Operations Management Capacity Design

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Operations ManagementCapacity Design
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Types of Planning Over a Time Horizon
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Definition and Measures of Capacity
Design Capacity
The maximum throughput, or number of units a
facility can produce in a period of time.
Capacity a firm can expect to achieve given its
product mix, methods of scheduling, maintenance,
and standards of quality.
Effective capacity

Utilization
Actual output as a percent of design capacity.
Efficiency
Actual output as a percent of effective capacity.
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Utilization

• Measure of planned or actual capacity usage of a
  facility, work center, or machine

Actual Output

Utilization
Design Capacity
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Efficiency

• Measure of how well a facility or machine is
  performing when used

Actual output

Efficiency
Effective Capacity
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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

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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 of this second line will be 75
• What is the expected output?

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Managing Demand

• Demand exceeds capacity curtail demand by
  raising prices, scheduling long lead times, etc
• Capacity exceeds demand stimulate demand
  through price reductions, aggressive marketing,
  etc
• Adjusting to seasonal demands offer products
  with complementary demand patterns pdts for
  which demand is high for one when low for the
  other

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Managing Capacity

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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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

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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

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Breakeven Chart
Total revenue line
Profit
Breakeven point Total cost Total revenue
Profit
Total cost line
Cost in Dollars
Variable cost
Loss
Fixed cost
Volume (units/period)
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Crossover Chart
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Break Even Contd..

• BEPx FC (units)
• P-V
• BEPrs. FC (amount)
• 1-(V/P)
• BEPrs. FC (multi
  product)
• ?(1-Vi/Pi)(Wi)
• PSelling price, Vvariable cost
• FCfixed cost

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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.

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BEP Calc. in multi product case
ITEM PRICE COST FORECASTED SALES ANNUALLY
Sandwich 2.95 1.25 7000
Cola 0.80 0.30 7000
Burger 1.55 0.47 5000
Tea .75 0.25 5000
Salad 2.85 1.00 3000
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Item P V V/P 1-(V/P) Forecasted sales of sales wghtd.contribution
Forecasted sales of sales wghtd.contribution
sandwich 2.95 1.25 .42 .58 20650 .446 .259
Cola 0.80 .30 .38 .62 5600 .121 .075
Burger 1.55 .47 .30 .70 7750 .167 .117
Tea 0.75 .25 .33 .67 3750 .081 .054
Salad 2.85 1.0 .35 .65 8550 .185 .120
46300 1.00 .625
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• If the fixed costs are 3500,
• BEPrs. FC
  ?(1-Vi/Pi)(Wi)
• 350012 67200
• 0.625

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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.

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• 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

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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