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Operations Management Capacity Design

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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

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.

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

Actual Output

=

Utilization

Design Capacity

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

Actual output

=

Efficiency

Effective Capacity

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

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?

- 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

- 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

- 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

- 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

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)

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

- 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

- 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.

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

0.625

- 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.

- 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

- 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