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Heizer om10 ch07_s-capacity

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Heizer om10 ch07_s-capacity

  1. 1. 10/16/2010 Capacity and Constraint Outline S7 Management Capacity Design and Effective Capacity Capacity and Strategy PowerPoint presentation to accompany Heizer and Render Capacity Considerations Operations Management, 10e Principles of Operations Management, 8e Managing Demand PowerPoint slides by Jeff Heyl Demand and Capacity Management in the Service Sector© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 1 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 2 Outline – Continued Outline – Continued Bottleneck Analysis and Theory of Reducing Risk with Incremental Constraints Changes Process Times for Stations, Applying Expected Monetary Systems, and Cycles Value to Capacity Decisions Theory of Constraints Applying Investment Analysis to Bottleneck Management Strategy-Driven Investments Break-Even Analysis Investment, Variable Cost, and Single-Product Case Cash Flow Multiproduct Case Net Present Value© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 3 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 4 Learning Objectives Learning Objectives When you complete this supplement, When you complete this supplement, you should be able to: you should be able to: 1. Define capacity 5. Determine the expected monetary 2. Determine design capacity, effective value of a capacity decision capacity, and utilization 6. Compute net present value 3. Perform bottleneck analysis 4. Compute break-even analysis© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 5 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 6 1
  2. 2. 10/16/2010 Process Strategies Capacity The throughput, or the number of The objective of a process strategy is units a facility can hold, receive, to build a production process that store, or produce in a period of time meets customer requirements and Determines ete es product specifications within cost fixed costs and other managerial constraints Determines if demand will be satisfied Three time horizons© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 7 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 8 Planning Over a Time Design and Effective Horizon Capacity Options for Adjusting Capacity Long-range Add facilities Design capacity is the maximum planning Add long lead time equipment * theoretical output of a system Intermediate- Subcontract Add personnel range Add equipment Build or use inventory Normally expressed as a rate N ll d t planning Add shifts Effective capacity is the capacity a Short-range Schedule jobs firm expects to achieve given current planning * Schedule personnel Allocate machinery operating constraints Modify capacity Use capacity Often lower than design capacity * Difficult to adjust capacity as limited options exist Figure S7.1© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 9 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 10 Utilization and Efficiency Bakery Example Utilization is the percent of design capacity Actual production last week = 148,000 rolls achieved Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Utilization = Actual output/Design capacity p g p y Bakery operates 7 days/week, 3 - 8 hour shifts Efficiency is the percent of effective capacity Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls achieved Efficiency = Actual output/Effective capacity© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 11 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 12 2
  3. 3. 10/16/2010 Bakery Example Bakery Example Actual production last week = 148,000 rolls Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, 3 - 8 hour shifts Bakery operates 7 days/week, 3 - 8 hour shifts Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls Utilization = 148,000/201,600 = 73.4%© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 13 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 14 Bakery Example Bakery Example Actual production last week = 148,000 rolls Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, 3 - 8 hour shifts Bakery operates 7 days/week, 3 - 8 hour shifts Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls Utilization = 148,000/201,600 = 73.4% Utilization = 148,000/201,600 = 73.4% Efficiency = 148,000/175,000 = 84.6%© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 15 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 16 Bakery Example Bakery Example Actual production last week = 148,000 rolls Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, 3 - 8 hour shifts Bakery operates 7 days/week, 3 - 8 hour shifts Efficiency = 84.6% Effi i 84 6% Efficiency of new line = 75% Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls Expected Output = (Effective Capacity)(Efficiency) Utilization = 148,000/201,600 = 73.4% = (175,000)(.75) = 131,250 rolls Efficiency = 148,000/175,000 = 84.6%© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 17 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 18 3
  4. 4. 10/16/2010 Bakery Example Capacity and Strategy Actual production last week = 148,000 rolls Capacity decisions impact all 10 Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour decisions of operations Bakery operates 7 days/week, 3 - 8 hour shifts management as well as other Efficiency = 84.6% Effi i 84 6% functional areas of the organization f ti l f th i ti Efficiency of new line = 75% Capacity decisions must be Expected Output = (Effective Capacity)(Efficiency) integrated into the organization’s = (175,000)(.75) = 131,250 rolls mission and strategy© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 19 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 20 Capacity Considerations Economies and Diseconomies of Scale 1. Forecast demand accurately (dollars per room per night) 2. Understand the technology and Average uni cost capacity increments p y 25 - room 75 - room it roadside motel roadside motel m 50 - room 3. Find the optimum roadside motel operating level (volume) Economies Diseconomies 4. Build for change of scale of scale 25 50 75 Number of Rooms Figure S7.2© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 21 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 22 Managing Demand Complementary Demand Demand exceeds capacity Patterns Curtail demand by raising prices, scheduling longer lead time Long term solution is to increase capacity 4,000 – Sales in units Capacity exceeds demand 3,000 – Stimulate market 2,000 – Product changes Jet ski 1,000 – engine Adjusting to seasonal demands sales Produce products with complementary JFMAMJJASONDJFMAMJJASONDJ demand patterns Time (months) Figure S7.3© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 23 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 24 4
  5. 5. 10/16/2010 Complementary Demand Complementary Demand Patterns Patterns Combining both demand patterns reduces the variation 4,000 – 4,000 – Sales in units Sales in units Snowmobile S bil Snowmobile S bil 3,000 – motor sales 3,000 – motor sales 2,000 – 2,000 – 1,000 – Jet ski 1,000 – Jet ski engine engine sales sales JFMAMJJASONDJFMAMJJASONDJ JFMAMJJASONDJFMAMJJASONDJ Time (months) Time (months) Figure S7.3 Figure S7.3© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 25 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 26 Tactics for Matching Demand and Capacity Capacity to Demand Management in the 1. Making staffing changes Service Sector 2. Adjusting equipment Demand management Purchasing additional machinery Appointment, reservations, FCFS rule Selling or leasing out existing equipment 3. Improving processes to increase throughput Capacity 4. Redesigning products to facilitate more management throughput Full time, 5. Adding process flexibility to meet changing temporary, product preferences part-time 6. Closing facilities staff© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 27 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 28 Bottleneck Analysis and Process Times for Stations, Theory of Constraints Systems, and Cycles Each work area can have its own unique The process time of a station is the capacity time to produce a unit at that single Capacity analysis determines the workstation throughput capacity of workstations in a The process time of a system is the system time of the longest process in the A bottleneck is a limiting factor or system … the bottleneck constraint The process cycle time is the time it A bottleneck has the lowest effective takes for a product to go through the capacity in a system production process with no waiting© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 29 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 30 5
  6. 6. 10/16/2010 Process Times for Stations, A Three-Station Three- Systems, and Cycles Assembly Line The system process time is the QuickTime™ and a decompressor are needed to see this picture. process time of the bottleneck after dividing by the number of parallel operations The system capacity is the inverse A B C of the system process time 2 min/unit 4 min/unit 3 min/unit The process cycle time is the total time through the longest path in the Figure S7.4 system© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 31 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 32 Capacity Bread Fill Toast Capacity Analysis Analysis Order 30 sec 15 sec 20 sec 40 sec Wrap 37.5 sec Bread Fill Toast 15 sec 20 sec 40 sec Two identical sandwich lines Toast work station has the longest processing Lines have two workers and three operations time – 40 seconds All completed sandwiches are wrapped The two lines each deliver a sandwich every 40 seconds so the process time of the combined p lines is 40/2 = 20 seconds Bread Fill Toast At 37.5 seconds, wrapping and delivery has the Order 15 sec/sandwich 20 sec/sandwich 40 sec/sandwich Wrap longest processing time and is the bottleneck30 sec/sandwich 37.5 sec/sandwich Capacity per hour is 3,600 seconds/37.5 Bread Fill Toast seconds/sandwich = 96 sandwiches per hour 15 sec/sandwich 20 sec/sandwich 40 sec/sandwich Process cycle time is 30 + 15 + 20 + 40 + 37.5 = 142.5 seconds© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 33 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 34 Capacity Cleaning Capacity Analysis Analysis Check in 2 min/unit Takes X-ray 2 min/unit Develops X-ray 4 min/unit 24 min/unit X-ray exam Dentist 8 min/unit Check out 6 min/unit 5 min/unit Standard process for cleaning teeth All possible paths must be compared Cleaning and examining X-rays can happen simultaneously Cleaning path is 2 + 2 + 4 + 24 + 8 + 6 = 46 minutes X-ray exam path is 2 + 2 + 4 + 5 + 8 + 6 = 27 Cleaning minutes Takes Develops 24 min/unit Check Longest path involves the hygienist cleaning the Check in Dentist X-ray X-ray out teeth 2 min/unit 2 min/unit 4 min/unit X-ray 8 min/unit 6 min/unit Bottleneck is the hygienist at 24 minutes exam Hourly capacity is 60/24 = 2.5 patients 5 min/unit Patient should be complete in 46 minutes© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 35 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 36 6
  7. 7. 10/16/2010 Theory of Constraints Bottleneck Management Five-step process for recognizing and 1. Release work orders to the system at the managing limitations pace of set by the bottleneck Step 1: Identify the constraint 2. Lost time at the bottleneck represents Step 2: Develop a plan for overcoming the p p p g y lost time for the whole system constraints 3. Increasing the capacity of a non- Step 3: Focus resources on accomplishing Step 2 bottleneck station is a mirage Step 4: Reduce the effects of constraints by 4. Increasing the capacity of a bottleneck offloading work or expanding capability increases the capacity of the whole Step 5: Once overcome, go back to Step 1 and find system new constraints© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 37 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 38 Break- Break-Even Analysis Break- Break-Even Analysis Fixed costs are costs that continue Technique for evaluating process even if no units are produced and equipment alternatives Depreciation, taxes, debt, mortgage Objective is to find the point in payments dollars and units at which cost Variable costs are costs that vary equals revenue with the volume of units produced Requires estimation of fixed costs, Labor, materials, portion of utilities variable costs, and revenue Contribution is the difference between selling price and variable cost© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 39 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 40 Break- Break-Even Analysis Break- Break-Even Analysis – Assumptions 900 – Total revenue line Costs and revenue are linear 800 – Break-even point Total cost line functions 700 – Total cost = Total revenue Cost in dollars 600 – Generally not the case in the y d 500 – real world 400 – Variable cost We actually know these costs 300 – Very difficult to verify 200 – 100 – Fixed cost Time value of money is often – | | | | | | | | | | | | ignored 0 100 200 300 400 500 600 700 800 900 1000 1100 Figure S7.5 Volume (units per period)© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 41 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 42 7
  8. 8. 10/16/2010 Break- Break-Even Analysis Break- Break-Even Analysis BEPx = break-even point in x = number of units BEPx = break-even point in x = number of units units produced units produced BEP$ = break-even point in TR = total revenue = Px BEP$ = break-even point in TR = total revenue = Px dollars F = fixed costs dollars F = fixed costs P = price per unit (after V = variable cost per unit P = price per unit (after V = variable cost per unit all discounts) TC = total costs = F + Vx all discounts) TC = total costs = F + Vx BEP$ = BEPx P Break- Break-even point occurs when = F P Profit = TR - TC P-V = Px - (F + Vx) TR = TC F F or BEPx = = = Px - F - Vx P-V (P - V)/P Px = F + Vx F = (P - V)x - F = 1 - V/P© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 43 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 44 Break- Break-Even Example Break- Break-Even Example Fixed costs = $10,000 Material = $.75/unit Fixed costs = $10,000 Material = $.75/unit Direct labor = $1.50/unit Selling price = $4.00 per unit Direct labor = $1.50/unit Selling price = $4.00 per unit F $10,000 F $10,000 BEP$ = = BEP$ = = 1 - (V/P) 1 - [(1.50 + .75)/(4.00)] 1 - (V/P) 1 - [(1.50 + .75)/(4.00)] $10,000 = = $22,857.14 .4375 F $10,000 BEPx = = = 5,714 P-V 4.00 - (1.50 + .75)© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 45 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 46 Break- Break-Even Example Break- Break-Even Example 50,000 – Multiproduct Case Revenue 40,000 – F Break-even BEP$ = point 30,000 – Total ∑ 1- Vi x (Wi) Dollars s costs t Pi 20,000 – Fixed costs where V = variable cost per unit 10,000 – P = price per unit F = fixed costs – | | | | | | W = percent each product is of total dollar sales 0 2,000 4,000 6,000 8,000 10,000 Units i = each product© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 47 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 48 8
  9. 9. 10/16/2010 Multiproduct Example Multiproduct Example Fixed costs = $3,000 per month Fixed costs = $3,000 per month Annual Forecasted Annual Forecasted Item Price Cost Sales Units Item Price Cost Sales Units Sandwich $5.00 $3.00 9,000 Sandwich $5.00 $3.00 9,000 Drink 1.50 .50 9,000 Drink 1.50 .50 9,000 Baked potato 2.00 2 00 1.00 1 00 7,000 7 000 Baked potato 2.00 2 00 1.00 1 00 7,000 7 000 Annual Weighted Selling Variable Forecasted % of Contribution Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7) Sandwich $5.00 $3.00 .60 .40 $45,000 .621 .248 Drinks 1.50 .50 .33 .67 13,500 .186 .125 Baked 2.00 1.00 .50 .50 14,000 .193 .096 potato $72,500 1.000 .469© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 49 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 50 Multiproduct Example F Reducing Risk with BEP = ∑ 1 - P x (W ) V $ i i Incremental Changes Fixed costs = $3,000 per month i (a) Leading demand with (b) Capacity lags demand with incremental expansion incremental expansion $3,000 x Forecasted Annual 12 New Item Price Cost = Sales Units = $76,759 New .469 capacity capacity Demand Sandwich $5.00 $3.00 9,000 Demand Expected Expected demand demand Drink 1.50 .50 Daily 9,000 $76,759 Baked potato 2.00 2 00 1sales = 312 days = $246.02 1.00 00 7 000 $246 02 7,000 Annual Weighted Selling Variable .621 x $246.02 of Contribution Forecasted % (c) Attempts to have an average Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ = 30.6 ≈ 31 Sales (col 5 x col 7) capacity with incremental $5.00 sandwiches expansion Sandwich $5.00 $3.00 .60 .40 $45,000 .621 per day .248 New Drinks 1.50 .50 .33 .67 13,500 .186 .125 Demand capacity Expected Baked 2.00 1.00 .50 .50 14,000 .193 .096 demand potato $72,500 1.000 .469 Figure S7.6© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 51 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 52 Reducing Risk with Reducing Risk with Incremental Changes Incremental Changes (a) Leading demand with incremental (b) Capacity lags demand with incremental expansion expansion New New capacity capacity Expected Demand Demand Expected demand demand 1 2 3 1 2 3 Time (years) Time (years) Figure S7.6 Figure S7.6© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 53 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 54 9
  10. 10. 10/16/2010 Reducing Risk with Expected Monetary Value Incremental Changes (EMV) and Capacity Decisions (c) Attempts to have an average capacity with incremental expansion Determine states of nature New capacity Future demand Expected Market favorability Demand demand Analyzed using decision trees Hospital supply company Four alternatives 1 2 3 Time (years) Figure S7.6© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 55 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 56 Expected Monetary Value Expected Monetary Value (EMV) and Capacity Decisions (EMV) and Capacity Decisions Market favorable (.4) Market favorable (.4) $100,000 $100,000 Market unfavorable (.6) Market unfavorable (.6) -$90,000 -$90,000 Market favorable ( 4) (.4) Market favorable ( 4) (.4) $60,000 $60,000 Medium plant Medium plant Market unfavorable (.6) -$10,000 Large Plant Market unfavorable (.6) -$10,000 Market favorable (.4) EMV = (.4)($100,000) Market favorable (.4) $40,000 + (.6)(-$90,000) $40,000 Market unfavorable (.6) Market unfavorable (.6) -$5,000 EMV = -$14,000 -$5,000 $0 $0© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 57 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 58 Expected Monetary Value (EMV) and Capacity Decisions Strategy- Strategy-Driven Investment -$14,000 Market favorable (.4) $100,000 Market unfavorable (.6) -$90,000 Operations may be responsible $18,000 for return-on-investment (ROI) Market favorable ( 4) (.4) Medium plant $60,000 Analyzing capacity alternatives Market unfavorable (.6) -$10,000 should include capital $13,000 Market favorable (.4) investment, variable cost, cash $40,000 flows, and net present value Market unfavorable (.6) -$5,000 $0© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 59 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 60 10
  11. 11. 10/16/2010 Net Present Value (NPV) Net Present Value (NPV) In general: In general: F = P(1 + i)N F = P(1 + i)N where F = future value where F = future value P = present value t l P While this works = present value t l i = interest rate i fine, it is = interest rate N = number of years N cumbersome for = number of years larger values of N Solving for P: Solving for P: F F P= P= (1 + i)N (1 + i)N© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 61 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 62 NPV Using Factors Present Value of an Annuity F P= (1 + i)N = FX An annuity is an investment which generates uniform equal payments where X = a factor from Table S7.1 defined as = 1/(1 + i)N and S = RX F = future value where X = factor from Table S7.2 Year 6% 8% 10% 12% 14% S = present value of a series of 1 .943 .926 .909 .893 .877 uniform annual receipts Portion of Table S7.1 2 .890 .857 .826 .797 .769 R = receipts that are received every 3 .840 .794 .751 .712 .675 year of the life of the investment 4 .792 .735 .683 .636 .592 5 .747 .681 .621 .567 .519© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 63 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 64 Present Value of an Annuity Present Value of an Annuity Portion of Table S7.2 $7,000 in receipts per for 5 years Interest rate = 6% Year 6% 8% 10% 12% 14% 1 .943 .926 .909 .893 .877 2 1.833 1 833 1.783 1 783 1.736 1 736 1.690 1 690 1.647 1 647 From Table S7.2 3 2.676 2.577 2.487 2.402 2.322 X = 4.212 4 3.465 3.312 3.170 3.037 2.914 5 4.212 3.993 3.791 3.605 3.433 S = RX S = $7,000(4.212) = $29,484© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 65 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 66 11
  12. 12. 10/16/2010 Limitations 1. Investments with the same NPV may have different projected lives and salvage values 2. Investments with the same NPV may have different cash flows All rights reserved. No part of this publication may be reproduced, stored in a retrieval 3. Assumes we know future interest rates system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. 4. Payments are not always made at the end of a period© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 67 © 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 68 12

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