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PPT – Operations Management Capacity Planning Supplement 7 PowerPoint presentation | free to download

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Operations Management Capacity

PlanningSupplement 7

Outline

- Capacity.
- Utilization.
- Efficiency.
- Managing Demand and Capacity.
- Break-Even Crossover Analysis.
- Net Present Value.

Capacity Planning

Capacity planning answers

- How much long-range capacity is needed?
- Add or remove facilities or equipment.
- How much intermediate-range capacity is needed?
- Add or remove personnel, equipment or shifts Use

or build inventory Subcontract.

Definition and Measures of Capacity

Capacity

The maximum output of a system in a given

period. The maximum capacity that can be

achieved under ideal conditions. Example

200/day The expected capacity given the current

operating environment and constraints may be

viewed as a percentage of design

capacity. Example 180/day or 90

Design Capacity

Effective capacity

Utilization Efficiency

- Utilization Percent of design capacity

achieved. - Efficiency Percent of effective capacity

achieved.

Actual output

Utilization

Design capacity

Actual output

Efficiency

Effective capacity

Utilization Efficiency Example

- Design capacity 120/day.
- Effective capacity 100/day.
- Actual output 80/day.

Actual output

80/120 67

Utilization

Design capacity

Actual output

80/100 80

Efficiency

Effective capacity

Anticipated Output

- Anticipated output
- Design Capacity x Effective Capacity x

Efficiency - Example
- Design capacity 150 units per day
- Effective capacity 80
- Efficiency 90
- Anticipated output 150 x 0.80 x 0.90 108 per

day. - Efficiency 90 Utilization 108/15072

Capacity Planning Process

- Forecast demand accurately.
- Compute needed capacity.
- Develop alternative plans.
- Understand technology and capacity increments.
- Evaluate capacity plans.
- Quantitative Qualitative factors.
- Build for change.
- Select and implement best capacity plan.

Managing Existing Capacity

- To make capacity match demand, either
- Adjust demand Demand management.
- Adjust capacity Capacity management.
- Use or build inventory.
- Find complementary products for seasonal demands.

Managing Existing Capacity

Capacity Management

Demand Management

- Vary staffing.
- Change equipment processes.
- Change methods.
- Redesign the product/service for faster

processing.

- Vary prices.
- Vary promotion.
- Backorder.
- Offer complementary products.

Complementary Products

Sales (Units)

5,000

4,000

3,000

2,000

1,000

Jet Skis

0

J

M

M

J

S

N

J

M

M

J

S

N

J

Time (Months)

Capacity Expansion Options

- 1. Add capacity in advance of increasing demand.
- Advantages
- Can capture market.
- Discourage competition.
- Disadvantages
- Expensive and risky.
- Demand may not materialize.
- Size of needed expansion relies on forecast.

Capacity Expansion Options (cont.)

- Add new capacity after demand materializes.
- Advantages
- Lower cost.
- Less risk.
- Size of expansion known.
- Disadvantages
- May be too late to market.

Break-even Analysis

- To evaluate process equipment alternatives.
- Objective
- Find the point ( or units) at which total cost

equals total revenue, -or- - Find the range of output over which different

alternatives are preferred. - Assumptions
- Revenue costs are related linearly to volume.
- All information is known with certainty.
- No time value of money.

Break-even Analysis - Costs

- Fixed costs Costs independent of the volume of

units produced. - Depreciation, taxes, debt, mortgage payments,

etc. - Variable costs Costs that vary with the volume

of units produced. - Labor, materials, portion of utilities, etc.

Break-even Chart

Dollars

Volume (units/period)

Break-even Equations

- F Fixed cost per unit time.
- V Variable cost per unit produced.
- x Number of units produced per unit time.
- P Revenue (price) per unit
- TC Total costs per unit time F Vx
- TR Total revenue per unit time Px
- Profit TR - TC
- At break-even point Total Cost Total Revenue

Break-even Example 1

- A firm produces radios with a fixed cost of

7,000 per month and a variable cost of 5 per

radio. If radios sell for 8 each - 1a) What is the break-even point?
- TR TC so 8x 7000 5x
- x 7000/3 2,333.333 radios per month
- 1b) What output is needed to produce a profit of

2,000/month? - Profit 2000/month so
- TR - TC 8x - (7000 5x) 2000
- x 9000/3 3,000 radios per month

Break-even Example 1 - continued

- 1c) What is the profit or loss if 500 radios are

produced each week? - First, get monthly production
- 500?52/12 2,166.6667 radios per month
- Then calculate profit or loss
- TR - TC 8?2166.6667 - (7000 5?2166.6667)
- -500 per month
- (500 loss per month)

Break-even Example 2

- A firm produces radios with a fixed cost of

7,000 per month and a variable cost of 5 per

radio for the first 3,000 radios produced per

month. For all radios produced each month after

the first 3,000 the variable cost is 10 per

radio (for added overtime and maintenance costs).

If radios sell for 8 each - 2a) What are the break-even point(s)?
- Now TC has two parts depending on the level of

production - For x ? 3000/month TC 7000 5x
- For x gt 3000/month TC 7000 5(3000)

10(x-3000) - -8000 10x
- For any x TR 8x

Break-even Example 2 - continued

- For x ? 3000/month TC 7000 5x
- For x gt 3000/month TC -8000 10x
- For any x TR 8x
- For x ? 3000/month 7000 5x 8x so x

2,333.33/month - This is lt 3000/month, so it is a valid

break-even point. - For x gt 3000/month -8000 10x 8x so x

4000/month - This is gt 3000/month, so it is also a valid

break-even point.

Break-even Example 2

40

Dollars (Thousands)

Total revenue line

32

24

Total cost line

16

Break-even points

8

1000

4000

3000

2000

Volume (units/month)

Break-even Example 3

- A firm produces radios with a fixed cost of

7,000 per month and a variable cost of 5 per

radio for the first 2,000 radios produced per

month. For all radios produced each month after

the first 2,000 the variable cost is 10 per

radio (for added overtime and maintenance costs).

If radios sell for 8 each - 3a) What are the break-even point(s)?
- Again TC has two parts depending on the level of

production - For x ? 2000/month TC 7000 5x
- For x gt 2000/month TC 7000 5(2000)

10(x-2000) - -3000 10x
- For any x TR 8x

Break-even Example 3 - continued

- For x ? 2000/month TC 7000 5x
- For x gt 2000/month TC -3000 10x
- For any x TR 8x
- For x ? 2000/month 7000 5x 8x so x

2,333.33/month - This is not lt 2000/month, so it is not a

break-even point!! - For x gt 2000/month -3000 10x 8x so x

1500/month - This is not gt 2000/month, so it is not a

break-even point!! - THERE ARE NO BREAK-EVEN POINTS!

Break-even Example 3

40

Dollars (Thousands)

32

24

Total cost line

Total revenue line

16

8

1000

4000

3000

2000

Volume (units/month)

Other Break-even Possibilities

40

Dollars (Thousands)

32

24

Total cost line

Total revenue line

16

8

1000

4000

3000

2000

Volume (units/month)

Crossover Chart

Process A Low volume, high variety

Process B Repetitive

Process C High volume, low variety

Total cost - Process A

Total cost - Process B

Total cost - Process C

Process B

Process A

Process C

Lowest cost process

Crossover Example

- Consider three production processes with

different fixed and variable costs - Process A FA 5000/week VA 10/unit
- Process B FB 8000/week VB 4/unit
- Process C FC 10000/week VC 3/unit
- Over which range of output is each process best?
- First write total cost expressions
- A 5,000 10x
- B 8,000 4x
- C 10,000 3x

Crossover Example

- A 5,000 10x
- B 8,000 4x
- C 10,000 3x
- 1. At x 0, A is best (since 5000 lt 8000 lt

10000). - 2. As x gets larger, either B or C may become

better than A - B lt A when 8000 4x lt 5000 10x or x gt

500/week - C lt A when 10000 3x lt 5000 10x or x

gt 714.28/week - So A is best only for x lt 500/week and
- B is best starting at x gt 500/week

Crossover Example

- A 5,000 10x
- B 8,000 4x
- C 10,000 3x
- 3. Eventually, C will become better than B (note

that C has a lower variable cost than B). - C lt B when 10000 3x lt 8000 4x or x gt

2000/week - so B is best for 500/week lt x lt 2000/week and

- C is best starting at x gt 2000/week

Crossover Example

- Summary
- A is best for output of 0-500 units per week.
- B is best for output of 500-2000 units per week.
- C is best for output greater than 2000 units per

week.

Time Value of Money - Net Present Value

- Future cash receipt of amount F is worth less

than F today. - F Future value N years in the future.
- P Present value today.
- i Interest rate.

Annuities

- An annuity is a annual series of equal payments.
- R Amount received every year for N years.
- S Present value today.
- S RX
- where X is from Table S7.2.
- Example What is present value of 1,000,000 paid

in 20 equal annual installments? - For i 6/year, S 50000 ? 11.47 573,500
- For i 14/year, S 50000 ? 6.623 331,150

Limitations of Net Present Value

- Investments with the same NPV will differ
- Different lengths.
- Different salvage values.
- Different cash flows.
- Assumes we know future interest rates!
- Assumes payments are always made at the end of

the period.

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