3

SUPPLEMENT
Capacity Planning
7
PowerPoint presentation to accompany
Heizer and Render
Operations Management, Global Edition, Eleventh Edition
Principles of Operations Management, Global Edition, Ninth Edition

PowerPoint slides by Jeff Heyl

© 2014 Pearson Education S7 - 1

 OUTLINE
• Capacity
- design capacity
- effective capacity
• Key Issues in Capacity Planning
• Bottleneck Analysis
• Multi-Product Break-Even Analysis
• Applying EMV to Capacity Planning
Decisons

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 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
 Determines if facilities remain idle
© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 3
 Planning Over a Time
Horizon
Options for Adjusting Capacity

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

* Difficult to adjust capacity as limited options exist

Figure S7.1
© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 4
 Design and Effective
Capacity
 Design capacity is the maximum
theoretical output of a system
 Normally expressed as a rate
 Effective capacity is the capacity a
firm expects to achieve given current
operating constraints
 Often lower than design capacity

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 5

 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

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 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, 3 - 8 hour shifts

Weekly Design capacity = (7 x 3 x 8) x (1,200)

= 201,600 rolls

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 7

 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

Weekly Design capacity = (7 x 3 x 8) x (1,200)

= 201,600 rolls

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 8

 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

Weekly 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 - 9

 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

Weekly 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 - 10

 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

Weekly 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%

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 11

 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

Weekly 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%

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 12

 Bakery Example: Estimating Output of
a New Facility
They are considering adding a second production line
and they plan to hire new employees and train them to
operate this new line
Effective capacity on this new line = 175,000 rolls which
is the same on the first line
However, due to new hires they expect that efficiency of
this new line will be 75% rather than 84.6%

Expected Output = (Effective Capacity) * (Efficiency)

= (175,000) * (.75) = 131,250 rolls

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 13

 İmportant Issues in
Capacity Planning
1. Forecast demand accurately
2. Understand the technology and
capacity increments
3. Find the optimum
operating level
(volume)
4. Build for change

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 14

 Optimum (Best) Operating Level
and Size

• Alternative 1: Purchase one large facility, requiring one large

initial investment
• Alternative 2: Add capacity incrementally in smaller chunks as
© Wiley 2010
needed 15 S7 - 15
 Optimum (Best) Operating Level
• The Best Operating Level is the output that results in
the lowest average unit cost
• Economies of Scale:
– Where the cost per unit of output drops as volume of output
increases
– Spread the fixed costs of buildings & equipment over
multiple units, allow bulk purchasing & handling of material
• Diseconomies of Scale:
– Where the cost per unit rises as volume increases
– Often caused by congestion (overwhelming the process with
too much work-in-process) and scheduling complexity

S7 - 16
 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 complementary
demand patterns
© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 17
 Complementary Demand
Patterns

4,000 –
Sales in units

3,000 –

2,000 –

1,000 – Jet ski

engine
sales

JFMAMJJASONDJFMAMJJASONDJ
Time (months)
Figure S7.3
© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 18
 Complementary Demand
Patterns

4,000 –
Sales in units

Snowmobile
3,000 – motor sales

2,000 –

1,000 – Jet ski

engine
sales

JFMAMJJASONDJFMAMJJASONDJ
Time (months)
Figure S7.3
© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 19
 Complementary Demand
Patterns
Combining both
demand patterns
reduces the
variation
4,000 –
Sales in units

Snowmobile
3,000 – motor sales

2,000 –

1,000 – Jet ski

engine
sales

JFMAMJJASONDJFMAMJJASONDJ
Time (months)
Figure S7.3
© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 20
 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
© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 21
 Demand and Capacity
Management in the
Service Sector
 Demand management (scheduling
customers)
 Appointment, reservations, FCFS rule
 Capacity
management
(scheduling workforce)
 Full time,
temporary,
part-time
staff
© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 22
 Bottleneck Analysis and
Theory of Constraints
 Each work area can have its own unique
capacity
 Capacity analysis determines the
throughput capacity of workstations in a
system
 A bottleneck is a limiting factor or
constraint
 A bottleneck has the lowest effective
capacity in a system
© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 23
S7 - 24
 Bottleneck Management
1. Release work orders to the system at the
pace of set by the bottleneck
2. Lost time at the bottleneck represents
lost time for the whole system
3. Increasing the capacity of a non-
bottleneck station is a mirage
4. Increasing the capacity of a bottleneck
increases the capacity of the whole
system

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 25

Bottleneck Analysis and the
Theory of Constraints
► The bottleneck time is the time of the
slowest workstation (the one that
takes the longest) in a production
system
► The throughput time is the time it
takes a unit to go through productionFigure S7.4
from start to end
A B C

2 min/unit 4 min/unit 3 min/unit

S7 - 26
 Capacity Analysis
► Two identical sandwich assembly lines
► Each assembly line has two workers and
two operations
► All completed sandwiches are wrapped
Bread Fill
15 sec/sandwich 20 sec/sandwich
Wrap/
Order Toaster
Deliver
30 sec/sandwich 20 sec/sandwich
Bread Fill 37.5 sec/sandwich

15 sec/sandwich 20 sec/sandwich

S7 - 27
Capacity Bread
15 sec
Fill
20 sec Wrap/

Analysis Order
30 sec
Bread
15 sec
Fill
20 sec
Toaster
20 sec
Deliver

37.5 sec

► The two lines each deliver a sandwich

every 20 seconds
► At 37.5 seconds, wrapping and delivery
has the longest processing time and is
the bottleneck
► Capacity per hour is 3,600 seconds/37.5
seconds/sandwich = 96 sandwiches per
hour
► Throughput time is 30 + 15 + 20 + 20 +
37.5 = 122.5 seconds
S7 - 28
 Capacity Analysis
Example S4, pg.322
 Standard process for cleaning teeth
 Cleaning and examining X-rays can happen
simultaneously

Hygienist
Cleans
the teeth
A Lab Ass. A Lab Ass 24 min/unit Dentist
Customer re-processes Customer
Checks in
Takes Develops
pays
X-ray X-ray Dentist
Examines
2 min/unit 2 min/unit 4 min/unit X-ray and 8 min/unit 6 min/unit
processes

5 min/unit

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 29

 Capacity Check
in
Takes
X-ray
Develops
X-ray
Cleaning

24 min/unit
Dentist
Check
out

Analysis 2 min/unit 2 min/unit 4 min/unit X-ray

exam

5 min/unit
8 min/unit 6 min/unit

 All possible paths must be compared

 Cleaning path is 2 + 2 + 4 + 24 + 8 + 6 = 46
minutes, X-ray exam path is 2 + 2 + 4 + 5 + 8 + 6
= 27 minutes
 Longest path involves the hygienist cleaning the
teeth, so the throughput time is 46 min. The
patient will be out of door after 46 min.
 Bottleneck is the hygienist at 24 minutes.
 Hourly System capacity is (1/24)*60 min = 2.5
patients/per hour

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 30

 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

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 31

 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

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 32

 Break-Even Analysis
Assumptions
 Costs and revenue are linear
functions
 Generally not the case in the
real world
 We actually know these costs
 Very difficult to verify
 Time value of money is often
ignored
© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 33
 Break-Even Analysis
–
Total revenue line
900 –

800 –
Break-even point Total cost line
700 – Total cost = Total revenue
Cost in dollars

600 –

500 –

400 – Variable cost

300 –

200 –

100 – Fixed cost

–
| | | | | | | | | | | |
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 - 34

 Break-Even Analysis
BEPx = break-even point in x = number of units
units produced
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

Break-even point occurs when

TR = TC F
or BEPx =
P-V
Px = F + Vx

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 35

 Break-Even Analysis
BEPx = break-even point in x = number of units
units produced
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
© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 36
 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)]

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 37

 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)

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 38

 Break-Even Example
50,000 –

Revenue
40,000 –
Break-even
point Total
30,000 –
Dollars

costs

20,000 –

Fixed costs
10,000 –

–
| | | | | |
0 2,000 4,000 6,000 8,000 10,000
Units

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 39

 Multiproduct Break-Even
Analysis
Each product’s contribution is weighted by
its proportion of sales

F
BEP$ =
∑ 1-
Vi
Pi
x (Wi)

where Vi = variable cost per unit

Pi = price per unit
F = fixed costs
Wi = percent each product is of total dollar sales
i = each product

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 40

 Multiproduct Example
Fixed costs = $3,000 per month
ITEM PRICE COST ANNUAL FORECASTED SALES UNITS
Sandwich $5.00 $3.00 9,000
Drink 1.50 .50 9,000
Baked potato 2.00 1.00 7,000

1 2 3 4 5 6 7 8
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 0.50 .33 .67 13,500 .186 .125

Baked
potato 2.00 1.00 .50 .50 14,000 .193 .097

$72,500 1.000 .470

S7 - 41
 Multiproduct Example
BEP =
F
$

∑ 1 - P x (W )
V i

i
i
Fixed costs = $3,000 per month
Annualx Forecasted
$3,000 12
Item Price Cost = Sales Units
= $76,759
.469
Sandwich $5.00 $3.00 9,000
Drink 1.50 .50
Daily 9,000
$76,759
Baked potato 2.00 sales = 312 days
1.00 = $246.02
7,000

Annual Weighted
Selling Variable .621 x $246.02% of Contribution
Forecasted
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales = 30.6  531x col 7)
$5.00$ Sales (col
sandwiches
Sandwich $5.00 $3.00 .60 .40 $45,000 .621 per day
.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 - 42

 Reducing Risk with
Figure S7.6
Incremental Changes
(a) Leading demand with (b) Leading demand with a
incremental expansion one-step expansion
New
New capacity
capacity

Demand
Demand

Expected Expected
demand demand

(c) Lagging demand with (d) Attempts to have an average

incremental expansion capacity with incremental
New expansion
capacity New
Demand

Expected Demand capacity Expected

demand demand

S7 - 43
 Reducing Risk with
Incremental Changes
(a) Leading demand with incremental
expansion

New
capacity
Demand

Expected
demand

1 2 3
Time (years)
Figure S7.6
© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 44
 Reducing Risk with
Incremental Changes
(b) Leading demand with a one-step
expansion
Figure S7.6

New
capacit
y
Demand

Expecte
d
demand

1 2 3
Time (years)
S7 - 45
 Reducing Risk with
Incremental Changes
(c) Capacity lags demand with incremental
expansion

New
capacity

Expected
Demand

demand

1 2 3
Time (years)
Figure S7.6
© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 46
 Reducing Risk with
Incremental Changes
(d) Attempts to have an average capacity
with incremental expansion

New
capacity
Demand

Expected
demand

1 2 3
Time (years)
Figure S7.6
© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 47
 Expected Monetary Value
(EMV) and Capacity Decisions

 Determine states of nature

 Future demand
 Market favorability
 Analyzed using decision trees
 Hospital supply company
 Four alternatives

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 48

 Expected Monetary Value
(EMV) and Capacity Decisions
Market favorable (.4)
$100,000

Market unfavorable (.6)

-$90,000

Market favorable (.4)

$60,000
Medium plant
Market unfavorable (.6)
-$10,000

Market favorable (.4)

$40,000

Market unfavorable (.6)

-$5,000

$0

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 49

 Expected Monetary Value
(EMV) and Capacity Decisions
Market favorable (.4)
$100,000

Market unfavorable (.6)

-$90,000

Market favorable (.4)

$60,000
Medium plant
Large Plant Market unfavorable (.6)
-$10,000

EMV = (.4)($100,000) Market favorable (.4)

$40,000
+ (.6)(-$90,000)
Market unfavorable (.6)
EMV = -$14,000 -$5,000

$0

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 50

 Expected Monetary Value
(EMV) and Capacity Decisions
-$14,000
Market favorable (.4)
$100,000

Market unfavorable (.6)

-$90,000
$18,000
Market favorable (.4)
$60,000
Medium plant
Market unfavorable (.6)
-$10,000
$13,000
Market favorable (.4)
$40,000

Market unfavorable (.6)

-$5,000

$0

© 2011 Pearson Education, Inc. publishing as Prentice Hall S7 - 51

 EMV Applied to Capacity
Decision
▶ Southern Hospital Supplies capacity
expansion
EMV (large plant) = (.4)($100,000) + (.6)(–$90,000)
= –$14,000
EMV (medium plant) = (.4)($60,000) + (.6)(–$10,000)
= +$18,000
EMV (small plant) = (.4)($40,000) + (.6)(–$5,000)
= +$13,000
EMV (do nothing) = $0

S7 - 52