Fundamentals of Operations Management BUS 3 – 140 Capacity Planning Oct 2, 2007

1. Fundamentals ofOperations ManagementBUS 3 – 140Capacity PlanningOct 2, 2007

2. Definitions • Design capacity Maximum output rate or service capacity for which an operation, process, or facility is designed • Effective capacity Design capacity minus allowances such as personal time, maintenance, and scrap • Actual output Rate of output actually achieved--cannot exceed effective capacity. * From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

3. Measures of Capacity (Table 5.1) * From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

4. Factors that Influence Effective Capacity (Table 5.2) FACILITIES POLICY Design OPERATIONAL Location Layout Scheduling Environment Materials Management Quality assurance PRODUCT / SERVICES Maintenance policies Design Equipment breakdowns Product or service MIX SUPPLY CHAINS PROCESS EXTERNAL FACTORS Quantity capabilities Quality capabilities Product standards Safety regulations HUMAN FACTORS Unions Job Content Pollution control standards Job Design Training and Experience Motivation Compensation Learning Curve Absenteeism & labor turnover

5. Strategic Considerations in Capacity Planning • Revenue • Cost • Technologies • Volumes • Markets • Acquisitions • Sourcing decisions • Expansion decisions • Capital equipment • Long time to Implement and then in place for a Long time

6. Tactical Considerations in Capacity Planning

7. Constraints Anything that LIMITS a system in reaching its Goal Types of Constraints: • Resource • Material • Supplier/Vendor • Financial • Knowledge/Competence • Policy

8. Potential Bottleneck Operations (2 Examples) Bottleneck Operation 120/hr. Operation 210/hr. Operation 315/hr. 10/hr. Maximum output ratelimited by bottleneck 40 Units coming in every hour, but only 30 going out Machine #1 10/hr Machine #2 Bottleneck Operation 10/hr 30/hr Machine #3 10/hr Machine #4 10/hr

9. Bottleneck True Definition A Constraint that causes REVENUE to be Lost IMBALANCE IMBALANCE IMBALANCE Operation 120/hr. Operation 210/hr. Operation 315/hr. 10/hr. Unless more than 10 units per hour can be SOLD, the Operations are Imbalanced but not a true bottleneck

10. Unique Elements of Service Capacity • The need to be near Customers • Cannot store “inventory” of services in advance of the requirement • Variability of Inputs and Outputs

11. Developing Capacity Alternatives • Design flexibility into systems • Add power and water lines for easier expansion • Simplify facilities • Three bedroom house when you have no kids • Take stage of life cycle into account • Take a “big picture” approach to capacity changes • Correlation of different events (e.g. Increasing number of Hotel Rooms offered will increase need for Parking, Food, Housekeeping, etc..) • Attempt to smooth out capacity requirements • Influence demand so that load during peak times may be transferred of too-peak times • Use same equipment for complementary products (e.g. Bicycles and “Body by Jake”)

12. Capacity Planning & Cost

13. Fixed and variable Costs • Fixed Costs • Remain CONSTANT regards of level of Volume • Rent • Manager salaries • Insurance • Overhead • Variable Costs • Vary directly with Volume of Output • Total Material Cost • Total Beware of ABSORBING OVERHEAD (amortizing Fixed Costs) as a justification for producing more than can be Sold

14. Total cost = VC + FC Amount ($) Total variable cost (VC) Fixed cost (FC) 0 Q (volume in units) Breakeven Point • The volume of output at which total cost and total revenue are equal • Fixed Cost divided by Contribution Margin per unit Profit Profit Total revenue Total revenue Total cost Total cost Break Even Point units 0 0 Q (volume in units) Q (volume in units) Once the Breakeven Point is passed, Economies Of Scale result in accelerated Profits

15. Breakeven Exercise Page 194 of Book