Operations Management Capacity Design 1 Types of Planning

Operations Management Capacity Design 1

Types of Planning Over a Time Horizon Long Range Planning Intermediate Range Planning Short Range Planning Add Facilities Sub-Contract Add Equipment Add Shifts Add Personnel Build or Use Inventory Schedule Jobs Schedule Personnel Allocate Machinery Modify Capacity Use Capacity 2

Definition and Measures of Capacity Design Capacity: The maximum “throughput, ” or number of units a facility can produce in a period of time. Effective capacity: Capacity a firm can expect to achieve given its product mix, methods of scheduling, maintenance, and standards of quality. Utilization : Efficiency : Actual output as a percent of design capacity. Actual output as a percent of effective capacity. 3

Utilization Measure of planned or actual capacity usage of a facility, work center, or machine Utilization = Actual Output Design Capacity 4

Efficiency Measure of how well a facility or machine is performing when used Actual output Efficiency = Effective Capacity 5

Example Facility produces breakfast rolls l Last week, produced 148, 000 rolls l Effective capacity is 175, 000 rolls l Line operates 7 days a week with three 8 hour shifts per day l Line designed to produce 1200 rolls per hour l Determine l l l Design Capacity Utilization Efficiency 6

Calculating actual output Same facility adding one more line due to increase in demand for deluxe rolls l Effective capacity is 175, 000 rolls of this line l Efficiency of this second line will be 75% l What is the expected output? 7

Managing Demand l Demand exceeds capacity – curtail demand by raising prices, scheduling long lead times, etc l Capacity exceeds demand – stimulate demand through price reductions, aggressive marketing, etc l Adjusting to seasonal demands – offer products with complementary demand patterns – pdts for which demand is high for one when low for the other 8

Managing Capacity 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 1. 9

Breakeven Analysis l Technique for evaluating process & equipment alternatives l Objective: Find the point ($ or units) at which total cost equals total revenue l Assumptions l Revenue & costs are related linearly to volume l All information is known with certainty 10

Break-Even Analysis l Fixed costs: costs that continue even if no units are produced: depreciation, taxes, debt, mortgage payments, salaries, etc l Variable costs: costs that vary with the volume of units produced: labor wages, materials, portion of utilities 11

Breakeven Chart Cost in Dollars Total revenue line Profit Breakeven point Total cost = Total revenue Total cost line Variable cost Loss Fixed cost Volume (units/period) 12

Crossover Chart Process A: low volume, high variety Process B: Repetitive A Process C: High volume, s low variety s e oc t al t o s co r -P s. B t-P os tal c es roc To ess C c o r P cost Total T Fixed cost - Process C Fixed cost - Process B Fixed cost - Process A Process B Process C Lowest cost process 13

Break Even Contd. . l BEPx= FC (units) P-V BEPrs. = FC (amount) 1 -(V/P) BEPrs. = FC (multi product) ∑[(1 -Vi/Pi)*(Wi)] P=Selling price, V=variable cost FC=fixed cost

BEP Calc. l 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.

BEP Calc. in multi product case ITEM PRICE COST Sandwic 2. 95 h 1. 25 FORECASTED SALES ANNUALLY 7000 Cola 0. 80 0. 30 7000 Burger 1. 55 0. 47 5000 Tea . 75 0. 25 5000 Salad 2. 85 1. 00 3000

Item P V V/P 1 -(V/P) Forec asted sales % of wghtd sales. contri bution 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

If the fixed costs are 3500, l BEPrs. = FC ∑[(1 -Vi/Pi)*(Wi)] l 3500*12 0. 625 = 67200

Decision trees application l l l 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 -90 k Medium plant 60 k -10 k Small plant 40 k -5 k The probability of fav and unfav. Markets are 0. 4 and 0. 6 respectively.

EMV (large plant)=0. 4(100 k)+(. 6)(-90 k)=14 k l EMV (medium plant)=0. 4(60 k)+(. 6)(10 k)=18 k l EMV (small plant)=0. 4(40 k)+(. 6)(-5 k)=13 k l l Based on Expected market value, the company should build a medium plant

Net Present value l A co. having two capacity expansion alternatives A and B have useful lives of 4 years. Initial outlay for A is 25 k and that for B is 26 k. The cost of capital is 8%. the cash flow pattern is as follows. year A B 1 10 k 9 k 2 9 k 9 k 3 8 k 9 k 4 7 k 9 k