Session 2 - Capacity Planning
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Transcript of Session 2 - Capacity Planning
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7/25/2019 Session 2 - Capacity Planning
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M213M213OPERATIONS MANAGEMENTOPERATIONS MANAGEMENT
Capacity PlanningCapacity Planning
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How much long-range capacity is needed
When more capacity is needed
Where facilities should be located
(location)
How facilities should be arranged (layout)
Facility planning answers:
Facility PlanningFacility Planning
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Forecast
Demand
Compute
Needed
Capacity
Compute
Rated
Capacity
Evaluate
Capacity
Plans
Implement
Best Plan
Qualitative
Factors
(e.g., Skills)
Select Best
Capacity
Plan
Develop
Alternative
Plans
Quantitative
Factors
(e.g., Cost)
Capacity Planning ProcessCapacity Planning Process
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Definition and Measures of CapacityDefinition and Measures of Capacity
Capacity: The throughput, or number of units a
facility can hold, receive, store, or
produce in a period of time.
Utilization: Actual output as a percent of design
capacity.
Effectivecapacity:
Capacity a firm can expect to receivegiven its product mix, methods ofscheduling, maintenance, andstandards of quality.
Efficiency: Actual output as a percent of effective
capacity.
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Actual or Expected OutputActual or Expected Output
Actual (or Expected) Output= (Effective Capacity)(Efficiency)
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UtilizationUtilization
Measure of planned or actual capacity
usage of a facility, work center, or
machine
UtilizationUtilizationActual Output
Design Capacity
Planned hours to be used
Total hours available
=
=
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EfficiencyEfficiency
Measure of how well a facility or
machine is performing when used
EfficiencyEfficiencyActual output
Effective Capacity
Actual output in unitsStandard output in units
Average actual time
Standard time
=
=
=
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Breakeven AnalysisBreakeven Analysis
Technique for evaluating process &
equipment alternatives
Objective: Find the point (currency or units)at which total cost equals total revenue
Assumptions
Revenue & costs are related linearly to volume All information is known with certainty
No time value of money
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Breakeven AnalysisBreakeven Analysis
Fixed costsFixed costs: costs that continue even if no
units are produced: depreciation, taxes,
debt, mortgage payments Variable costsVariable costs: costs that vary with the
volume of units produced: labor, materials,
portion of utilities
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Breakeven ChartBreakeven Chart
Fixed cost
Variable cost
Total cost line
Total revenue line
ProfitBreakeven pointTotal cost = Total revenue
Volume (units/period)
C
ostinC
urrency
Loss
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Breakeven VolumeBreakeven Volume
BESBESFixed Cost
1 (Variable Cost/Selling Price)=
BEVBEVFixed Cost
Selling Price Variable Cost=
Breakeven SalesBreakeven Sales
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Net Present ValueNet Present Value
This measure shows the profit of an investment
after funding costs have been deducted. It uses
the principle of discounting cash flows.
For example, if someone is offered $100 now or
$100 in one years time, they will choose to
receive $100 today, because if interest rates are
10% and the $100 is invested, in one year it willhave grown to $110. This is the concept of the
time value of money.
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Net Present Value (NPV)Net Present Value (NPV)
F= future value
P = present valuei = interest rate
N = number of years
N
i
F
P)1(
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Net Present Value (NPV)Net Present Value (NPV)
0.5830.6230.6650.7117
0.5400.5820.6270.6778
0.5000.5440.5920.6459
0.7350.7630.7920.8234
0.6810.7130.7470.7845
0.6300.6660.7050.7466
0.7940.8160.8400.86430.8570.8730.8900.9072
0.8570.9350.9430.9521
8%7%6%5%Year
N
i
FP
)1(
Present value of $1.00
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Limitations of Net Present ValueLimitations of Net Present Value
Investments with the same present value mayhave significantly different project lives anddifferent salvage values
Investments with the same net present valuesmay have different cash flows
We assume that we know future interest rates -which we do not
We assume that payments are always made atthe end of the period - which is not always thecase