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S7S7 Capacity and Constraint Management

Capacity and Constraint Management

PowerPoint presentation to accompany Heizer and Render Operations Management, 10e Principles of Operations Management, 8e

PowerPoint slides by Jeff Heyl

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Outline Capacity

Design and Effective Capacity Capacity and Strategy Capacity Considerations Managing Demand Demand and Capacity Management in the

Service Sector

Bottleneck Analysis and Theory of Constraints Process Times for Stations, Systems, and

Cycles

Break-Even Analysis

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Learning Objectives

When you complete this supplement, you should be able to:

1. Define capacity

2. Determine design capacity, effective capacity, and utilization

3. Perform bottleneck analysis

4. Compute break-even analysis

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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

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Planning Over a Time Horizon

Figure S7.1

Modify capacity Use capacity

Intermediate-range planning

Subcontract Add personnelAdd equipment Build or use inventory Add shifts

Short-range planning

Schedule jobsSchedule personnel Allocate machinery*

Long-range planning

Add facilitiesAdd long lead time equipment *

* Difficult to adjust capacity as limited options exist

Options for Adjusting Capacity

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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

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Utilization and Efficiency

Utilization is the percent of design capacity achieved

Efficiency is the percent of effective capacity achieved

Utilization = Actual output/Design capacity

Efficiency = Actual output/Effective capacity

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Bakery Example

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

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Bakery Example

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

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Bakery Example

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

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Bakery Example

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

Utilization = 148,000/201,600 = 73.4%

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Bakery Example

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shifts

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%

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Bakery Example

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shifts

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%

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Bakery Example

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shiftsEfficiency = 84.6%Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

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

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Bakery Example

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shiftsEfficiency = 84.6%Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

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

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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

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Complementary Demand Patterns

4,000 –

3,000 –

2,000 –

1,000 –

J F M A M J J A S O N D J F M A M J J A S O N D J

Sal

es i

n u

nit

s

Time (months)

Combining both demand patterns reduces the variation

Snowmobile motor sales

Jet ski engine sales

Figure S7.3

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Demand and Capacity Management in the

Service Sector Demand management

Appointment, reservations, FCFS rule

Capacity management Full time,

temporary, part-time staff

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Break-Even Analysis

Objective is to find the point in dollars and units at which cost equals revenue

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

Assumes - Costs and revenue are linear

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Profit corri

dor

Loss

corridor

Break-Even AnalysisTotal revenue line

Total cost line

Variable cost

Fixed cost

Break-even pointTotal cost = Total revenue

–

900 –

800 –

700 –

600 –

500 –

400 –

300 –

200 –

100 –

–| | | | | | | | | | | |

0 100 200 300 400 500 600 700 800 900 10001100

Co

st in

do

llars

Volume (units per period)Figure S7.5

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Break-Even Analysis

BEPx =break-even point in unitsBEP$ =break-even point in dollarsP = price per unit (after all discounts)

x = number of units producedTR = total revenue = PxF = fixed costsV = variable cost per unitTC = total costs = F + Vx

TR = TCor

Px = F + Vx

Break-even point occurs when

BEPx =F

P - V

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Break-Even Analysis

BEPx =break-even point in unitsBEP$ =break-even point in dollarsP = price per unit (after all discounts)

x = number of units producedTR = total revenue = PxF = fixed costsV = variable cost per unitTC = total costs = F + Vx

BEP$ = BEPx P

= P

=

=

F(P - V)/P

FP - V

F1 - V/P

Profit = TR - TC= Px - (F + Vx)= Px - F - Vx= (P - V)x - F

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Break-Even Example

Fixed costs = $10,000 Material = $.75/unitDirect labor = $1.50/unit Selling price = $4.00 per unit

BEP$ = =F

1 - (V/P)$10,000

1 - [(1.50 + .75)/(4.00)]

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Break-Even Example

Fixed costs = $10,000 Material = $.75/unitDirect labor = $1.50/unit Selling price = $4.00 per unit

BEP$ = =F

1 - (V/P)$10,000

1 - [(1.50 + .75)/(4.00)]

= = $22,857.14$10,000

.4375

BEPx = = = 5,714F

P - V$10,000

4.00 - (1.50 + .75)

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Break-Even Example

50,000 –

40,000 –

30,000 –

20,000 –

10,000 –

–| | | | | |

0 2,000 4,000 6,000 8,000 10,000

Do

llars

Units

Fixed costs

Total costs

Revenue

Break-even point

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Break-Even Example

BEP$ =F

∑ 1 - x (Wi)Vi

Pi

Multiproduct Case

where V = variable cost per unitP = price per unitF = fixed costs

W = percent each product is of total dollar salesi = each product

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In-Class Problems from the Lecture Guide Practice Problems

Problem 1:The design capacity for engine repair in our company is 80 trucks/day. The effective capacity is 40 engines/day and the actual output is 36 engines/day. Calculate the utilization and efficiency of the operation. If the efficiency for next month is expected to be 82%, what is the expected output?

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In-Class Problems from the Lecture Guide Practice Problems

Problem 5:Jack’s Grocery is manufacturing a “store brand” item that has a variable cost of $0.75 per unit and a selling price of $1.25 per unit. Fixed costs are $12,000. Current volume is 50,000 units. The Grocery can substantially improve the product quality by adding a new piece of equipment at an additional fixed cost of $5,000. Variable cost would increase to $1.00, but their volume should increase to 70,000 units due to the higher quality product. Should the company buy the new equipment?

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In-Class Problems from the Lecture Guide Practice Problems

Problem 6:What are the break-even points ($ and units) for the two processes considered in Problem S7.5?

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In-Class Problems from the Lecture Guide Practice Problems

Problem 7:Develop a break-even chart for Problem S7.5.