IE 305 CH 5 Capacity Planning

7/29/2019 IE 305 CH 5 Capacity Planning

1/40

2006 Prentice Hall, Inc. S7 1

CH 5

CAPACITY PLANNING

IE 305 BUS 307


2/40


Capacity

The throughput, or the number ofunits 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


3/40


Modify capacity Use capacity

Planning Over a Time

Horizon

Intermediate-rangeplanning

Subcontract Add personnelAdd equipment Build or use inventoryAdd shifts

Short-range

planning

Schedule jobsSchedule personnelAllocate machinery*

Long-rangeplanning

Add facilitiesAdd long lead time equipment *

*Limited options existFigure S7.1


4/40


Design and Effective

Capacity Design capacity is the maximum

theoretical output of a system

Normally expressed as a rate

Effective capacity is the capacity afirm expects to achieve given currentoperating constraints

Often lower than design capacity


5/40


Utilization and Efficiency

Utilization is the percent of design capacityachieved

Efficiency is the percent of effective capacity

achieved

Utilization = Actual Output/Design Capacity

Efficiency = Actual Output/Effective Capacity


6/40


Bakery Example

Actual production last week =148,000 rollsEffective capacity =175,000 rollsDesign 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


7/40 2006 Prentice Hall, Inc. S7 7

Bakery Example




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



Bakery Example


Bakery operates 7 days/week, 3 8 hourshifts


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

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



Bakery Example



Efficiency = 84.6%

Efficiency of new line = 75%

Expected Output =(Effective Capacity)(Efficiency)

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



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 complimentarydemand patterns



Economies and

Diseconomies of Scale

Economiesof scale

Diseconomiesof scale

25 - RoomRoadside Motel 50 - Room

Roadside Motel

75 - RoomRoadside Motel

Number of Rooms25 50 75

A

verageunitc

ost

(dollarsperroomp

ernight)

Figure S7.2



Capacity Considerations

Forecast demand accurately

Understanding the technologyand capacity increments

Find the optimal operating level(volume)

Build for change



Approaches to CapacityExpansion

(a) Leading demand withincremental expansion

De

mand

Expecteddemand

Newcapacity

(b) Leading demand withone-step expansion

De

mand

Newcapacity

Expecteddemand

(d) Attempts to have an averagecapacity with incrementalexpansion

Demand

Newcapacity Expected

demand

(c) Capacity lags demand withincremental expansion

Demand

NewcapacityExpecteddemand

Figure S7.4



Break-Even Analysis

Technique for evaluating processand equipment alternatives

Objective is to find the point indollars and units at which costequals revenue

Requires estimation of fixed costs,variable costs, and revenue



Break-Even Analysis

Fixed costs are costs that continueeven if no units are produced

Depreciation, taxes, debt, mortgagepayments

Variable costs are costs that varywith the volume of units produced

Labor, materials, portion of utilities

Contribution is the difference betweenselling price and variable cost



Break-Even Analysis

Costs and revenue are linear

functionsGenerally not the case in the real

world

We actually know these costs

Very difficult to accomplish

There is no time value of money

Assumptions



Break-Even Analysis

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 1000 1100

Costindollars

Volume (units per period)

Figure S7.5



Break-Even Analysis

BEPx = Break-even point inunits

BEP$ = Break-even point indollars

P = Price per unit (after

all discounts)

x = Number of unitsproduced

TR = Total revenue = PxF = Fixed costsV = Variable costs

TC = Total costs = F + Vx

TR = TCor

Px = F + Vx

Break-even pointoccurs when

BEPx = FP - V


19/40


Break-Even Analysis

BEPx = Break-even point inunits

BEP$ = Break-even point indollars

P = Price per unit (after

all discounts)

x = Number of unitsproduced

TR = Total revenue = PxF = Fixed costsV = Variable costs

TC = Total costs = F + Vx

BEP$ = 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


20/40


Break-Even Example

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

BEP$= =F

1 - (V/P)$10,000

1 - [(1.50 + .75)/(4.00)]


21/40


Break-Even Example

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

BEP$= =F1 - (V/P)$10,000

1 - [(1.50 + .75)/(4.00)]

= = $22,857.14$10,000.4375

BEPx= = = 5,714F

P - V$10,000

4.00 - (1.50 + .75)


22/40


Break-Even Example

BEP$=F

1 - x (Wi)Vi

P i

Multiproduct Case

where V = variable cost per unit

P = price per unitF = fixed costs

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


23/40


Multiproduct Example

Annual ForecastedItem Price Cost Sales Units

Sandwich $2.95 $1.25 7,000

Soft drink .80 .30 7,000Baked potato 1.55 .47 5,000

Tea .75 .25 5,000Salad bar 2.85 1.00 3,000

Fixed costs = $3,500 per month


24/40


Multiproduct ExampleAnnual Forecasted

Item Price Cost Sales UnitsSandwich $2.95 $1.25 7,000


Tea .75 .25 5,000Salad 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 .075Baked 1.55 .47 .30 .70 7,750 .167 .117

potatoTea .75 .25 .33 .67 3,750 .081 .054Salad bar 2.85 1.00 .35 .65 8,550 .185 .120

$46,300 1.000 .625

Annual WeightedSelling Variable Forecasted % of Contribution

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


25/40


Multiproduct Example

Annual ForecastedItem Price Cost Sales Units

Sandwich $2.95 $1.25 7,000


Tea .75 .25 5,000Salad 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 .117potato

Tea .75 .25 .33 .67 3,750 .081 .054Salad bar 2.85 1.00 .35 .65 8,550 .185 .120

$46,300 1.000 .625

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

P i

= = $67,200$3,500 x 12

.625

Dailysales = = $215.38

$67,200312 days

.446 x $215.38$2.95

= 32.6 33sandwiches

per day


26/40


Strategy-Driven Investment

Operations may be responsible

for return-on-investment (ROI) Analyzing capacity alternatives

should include capitalinvestment, variable cost, cashflows, and net present value


27/40


Net Present Value (NPV)

where F = future value

P = present value

i = interest rateN = number of years

P =F

(1 + i)N


28/40


NPV Using Factors

P = = FXF

(1 + i)N

where X = a factor from Table S7.1defined as = 1/(1 + i)N andF = future value

Year 5% 6% 7% 10%

1 .952 .943 .935 .9092 .907 .890 .873 .8263 .864 .840 .816 .7514 .823 .792 .763 .6835 .784 .747 .713 .621

Portion ofTable S7.1


29/40


Present Value of an Annuity

An annuity is an investment whichgenerates uniform equal payments

S = RXwhere X = factor from Table S7.2

S = present value of a series ofuniform annual receipts

R = receipts that are received everyyear of the life of the investment


30/40


Present Value of an Annuity

Portion of Table S7.2

Year 5% 6% 7% 10%

1 .952 .943 .935 .9092 1.859 1.833 1.808 1.7363 2.723 2.676 2.624 2.4874 4.329 3.465 3.387 3.1705 5.076 4.212 4.100 3.791


31/40


Process, Volume, and Variety

Process Focusprojects, job shops

(machine, print,

carpentry)Standard Register

Repetitive(autos, motorcycles)

Harley Davidson

Product Focus(commercialbaked goods,steel, glass)Nucor Steel

High Varietyone or fewunits per run,high variety

(allowscustomization)

Changes inModulesmodest runs,standardized

modulesChanges inAttributes(such as grade,quality, size,thickness, etc.)long runs only

Mass Customization(difficult to achieve,but huge rewards)

Dell Computer Co.

Poor Strategy(Both fixed andvariable costs

are high)

LowVolume

RepetitiveProcess

HighVolume

VolumeFigure 7.1


32/40


Some Possible Growth Patterns

Volume

Volume

Volume

Volume

0 0

0 0

Time Time

Time Time

Growth Decline

Cyclical Stable

l i C i


33/40


Developing CapacityAlternatives

Design flexibility into systems

Take a big picture approach to

capacity changes Prepare to deal with capacity chunks

Attempt to smooth out capacity

requirements Identify the optimal operating level

l i i i


34/40


Need to be near customers

Capacity and location are closely tied

Inability to store services

Capacity must me matched with timingof demand

Degree of volatility of demand

Peak demand periods

Planning Service Capacity


35/40


Measuring Capacity

By units of output ( barrels of beer , #of cars)

Standard time time to produce aproduct by a qualified operator at anormal pace.


36/40


Levels of Capacity

Must be measured at these threelevels

Machine or individual worker Work center

Plant

C l l ti P i


37/40


Calculating ProcessingRequirements

ProductAnnualDemand

Standard

processing timeper unit (hr.)

Processing timeneeded (hr.)

#1

#2

#3

400

300

700

5.0

8.0

2.0

2,000

2,400

1,4005,800


38/40


Determining CapacityAvailable

Measurement

Demonstrated capacity comes fromhistorical data

Calculation

Calculated or rated capacity is based onavailable time, utilization and efficiency.


39/40


Capacity Req.

Load determination

1. Determine time needed for each orderat each center.

2. Sum the CR for individual orders toobtain a load.

- Time needed for order

- Sum of Setup and Run times- Example 150 gear shafts with a setup of 1.5

hours and run time of 0.2 hours

- Standard time = 1.5 + ( 150 x 0.2)


40/40

QUESTIONS???

IE 305 CH 5 Capacity Planning

Documents

Transcript of IE 305 CH 5 Capacity Planning