Operations
Management
Capacity Design
1
Types of Planning Over a Time
Horizon
Long Range
Planning
Intermediate
Range Planning
Add Facilities
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
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:
Actual output as a percent of design capacity.
Efficiency:
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
Efficiency
Actual output
=
Effective Capacity
5
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
6
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?
7
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
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

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
10
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
11
Breakeven Chart
Total revenue line
Cost in Dollars
Breakeven point
Total cost = Total revenue
Profit
Profit
Total cost line
Variable cost
Loss
Fixed cost
Volume (units/period)
12
Crossover Chart
Process A: low volume, high variety
Process B: Repetitive
Process C: High volume, low variety
Fixed cost - Process C
Fixed cost - Process B
Fixed cost - Process A
Process A
Process B
Process C
Lowest cost process
13
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.

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
Sandwich 2.95
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
sandwich
V
V/P
1-(V/P) Foreca % of
sted
sales
sales
wghtd.
contrib
ution
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,
 BEPrs.=
FC
∑[(1-Vi/Pi)*(Wi)]

3500*12
0.625
= 67200
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 plant
100 k
-90k
 Medium plant
60k
-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
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.
year
A
B
1
10k
9k
2
9k
9k
3
8k
9k
4
7k
9k