capacity planning chapter5 feb 11
DESCRIPTION
capacity planningTRANSCRIPT
Virtual Company Tour
5-1
Quiz 2 Coverage & Schedule
5. Capacity Planning
a. Cost Volume Analysis
Session 9 (Feb 11)
6. Location Planning Session 10 (Feb 16)
7. Facilities Layout
a. Types of Manufacturing Process
b. Types of Layout
c. Line Balancing
d. Operations Sequence Analysis
Session 11 (Feb 16, 18)
8. Design of Work Systems
a. Principles of Work Design
b. Measurement of Work
c. Developing Standard Costs
9. Learning Curves
Session 12-14
(Feb 23, Mar 2, 4)
QUIZ 2 (15%) Session 15 (Mar 9, Mon)
5-2
McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
5
Capacity Planning
For Products and
Services
Group Activity – Virtual Tour
Answer the ff. question:
Comment on the design capacity of
the Phaeton factory?
Comment on the utilization of the VW
Phaeton factory?
What justification can be given for the
utilization figure?
Video
5-4
5-5
Learning Objectives
Explain the importance of capacity
planning.
Discuss ways of defining and
measuring capacity.
Describe the determinants of
effective capacity.
Discuss the major considerations
related to developing capacity
alternatives.
5-6
Capacity Planning
Capacity is the upper limit or ceiling on the load that an operating unit can handle.
Capacity also includes
Equipment
Space
Employee skills
The basic questions in capacity handling are:
What kind of capacity is needed?
How much is needed?
When is it needed?
5-7
Capacity – DEA!
Design capacity
maximum output rate or service capacity an
operation, process, or facility is designed for
Effective capacity
Design capacity minus allowances such as
personal time, maintenance, and scrap
Actual output
rate of output actually achieved—cannot
exceed effective capacity
5-8
Efficiency and Utilization
Actual outputEfficiency =
Effective capacity
Actual outputUtilization =
Design capacity
Actual output is always the NUMERATOR
Both measures expressed as percentages
5-9
Actual output = 36 units/day Efficiency = = 90%
Effective capacity 40 units/ day
Utilization = Actual output = 36 units/day = 72%
Design capacity 50 units/day
Example 1 – car wash business
Design capacity = 50 cars/day
Effective capacity = 40 cars/day
Actual output = 36 cars/day
S7 - 10© 2011 Pearson Education, Inc. publishing as Prentice Hall
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
S7 - 11© 2011 Pearson Education, Inc. publishing as Prentice Hall
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
S7 - 12© 2011 Pearson Education, Inc. publishing as Prentice Hall
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%
S7 - 13© 2011 Pearson Education, Inc. publishing as Prentice Hall
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%
S7 - 14© 2011 Pearson Education, Inc. publishing as Prentice Hall
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%
S7 - 15© 2011 Pearson Education, Inc. publishing as Prentice Hall
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%
S7 - 16© 2011 Pearson Education, Inc. publishing as Prentice Hall
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
S7 - 17© 2011 Pearson Education, Inc. publishing as Prentice Hall
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
5-18
Calculating Processing Requirements
(Example 2)
ProductAnnual
Demand
Standardprocessing time
per unit (hr.)Processing time
needed (hr.)
#1
#2
#3
400
300
700
5.0
8.0
2.0
2,000
2,400
1,400 5,800
If annual capacity is 2000 hours, then we need three machines to
handle the required volume: 5,800 hours/2,000 hours = 2.90 machines
SAMPLE PROBLEM SOLVING
5-19
Problem # 1
P1. The Crystal Sparkle Co. produces glass tumblers. The plant is
designed to produce 400 tumblers per hour, and there is one eight-hour
shift per working day. However, the plant does not operate for the full
eight hours: the employees take two 15-minute breaks in each shift, one
in the first four hours and one in the second four hours, and the first
thirty minutes of the shift are spent raising the kilns to the required
temperature for firing glass. The plant usually produces about 10,000
tumblers per five-day workweek. Answer the following questions by
adjusting the data to one eight-hour shift.
a. What is the design capacity of the plant in tumblers, per shift?
b. What is the effective capacity in tumblers per shift?
c. What is the actual output in tumblers per shift?
d. What is the efficiency ratio?
e. What is the utilization ratio?
5-20
Solution
a. Design capacity = 8 hrs. x 400 tumblers = 3,200 tumblers per 8-hour shift.
b. Effective capacity = Design capacity - Nonproductive activities.
Design capacity - 8.0 hrs.
Less: Breaks -.5 hrs.
Heat-up - .5 hrs.
Net productive time: 8 - 0.5 - 0.5 = 7.0 hrs.
Effective capacity = 7 hrs. x 400 tumblers = 2,800 tumblers.
c. Actual output = 10,000/5 = 2,000 tumblers per 8-hour shift. (This is an average
output. In reality, there could be variation; some shifts could exceed 2,000
tumblers while others fall short.)
d. Efficiency = Actual output/Effective capacity = (2000)/2800 x 100 = 71.43%.
e. Utilization = Actual output/Design capacity = (2000)/3200 x 100 = 62.50%.
5-21
Problem # 2
P2.The Goode and Cooke Company produces several models of frying pans.
There is little difference in the production time required for the various models;
the plant is designed to produce 160 frying pans per eight-hour shift, and there
are two shifts per working day. However, the plant does not operate for the full
eight hours: the employees take two 12-minute breaks in each shift, one in the
first four hours and one in the second four hours; two hours per week are
devoted to cleaning the factory and performing maintenance on the machines;
one four-hour period every four weeks is devoted to the meeting of the quality
circle. The plant usually produces about 3,500 frying pans per four-week period.
You may ignore holidays in solving this problem. Answer the following questions
by adjusting the data to a four-week time period.
a. What is the design capacity in frying pans?
b. What is the effective capacity in frying pans?
c. What is the actual output?
d. What is the efficiency?
e. What is the utilization?
f. Re-work the problem using a time period of one eight-hour shift.
5-22
Solution # 2
5-23
P2. a. Design capacity = 160 frying pans x 2 shifts x 20 working days = 6,400 frying pans per
four weeks.
b. 160/8 = 20 frying pans per hour.
8 hrs. x 2 shifts x 20 working days = 320 hrs. available.
Less
Breaks: (12 min. x 2 per shift x 2 shifts x 20 working days)/60 = 16 hrs.
Cleaning: 2 hrs. x 4 weeks 8 hrs.
Quality Circle 4 hrs.
Therefore, Net productive time is: 292 hrs.
Effective capacity = 292 hrs. x 20 frying pan per hour = 5,840 frying pans per four weeks.
c. Actual output = 3,500 frying pans.
d. Efficiency = Actual output/Effective Capacity = (100)(3500)/5840 = 59.93%.
e. Utilization = Actual output/Design capacity = (100)(3500)/6400 = 54.69%.
f. In terms of one 8-hour shift: Design capacity = 160 frying pans.
Effective capacity = 5840/40 = 146 frying pans.
The percentage answers will be the same as above.
Bottleneck OperationFigure 5.2
Machine #2Bottleneck
Operation
Machine #1
Machine #3
Machine #4
10/hr
10/hr
10/hr
10/hr
30/hr
Bottleneck operation: An operation
in a sequence of operations whose
capacity is lower than that of the
other operations
5-25
Bottleneck Operation
Operation 1
20/hr.
Operation 2
10/hr.
Operation 3
15/hr.10/hr.
Bottleneck
Maximum output rate
limited by bottleneck
5-26
Economies of Scale
Minimum cost & optimal operating rate are
functions of size of production unit.A
ve
rag
e c
os
t p
er
un
it
0
Smallplant Medium
plant Large
plant
Output rate
Figure 5.5
S7 - 27© 2011 Pearson Education, Inc. publishing as Prentice Hall
Economies and Diseconomies of Scale
Economies of scale
Diseconomies of scale
25 - room roadside motel 50 - room
roadside motel
75 - room roadside motel
Number of Rooms25 50 75
Ave
rag
e u
nit
co
st
(do
llars
per
roo
m p
er
nig
ht)
Figure S7.2
5-28
Evaluating Alternatives
Cost-volume analysis
Break-even point (BEP)
Financial analysis
Cash flow
Present value
Decision theory
Waiting-line analysis
Simulation
S7 - 29© 2011 Pearson Education, Inc. publishing as Prentice Hall
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 d
ollars
Volume (units per period)Figure S7.5
5-30
Break-Even Problem with Step Fixed Costs
Quantity
Step fixed costs and variable costs
1 machine
2 machines
3 machines
Figure 5.7A
5-31
Break-Even Problem with Step Fixed Costs
$
TC
TC
TCBEP
2
BEP3
Quantity
1
2
3
Multiple break-even points
Figure 5.7B
S7 - 32© 2011 Pearson Education, Inc. publishing as Prentice Hall
Break-Even Analysis
BEPx = break-even point in units
BEP$ = break-even point in dollars
P = price per unit (after all discounts)
x = number of units produced
TR = total revenue = Px
F = fixed costs
V = variable cost per unit
TC = total costs = F + Vx
TR = TC
or
Px = F + Vx
Break-even point occurs when
BEPx =F
P - V
S7 - 33© 2011 Pearson Education, Inc. publishing as Prentice Hall
Break-Even Analysis
BEPx = break-even point in units
BEP$ = break-even point in dollars
P = price per unit (after all discounts)
x = number of units produced
TR = total revenue = Px
F = fixed costs
V = variable cost per unit
TC = total costs = F + Vx
BEP$ = BEPx P
= P
=
=
F
(P - V)/P
F
P - V
F
1 - V/P
Profit = TR - TC
= Px - (F + Vx)
= Px - F - Vx
= (P - V)x - F
S7 - 34© 2011 Pearson Education, Inc. publishing as Prentice Hall
Break-Even Example
Fixed costs = $10,000 Material = $.75/unit
Direct labor = $1.50/unit Selling price = $4.00 per unit
BEP$ = =F
1 - (V/P)
$10,000
1 - [(1.50 + .75)/(4.00)]
S7 - 35© 2011 Pearson Education, Inc. publishing as Prentice Hall
Break-Even Example
Fixed costs = $10,000 Material = $.75/unit
Direct 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)
S7 - 36© 2011 Pearson Education, Inc. publishing as Prentice Hall
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
Problem # 3
P3.The selling price of the product is $199.95. The variable costs per unit are:
Labor- $60.25
Raw material- $25.70
Purchased component- $21.50
Variable overhead- $17.50
The fixed costs total $300,000 per year. Perform a cost-volume (breakeven)
analysis of this company.
a. State total revenue as a formula, for any given volume of Q products.
b. State total cost as a formula, for any given volume of Q products.
c. State total profit as a formula, for any given volume of Q products.
d. What is the breakeven point in units of the product?
e. How much revenue is earned at the breakeven point?
f. How much profit is earned at the breakeven point?
g. Estimate the profit when 9,000 units of the product are sold in a year.
h. How many units must be sold for the company to make $900,000?
5-37
Solution # 3
5-38
P3. a. Total Revenue = R x Q = 199.95Q.
b. Total cost = FC + VC x Q = 300000 + (60.25 + 25.70 + 21.50 + 17.50)Q = 300000 +
124.95Q.
c. Profit per year = R x Q - (VC x Q + FC) = 199.95Q - 124.95Q - 300000 = 75Q - 300000.
d. QBEP = FC/(R - VC) = 300000/75 = 4,000 units.
e. Revenue at the break-even point = 4000(199.95) = $799,800.
f. Profit at the break-even point = $0. This is the definition of “breaking even”.
g. Profit at 9,000 units = 75(9000) - 300000 = $375,000.
h. Number of units = 75Q-300,000 = $900,000
Q = 16,000 units.
Problem # 4
5-39
P4. The Lade & Bach Company produces office chairs. The price of the chairs is $99.75 and the
variable cost per chair is $49.75. The following fixed costs are incurred:
Depreciation of plant and equipment per year $20,000
Property taxes per year $12,000
Manager’s salary and fringe benefits per month $5,200
Perform a breakeven analysis of this company:
a. State total revenue as a formula, for any given volume of Q products.
b. State total cost as a formula, for any given volume of Q products.
c. State total profit as a formula, for any given volume of Q products.
d. What is the breakeven point in units of the product?
e. How much revenue is earned at the breakeven point?
f. How much profit is earned at the breakeven point?
g. Estimate the profit when 1,500 chairs are produced in a year.
h. How many chairs must be sold for the company to make $75,000 in a year?
Solution # 4
5-40
P4. a. Total revenue = R x Q = 99.75Q.
b. Total cost = FC + VC x Q = 94400 + 49.75Q.
c. Profit per year = R x Q - (VC x Q + FC) = 99.75Q - (49.75Q + 94400) = 50Q - 94400.
d. QBEP = FC/(R - VC) = 94400/50 = 1,888 chairs.
e. Revenue at the break-even point = 99.75(1888) = $188,328.
f. Profit at the break-even point = $0.
g. Profit at 1,500 chairs = 50(1500) - 94400 = -$19,400, which is a net loss.
h. Number of chairs = 50Q – 94400 = $75,000
Q = 3,388 chairs.
5-41
Forecasting Capacity
Requirements
Long-term vs. short-term capacity needs
Long-term relates to overall level of capacity
such as facility size, trends, and cycles
Short-term relates to variations from
seasonal, random, and irregular fluctuations
in demand
5-42
Need to be near customers
Capacity and location are closely tied
Inability to store services
Capacity must be matched with timing of
demand
Degree of volatility of demand
Peak demand periods
Planning Service Capacity
5-43
In-House or Outsourcing
1. Available capacity
2. Expertise
3. Quality considerations
4. Nature of demand
5. Cost
6. Risk
Outsource: obtain a good or service
from an external provider
5-44
Developing Capacity Alternatives
1. Design flexibility into systems
2. Take stage of life cycle into account
3. Take a “big picture” approach to capacity
changes
Bottleneck operations
4. Prepare to deal with capacity “chunks”
5. Attempt to smooth out capacity
requirements
6. Identify the optimal operating level