Operations management capacity design
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Operations Management Capacity Design. Long Range Planning. Add Facilities. Intermediate Range Planning. Sub-Contract Add Equipment Add Shifts. Add Personnel Build or Use Inventory. Schedule Jobs Schedule Personnel Allocate Machinery. Short Range Planning.

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Operations Management Capacity Design

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Operations management capacity design

Operations ManagementCapacity Design


Types of planning over a time horizon

Long Range Planning

Add Facilities

Intermediate Range Planning

Sub-Contract

Add Equipment

Add Shifts

Add Personnel

Build or Use Inventory

Schedule Jobs

Schedule Personnel

Allocate Machinery

Short Range Planning

Modify Capacity

Use Capacity

Types of Planning Over a Time Horizon


Definition and measures of capacity

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.


Utilization

Utilization

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

Actual Output

=

Utilization

Design Capacity


Efficiency

Efficiency

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

Actual output

=

Efficiency

Effective Capacity


Example

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


Calculating actual output

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?


Managing demand

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


Managing capacity

Managing Capacity

  • Making staffing changes (increasing or decreasing the number of employees)

  • Adjusting equipment and processes – which might include purchasing additional machinery or selling or leasing out existing equipment

  • Improving methods to increase throughput; and/or

  • Redesigning the product to facilitate more throughput


Breakeven analysis

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


Break even analysis

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


Breakeven chart

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)


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

Fixed cost - Process C

Fixed cost - Process B

Fixed cost - Process A

Lowest cost process

Process A

Process B

Process C

Crossover Chart


Break even contd

Break Even Contd..

  • 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

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.


Bep calc in multi product case

BEP Calc. in multi product case


Operations management capacity design

  • If the fixed costs are 3500,

  • BEPrs.= FC ∑[(1-Vi/Pi)*(Wi)]

    3500*12 = 67200

    0.625


Decision trees application

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 plant100 k-90k

  • Medium plant60k-10k

  • Small plant40k-5k

  • The probability of fav and unfav. Markets are 0.4 and 0.6 respectively.


Operations management capacity design

  • 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


Net present value

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.

    yearAB

    110k9k

    29k9k

    38k9k

    47k 9k


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