1. Operations
Management
Supplement 7 –
Capacity Planning
PowerPoint presentation to accompany
Heizer/Render
Principles of Operations Management, 6e
Operations Management, 8e
©2006 Prentice Hall, Inc. Hall, Inc.
© 2006 Prentice S7 – 1

2. Capacity
 The throughput, or the number of
units a facility can hold, receive,
store, or produce in a period of time
 Determines fixed costs
 Determines if demand will be
satisfied
 Three time horizons
© 2006 Prentice Hall, Inc. S7 – 2

3. Planning Over a Time
Horizon
Long-range Add facilities
planning Add long lead time equipment
*
Intermediate- Subcontract Add personnel
range Add equipment Build or use inventory
planning Add shifts
Schedule jobs
Short-range
planning
* Schedule personnel
Allocate machinery
Modify capacity Use capacity
* Limited options exist
Figure S7.1
© 2006 Prentice Hall, Inc. S7 – 3

4. Utilization and Efficiency
Utilization is the percent of design capacity
achieved
Utilization = Actual Output/Design Capacity
Efficiency is the percent of effective capacity
achieved
Efficiency = Actual Output/Effective Capacity
© 2006 Prentice Hall, Inc. S7 – 4

5. Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 – ‘8 hour shifts’
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls
Utilization = 148,000/201,600 = 73.4%
Efficiency = 148,000/175,000 = 84.6%
© 2006 Prentice Hall, Inc. S7 – 5

6. Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, three- ‘8 hour shifts’
Efficiency = 84.6%
Efficiency of new line = 75%
Expected Output = (Effective Capacity)(Efficiency)
= (175,000)(.75) = 131,250 rolls
© 2006 Prentice Hall, Inc. S7 – 6

7. Managing Demand
 Demand exceeds capacity
 Curtail demand by raising prices,
scheduling longer lead time
 Long term solution is to increase capacity
 Capacity exceeds demand
 Stimulate market
 Product changes
 Adjusting to seasonal demands
 Produce products with complimentary
demand patterns
© 2006 Prentice Hall, Inc. S7 – 7

8. Economies and
Diseconomies of Scale
(dollars per room per night)
Average unit cost
25 - Room 75 - Room
Roadside Motel 50 - Room Roadside Motel
Roadside Motel
Economies Diseconomies
of scale of scale
25 50 75
Number of Rooms
Figure S7.2
© 2006 Prentice Hall, Inc. S7 – 8

9. Capacity Considerations
 Forecast demand accurately
 Understanding the technology
and capacity increments
 Find the optimal operating level
(volume)
 Build for change
© 2006 Prentice Hall, Inc. S7 – 9

10. Approaches to Capacity
Expansion
(a) Leading demand with (b) Leading demand with
incremental expansion one-step expansion
New New
capacity capacity
Demand
Demand
Expected
Expected
demand
demand
(c) Capacity lags demand with (d) Attempts to have an average
incremental expansion capacity with incremental
New
expansion
capacity New
Demand
Expected Demand capacity Expected
demand demand
Figure S7.4
© 2006 Prentice Hall, Inc. S7 – 10

11. Break-Even Analysis
 Technique for evaluating process
and equipment alternatives
 Objective is to find the point in
dollars and units at which cost
equals revenue
 Requires estimation of fixed costs,
variable costs, and revenue
© 2006 Prentice Hall, Inc. S7 – 11

12. Break-Even Analysis
 Fixed costs are costs that continue
even if no units are produced
 Depreciation, taxes, debt, mortgage
payments
 Variable costs are costs that vary
with the volume of units produced
 Labor, materials, portion of utilities
 Contribution is the difference between
selling price and variable cost
© 2006 Prentice Hall, Inc. S7 – 12

13. Break-Even Analysis
–
Total revenue line
900 –
r
800 –
Break-even point rrido Total cost line
o
700 – Total cost = Total revenue f i tc
P ro
Cost in dollars
600 –
500 –
Variable cost
400 –
300 –
s
200 – os idor
L r
r
co
100 – Fixed cost
| | | | | | | | | | | |
–
0 100 200 300 400 500 600 700 800 900 1000 1100
Figure S7.5
Volume (units per period)
© 2006 Prentice Hall, Inc. S7 – 13

14. Break-Even Analysis
BEPx = Break- x= Number of
even point in units units produced
BEP$ = Break- TR = Total
even point in dollars revenue = Px
P = Price F= Fixed costs
per unit (after all V =
discounts) Variable costs
TC = Total
Break-even point costs = F + Vx
occurs when
TR = TC F
or BEPx =
P-V
Px = F + Vx
© 2006 Prentice Hall, Inc. S7 – 14

15. Break-Even Analysis
BEPx = Break- x= Number of
even point in units units produced
BEP$ = Break- TR = Total
even point in dollars revenue = Px
P = Price F= Fixed costs
per unit (after all V =
discounts) Variable costs
TC = Total
BEP$ = BEPx P costs = F + Vx
F Profit = TR - TC
= P-V P
= Px - (F + Vx)
F
= (P - V)/P = Px - F - Vx
F = (P - V)x - F
= 1 - V/P
© 2006 Prentice Hall, Inc. S7 – 15

16. Break-Even Example
Fixed costs = $10,000 Material = $.75/unit
Direct labor = $1.50/unit Selling price = $4.00 per unit
F $10,000
BEP$ = =
1 - (V/P) 1 - [(1.50 + .75)/(4.00)]
$10,000
= = $22,857.14
.4375
F $10,000
BEPx = = = 5,714
P-V 4.00 - (1.50 + .75)
© 2006 Prentice Hall, Inc. S7 – 16

17. Break-Even Example
Multiproduct Case
F
BEP$ =
∑ 1-
Vi
Pi
x (Wi)
where V = variable cost per unit
P = price per unit
F = fixed costs
W = percent each product is of total dollar sales
i = each product
© 2006 Prentice Hall, Inc. S7 – 17

18. Multiproduct Example
Fixed costs = $3,500 per month
Annual Forecasted
Item Price Cost Sales Units
Sandwich $2.95 $1.25 7,000
Soft drink .80 .30 7,000
Baked potato 1.55 .47 5,000
Tea .75 .25 5,000
Salad bar 2.85 1.00 3,000
© 2006 Prentice Hall, Inc. S7 – 18

19. Multiproduct Example
Fixed costs = $3,500 per month
Annual Forecasted
Item Price Cost Sales Units
Sandwich $2.95 $1.25 7,000
Soft drink .80 .30 7,000
Baked potato 1.55 .47 Annual 5,000 Weighted
Tea Selling Variable .75 .25Forecasted 5,000 Contribution
% of
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)
Salad bar 2.85 1.00 3,000
Sandwich $2.95 $1.25 .42 .58 $20,650 .446 .259
Soft drink .80 .30 .38 .62 5,600 .121 .075
Baked 1.55 .47 .30 .70 7,750 .167 .117
potato
Tea .75 .25 .33 .67 3,750 .081 .054
Salad bar 2.85 1.00 .35 .65 8,550 .185 .120
$46,300 1.000 .625
© 2006 Prentice Hall, Inc. S7 – 19

20. Multiproduct Example BEP$ =
F
∑ 1 - V x (W )
P
i
i
i
Fixed costs = $3,500 per month
$3,500 x Forecasted
Annual 12 = $67,200
=
Item Price Cost .625 Units
Sales
Sandwich $2.95 $1.25 7,000
Soft drink .80 Daily
.30 $67,200
7,000
Baked potato 1.55 sales 312 days = $215.38
=
.47 Annual 5,000 Weighted
Tea Selling Variable .75 .25Forecasted 5,000 Contribution
% of
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)
Salad bar 2.85 1.00 x $215.38
.446 3,000
Sandwich $2.95 $1.25 .42 .58 $20,650 = 32.6 ≈ .259
.446 33
$2.95 sandwiches
Soft drink .80 .30 .38 .62 5,600 .121 .075
Baked 1.55 .47 .30 .70 7,750 .167 per day
.117
potato
Tea .75 .25 .33 .67 3,750 .081 .054
Salad bar 2.85 1.00 .35 .65 8,550 .185 .120
$46,300 1.000 .625
© 2006 Prentice Hall, Inc. S7 – 20