Chapter 9Chapter 9Capacity DecisionsCapacity Decisions

IDS 605IDS 605

Spring 1999Spring 1999

Key Points: CapacityKey Points: Capacity

Capacity = organization’s ability to provide customer with goods and services they demand

Estimating capacity System capacity vs. department capacity Capacity decisions

Transparency 9.1

Expanded DefinitionExpanded Definitionof Capacityof Capacity

1. Managers need a yardstick to estimate capacity

2. Capacity = (max. rate of production/hour) X (number of hours)

3. Number of hours worked is affected: by overtime, second shift, preventive maintenance, and equipment failure

4. Rate of production is affected by: number of people assigned, equipment used and quality of materials

5. Capacity is a function of management decisions and ingenuity

Transparency 9.2

Estimating Capacity Factors that Estimating Capacity Factors that Affect Production RateAffect Production Rate

1. Change mix of products

2. Add people to production process

3. Increase motivation of production employees

4. Increase operating rate of machine

5. Improve quality of raw materials and work in process

6. Increase product yield

Transparency 9.3

Product-Oriented LayoutProduct-Oriented Layoutof Paper Millof Paper Mill

(Exhibit 9.1)Transparency 9.4

Process-Oriented Layout of an Process-Oriented Layout of an Automotive Service CenterAutomotive Service Center

Transparency 9.5 (Exhibit 9.2)

A Bottleneck in theA Bottleneck in theProduct FlowProduct Flow

Transparency 9.6 (Exhibit 9.3)

Simple Steel Production FlowSimple Steel Production Flow

Transparency 9.8 (Exhibit 9.5)

Steel Production Flow:Steel Production Flow:A Product LayoutA Product Layout

Transparency 9.9 (Exhibit 9.6)

Determining System CapacityDetermining System Capacity

Transparency 9.10 (Exhibit 9.7)

Rounding Out CapacityRounding Out Capacity

Transparency 9.11 (Exhibit 9.8)

7,000 6,000 2 8,000 1 10,000

2,000 1 4,000 3,000

Chemical Corporation:Chemical Corporation:A Product Layout A Product Layout (Slide 1 of 3)(Slide 1 of 3)

The numbers listed below the departments represent capacity in gallons per hour. The number of the arrows represent the number of parts (ratio) that must be combined to meet the needs of the next department.

A

B

C

D

E

F G

H

1,800

1

3 2

Transparency 9.12a

Chemical Corporation:Chemical Corporation:A Product Layout A Product Layout (Slide 2 of 3)(Slide 2 of 3)

G

FDA

B E H

C

3,600 3,600 6,000 9,000

7,000 6,000 8,000 10,000

1,200 2,400 3,000

2,000 4,000 3,000 1,200

1,800The numbers above the departments represent the production rate required to produce a system capacityof 9,000 gallons per hour. The bottleneck departmentis H.

1

1

3

2

2

1

Transparency 9.12b

Chemical Corporation:Chemical Corporation:A Product Layout A Product Layout (Slide 3 of 3)(Slide 3 of 3)

GFDA

B E H

C

7,000 6,000 8,000 10,000

1,334 2,667 3,333

2,000 4,000 ?????

1,334

1,800

4,000 4,000 6,667 10,0003 2

2 1

1

1

The System capacity can be increased by 1,000 gallonsper hour if the capacity of department H is increased by 333 gallons per hour. If it happens, The bottleneck becomes department G.

Transparency 9.12c

A Process Layout of aA Process Layout of aMedical CenterMedical Center

(Exhibit 9.9)Transparency 9.13

Capacity DecisionsCapacity Decisions

When to add capacity? How much capacity to add?

Where to add capacity? (Location decision, Chapter 10)

What type of capacity to add? (Process selection, Chapters 6&8)

Should capacity be reduced?

Transparency 9.14

Capacity vs. DemandCapacity vs. Demand

Transparency 9.15 (Exhibit 9.10)

Capacity, Demand andCapacity, Demand andProduction RateProduction Rate

Transparency 9.16 (Exhibit 9.11)

How Much Capacity to AddHow Much Capacity to Add

Transparency 9.17 (Exhibit 9.12)

Decision Tree forDecision Tree forCapacity DecisionCapacity Decision

Transparency 9.18 (Exhibit 9.13)

Calculations for Gross ProfitCalculations for Gross Profit(Slide 1 of 2)(Slide 1 of 2)

Transparency 9.19a (Exhibit 9.14)

continues on next slide

Calculations for Gross ProfitCalculations for Gross Profit(Slide 2 of 2)(Slide 2 of 2)

Transparency 9.19b (Exhibit 9.14)

Decision Tree for Capacity Decision Tree for Capacity Decision with Potential Decision with Potential

CompetitorCompetitor

Transparency 9.20 (Exhibit 9.15)

Calculations for Gross Profit with Calculations for Gross Profit with Potential Competitor Potential Competitor (Slide 1 of 2)(Slide 1 of 2)

Transparency 9.21a

Operating Revenue ($000,000)

8

9

10

Yrs. 1,2 ($10/unit)(200,000 units/yr.)(2 yrs.)Yr. 3 ($10/unit)(200,000 units/yr.)(.8)Yrs. 4,5 ($10/unit)(200,000 units/yr.)(.65)(2 yrs.)

Yrs. 1,2 ($10/unit)(100,000 units/yr.)(2 yrs.)Yr. 3 ($10/unit)(200,000 units/yr.)(.8)Yrs. 4,5 ($10/unit)(200,000 units/yr.)(.65)(2 yrs.)

Yrs. 1,2 ($10/unit)(100,000 units/yr.)(2 yrs.)Yrs. 3-5 ($10/unit)(200,000 units/yr.)(3 yrs.)

= 4= 1.6= 2.6 8.2= 2= 1.6= 2.6 6.2= 2= 6 8

EndpointNumber

(Exhibit 9.16)

Operating Costs ($100,000)

8

9

10

Yrs. 1,2 [($2.90/unit)(200,000 units/yr.) + $550,000/yr.](2 yrs.)Yr. 3 [($2.90/unit)(200,000 units/yr.)(.8) + $550,000/yr.]Yrs. 4,5 [($2.90/unit)(200,000 units/yr.)(.65) + $550,000/yr.](2 yrs.)

Yrs. 1,2 [($3.70/unit)(100,000 units/yr.) + $400,000/yr.](2 yrs.)Yr. 3 [($3.70/unit)(200,000 units/yr.)(.8) + $800,000/yr.]Yrs. 4,5 [($3.70/unit)(200,000 units/yr.)(.65) + $800,000/yr.](2 yrs.)

Yrs. 1,2 [($3.70/unit)(100,000 units/yr.) + $400,000/yr.](2 yrs.)Yrs. 3-5 [($3.70/unit)(200,000 units/yr.) + $800,000/yr.](3 yrs.)

= 2.26= 1.014= 1.854 5.128= 1.54= 1.392= 2.562 5.494= 1.54= 4.62 6.16

EndpointNumber

Calculations for Gross Profit with Calculations for Gross Profit with Potential Competitor Potential Competitor (Slide 2 of 2)(Slide 2 of 2)

Transparency 9.21b

8 910

3.0720.7061.84

EndpointNumber

Gross Profit($000,000)

(Exhibit 9.16)

Plant ClosingsPlant Closings

1. Demand for product has declined

2. Shift capacity to another location

3. Build new facilities with new technology

Transparency 9.22