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MANAGEMENT
Capacity Management
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
PLANNING OVER A TIME HORIZON
Schedule jobs
Short-range
Schedule personnel
planning
Allocate machinery
25 - room 75 - room
roadside motel 50 - room roadside motel
roadside motel
Economies Diseconomies
of scale of scale
25 50 75
Number of Rooms
MANAGING DEMAND
Demand exceeds capacity
Curtail demand by raising prices, scheduling longer lead
time
Long term solution is to increase capacity
4,000 –
Sales in units
3,000 –
2,000 –
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Time (months)
COMPLEMENTARY DEMAND PATTERNS
4,000 –
Sales in units
Snowmobile
3,000 – motor sales
2,000 –
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Time (months)
COMPLEMENTARY DEMAND PATTERNS
Combining both
demand patterns
reduces the
variation
4,000 –
Sales in units
Snowmobile
3,000 – motor sales
2,000 –
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Time (months)
TACTICS FOR MATCHING CAPACITY TO
DEMAND
1. Making staffing changes
2. Adjusting equipment
Purchasing additional machinery
Selling or leasing out existing equipment
3. Improving processes to increase throughput
4. Redesigning products to facilitate more throughput
5. Adding process flexibility to meet changing product
preferences
6. Closing facilities
DEMAND AND CAPACITY MANAGEMENT
IN THE SERVICE SECTOR
Demand management
Appointment, reservations, FCFS rule
Capacity
management
Full time,
temporary,
part-time
staff
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
New
capacity
Demand
Expected
demand
1 2 3
Time (years)
APPROACHES TO CAPACITY EXPANSION
(b) Leading demand with one-step
expansion
New
capacity
Expected
Demand
demand
1 2 3
Time (years)
APPROACHES TO CAPACITY EXPANSION
(c) Capacity lags demand with incremental
expansion
New
capacity
Expected
Demand
demand
1 2 3
Time (years)
APPROACHES TO CAPACITY EXPANSION
(d) Attempts to have an average capacity with
incremental expansion
New
capacity
Expected
Demand
demand
1 2 3
Time (years)
BREAK-EVEN ANALYSIS
800 –
Break-even point Total cost line
700 – Total cost = Total revenue
Cost in dollars
600 –
500 –
300 –
200 –
TR = TC F
or BEPx =
P-V
Px = F + Vx
BREAK-EVEN ANALYSIS
BEPx = break-even point in x = number of units produced
units
BEP$ = break-even point in TR = total revenue = Px
dollars F = fixed costs
P = price per unit (after V = variable cost per unit
all discounts) TC = total costs = F + Vx
BEP$ = BEPx P
= F P Profit = TR - TC
P-V = Px - (F + Vx)
= F
= Px - F - Vx
(P - V)/P
F = (P - V)x - F
=
1 - V/P
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)]
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
= .4375 = $22,857.14
50,000 –
Revenue
40,000 –
Break-even
point Total
30,000 –
costs
Dollars
20,000 –
Fixed costs
10,000 –
–
| | | | | |
0 2,000 4,000 6,000 8,000 10,000
Units
BREAK-EVEN EXAMPLE
Multiproduct Case
F
BEP$ =
∑ 1-
Vi
Pi
x (Wi)