120
    $46,300 1.000 .625
    Determining no. of machines
    required
    Theory Of Constraints (TOC)
    Steps in implementing TOC
    1.Identify the bottleneck/constraint.
    2.Exploit the bottleneck
    3.Subordinate all non-bottleneck activities
    to the bottleneck activity
    4.If output is still not adequate, offload work
    to another resource or add extra resources.
    5.Go back to the system and identify new
    bottleneck.

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