CAPACITY

'ter considering the process options, a number of USSlJlCS remain. In the rest of t:ltuiiS
aptcr, we deal with three issues that are important Uor good process decisions. These
ues are capacity, beeak-even analysis, and the investtlili\nil itself.
.. :
", ...,..-J.:... .4' . . .", .:...... ; .... ,..,.:,;,
TECHNIQUE
strict the offerings
ucture service so customers go where
.heservice is offereJ
vik Ir-servicc so custer..ees examine,
.omparc, and evaluate at thellr own pace
irutc services that ;nay lend tlaemselvcs "0
O!l1C type of automatio.i
"I'';:.! at delivery

wher.e customers g<D to a.service
toople.m.' a mew account, to loan
oilfluecltist0rloans, or tGHle11llers Jor deposits and

SUlpef>lnankcts and.dcparnnent stores
AI,u](])IiliJ.,wic teller machines
ClJIS!li@(IT!l,iiZe vans at Jeti,ver:y rather than at
[illi@<illJIC'ti0l\l
Tlil.aJiilood ail: a General Mills
IDbnt in St.
FI.orida. There the
sIM.iimp is loaded onto a con-
vevorbek to be peeled,
deveiueel, cooked, quick
frozell (aho,ve), sorted (below),
auch<;rauked for ultimate
dd[Mcny t>0 ill'1d'iviJuul
r.cS;l\amliam\l!S.
j
/'


CHAPTEr, 7 PROCESS STRATEGY AND CAPACITY PLANNING
:Iexible manu{actmmg <can improve service and: a,c@IiIfiI.Iile!1i1ilu:iiV' aijJlv,aimItatig\.
)anasonic bicycLe proolillK::tion process ibtegins by deflning iiiMdD,v.i:clililal\: Oilli5!UO'tmlJelf 1ilIeCdl5. 'li1lhie 'l!i6i1!(i)!Ill!lICiFll!illlll1llns'tl1hl SJwi;al frame in a
)anasonic bi.K::ycjie Sit0i1CftFOl'R which :IIli\IQ'SiUrements :M'e tatIW. Tlh.ese (.\!lS,n01Ii1i\, liweaSill'lie:!ilil1ll1l!nS ane S(Nllltn0 'ttIne ,!fae't!0Fy where CAD
ofrware a lbiliillC[P{' 'n atb011\l1lI J :minutes. At the Simmife 'Oi!lililJe, at lb<IJu-coclie lh;lDd,iiS wi!lH: bicycle
.ompoaeaes as t:1ie liIilo,ve tilbJuOIilligIlJ1liJ!.l0d1lmlClrioJil. TUlOOlJc-froum,lDegillnning to e!flidl!--hsOlifl\iy J Ino\JI!f>s.
mecLive capacitv
uilization

ili:iJilL . . ilizati expected capacity
iWIIlKtcttl\Ve uti uatlon == .
. capacity

...
- -
29i
CAPACITY
Rated. capacity
Rated capacity =
We determine rated capacity in example.
The Sara James Bakery has a plant fOF lblFealcfast: The has,:llI1il
efficiency of 90%, and the utilization 80'%1,. 1il1hwee PfOCes5 tmes to P(io,..
duce the rolls. The lines operate 7 dlays a WJiiIt three per thy:
Each line was Gl?signed to process 120 standaJrd! (tll.hl:B.11l iiS" Il\lItw.iI1. What
is the rated cape.city!
In order to compute the ratedcoapadty, multiply ItJhc:@JW>ilJli:!Qt'Y
equal to the number of lines times numheJlf ,Glf: hours dlm
per hour)' thie utilization times, eilfk,uelFtiC. Each ,fi:m
1
il1(ilhy is ,Ul8eqb <B!
week, d1;jJi! shilts ;i\JdJ"v Therefore,e<mIfu, ,jpJliocessJine j,s ,M8:nQ>Ulllis iJPelF
"'" 1 dl.' x J shifts per dI:wy, x S', hOliliJr$ ,well! shildJ. W%dln.
l tile JIbe dietermioedll as follows,:
"I =- lization1(eififfuci\lllllCi)'i),
iI = (.8)( .9) =411l,5i'dJ@,u(:l[I5'!w,eei.k

i.. ..... .-.,,_O. '_"' . ".'
can fue :iI!c()mplicated {)1I!ilIe
in large @II!il! ,ie.land. When dema:rrnGl! ,{f@!F goods and services C211Fl be fore-
casted with degree of precision, capacity can
be !Ill,iiI!mally requires two pEmalSiel). During the first future de-
mand is forecasted t.ri. traditional methods siIllcllt as regression .. During the
'second phase,lhi$ is used to requirements,
Once the has been managers must dlocliidlle the size of
each addition to The fulllie lIhat management kliill@!W$ the tech-
nology and the to be these future dkemm!mds.
Figure 7.Z-shQ\ll'$ two ways.new earm, :!be for @(. future de-
mand. In Figure 7.2(a), new capacity ll$ ''''e beginning of y'1dlJli ca-
pzcity will be sufficient to handle the beginning @i" 2. At
the beginning of year 1. new capacire lis which will allow
zation to meet demand until the 'fff J!. This process can be (i:I@Illl.\l!:iilt\lltlllecj}!
indefinitely into the
An alternative i$ in 'l.2':(0'lbi)i. iIlm., '''-l figure, a increase in ca-
p<.dty is acquired at .. of \\WIlb.lil0fu: satisfy fU'lture demand until
the beginrung ofyeal" J. . . .,.
Figure$l.11a' 7< .. reveal omdr ,ttw flilili3.ilil\y iwossible ah:ematives. In sr me
cases, l!ll1.'l1(j{1 ilbetween afl::ematives can be

ittl]hte 1r0itt:!liU C'(slt (if e:aleilh andSietlectt the
itl@!f!<illll,lt'sltt. [Irro it\l111'5Itt@:B.15'@'S"
ilifillt!tl<tllh, iffm.ll\r!@6 ate t(\)' quan-
.... ----- -...... . -."."" .C .:c_,-",_:c:c:c",-,, ..wC.,' .. c"c,,;,: :,:-0"",-,,,,,,
$ , -r '*+it't,f '.N.....Iro!'*M 'b"ti' '...... , - ....... -<- __
OMJPTER7 PROCESSSTRATEGY ANDCAPACiTYPLANNING
Thecapitalexpenditureslora capacity
changecan be tremendous,Many
companiesaddressthisby making
incrementalchangeswhenpossible.
Othersadjustby modifyingold
equipmentor usingolderequipment
even though it may noe beasefficient.
For instance,managers<l11I {.dliffiay,
ownedChelsea COiIll1ltJPill!l!Y,
makers of Jillybrandl>lil1iiXle6,<j]!e!1:!ild(edi
thattheircompanyaa.'lJ<!l1 iJP1iOMi
didnotSUpPO{ add\i;tI,iIGmialli .
investmentin new <1II\iI1iJ!p.iItl\1i 1IlUt!.

I yiMg @Ji 40i1i
iIIPeouR S1y1;\1ilfe., 4nell
i 0dk1ll, eljl\\ll';;;Jli\iIlelillt.
tttyand m 'CliSll!!llli , factoe acoe/lPloaJIDfce dliliilJdl services
[HH!Wliever, other lfalCwlS lRll((jll!ldlle by
!lbwlillkHlilmJg fUH.lIi GfCaJI1lfititjl!\ <l;vaHb%fHtiy (j)fj re-
S'@\l!IIliCe", coomKjlI . '
WlliJl I!l)!ltilQI i/il!litrl!llU ,ilS slwu!bgleet: to time
ge'Sltedi jiB !IFitg'U.lf!e 7/.1,mtll(!lJllU\011l '!be adequate, t1.hJe'S'e cases, H,p,:1l1dt:Da'bilis'tiit:,;'.iful.looIeIDs ma'y
be more appropriate; for S1UlCD SSIDl!IllK3j[paci:t!y !{piliallflflf1!i:ng
sionswithanuncertaerr0IkNilil:<ilfJ.uJC1
i
usdecisiontlh!e0Qc1, i!l\\dllulKillilLl\lg use (fees.
DecisionTrees !ti(@1 Capacity
'Decisiontrees, as we i[:Ifttapter 2's specifying
andvariousstatesofna\l\\we.JIEGlIJj capacityplanningsttllill3:tions', thestateofnaturemlSil\li-
ally is future demand BlU lllilQnilt' iIl favorability. By assi'gning probability values to illUhi
Demand
ifIofecast
fOOmand
forecast
-.
New
-.
capaQilt\:l! {-----
".ill I
-g :\
I
III New {-- -
capacity' 'Ii <lICqUired
0, II!
o
I
t
I
l

,I,

I ,I :I
l'2
2 3
Tmrne' l'llme (years)

(b)
:::APACITY
Vl3\liltOUS states of nature, ir ts. that maximize (he expected
value of the alternatives. Examp4Je 2 Sl]ru0WShtOW IiO apply decision trees to a
ckCision.
EXAMPLE 2
Southern Hospital Supplies, a lillla1kes hospital gqwns, is COtID.5lidlelUiJmg
capacity expansion. Its major ah:ffi:iliU;iivtes ase dlo nothing, build a 'Wil\aili1.lt,
build a medium plant. or build a Ijpi_li. 1Ii"!\fu ,J!ilIW facility would ptfodtl!llCe a mew
type of gown, and currently the for this pt"tlKdlWit '$ .
known. if a large plant is built and! ;jl. it"awl(1)l1)illiIDIUe exists, a proht oi .
could be realized. An unfavorable liliIJ:ilIldk.elI woillJJlidt yidd a $90,000 loss. Hioowe'V,e,r" a
medium plant would earn a $60,COJ ;lDllioffii!1i w,iinili a,1f:ilvorable market. A $)[ 0,000 IGGS
would result from an unfavorable A s.Dt on the other haM, wow/ltd
return $40,000 with favorable <Hld lose only $5,000 in aIR
.vorable market. Of course, there is k of doing nothing. .
. Recent market research indk'3lltlei a!tiMMr tIhellie is a .4 probability of a favofalbdle
market, which means that there is :d.'D(" :il: .6 of an unfavorable market.
With this information. the tr!!lt:illll wilt result in the highest expected
monetary value (EMV) can be sde!Il'edl:
EMV H<lrge plant) = + (.6)(-$90,(001): =-$H.(xx)
. EMV =. + (.6)(-$1O,OOO} =
ISM/V [pM_\Il)) == + (.6)(-$5,000) = -+-$B,0VO
(r<!lli>, 'I!l1<DJdlhrilIDlg)J =$.II
favorable (:41
Market unfavorabile (vffi
Market favorab(e
Mla\lt(et favorable (.4)
Mamet unfavorab4e {.i}
$1'00,000 .
-$10,0<J0
$40,000
-$5,000
$0
:

ChIAWFlBfR. 7 AND CAPACITY I'LAl;--JING
FOfeG,I,stiHg CHpilCi,tycan ["I(: difficult
even stable electric
utihly OPEC prilcc fixing,
rcstrilCti,ons on sulfur [rom
'I,n.<-); ",iiI, and N.l:ldcar
phln,l "I!'pn"\'a,b allll1akc IOHlg:-lliJ1HgC
capac irv di Cfl cuh.
Edison's (,oreca.sring
looked ahedld W years ,uaol'
12alternative 6wlUl!lires. TIQe TlesUl!llus
were forecasts th,a,t varied 30% 0fl the
upside and 30% on dlle
With these fOoeC<l16;ts, blila>ruilgement's
jl0ilb k"iJidli'f\Jg JII;exihifiry into
Ullle'ilf syslie'lfta" lilot j1\ll61t building more
JDower staoious. now have plans
torueet deli\1atacl th,rough sale or
purchase of electricity, depending
l!I!li'0m dille scenario that occurs. Other
04!'It'iiffili\\S ilffiCbuHll1e diemand manageraeee
lDwg'fanall,> urgifl.g COl\"liSl!lllililet1S
to redhwce or t'hdir e'1ieconici[,y
CO!lliS'U!'lilillpltj(j,m.
lR>a!tilh:e.r tl!h@[i)i capacity, P/OM IH2ln,3Igers l!!illdl')' taccicaliv man-
d1J1j?;;eGlblil.ilI;MUidlL 'Wile d!OSClll'SS techniques for managing demand.
Managing
Even with good a[i\\dl, facilities buih W llbQll forecast, there may be a IJOOIf
match between the :illCtllliail: cdelililJ2IJnd that occurs and capacitv available. A P20r mancllh.
may mean &;i{i\lh
cases firms have O(plttii1t.lI1i'JJS. ' .;'
Another capadty issue with which.
I I n such
cases, ;i\ID.!atY I iJr iWlII demand
'IPmltilielilll.s,dlh:ait: it, e, in Fig-
\!lIFe 7.3' i.;il! ,iins of lawn mower en-
pfOducts, perhaps the
ipmenI,'"and .
.....
301
11
L>REAK-EVEN ANALYSIS
FIGURE7.3 ByCombiningProductsTll:tiallt
CapacityCanIDle &lttite1fOtHized. AsmOOl:he'fclemandtfor
itnproved <illl'J1i fueuer humanresoeecestrategies,
r-
I, 4,@@ID:
(/)

JFMAMJJASONDJFWAMJJASONDJ
Tillime (months)
rACTICS FOR CAPACITY -':9 OEMAND. Various tactics for
n-;'tcltng adjustingIlkprocessto
I given
1.
2. include
'lU 'Ilt leasmgeX([S!Imlhlg .
3. .. and/or
4. redesi facilil .' l'lO!)t't.(tlh!fOughput.
.The beused toadjllliSt demandtoeXIti$!lliUI.\11g Thr
trategic iSSlili@,' m$h,1f!"<Iz(!)1l!lI.t!S':,; to a facility of the corf<e' !U$/irzte. Bt 3k-
i
e've1lili
nal:r;:. ismay1!l1 tl\1bl WJildlb.11dlhi;ft1ti .
. '.
ANALYSIS

"l---..
. 1
_
FIGURE7.4
900
00
700
~
600
!l!
"0
"0
5CO
CHAPTER7 PRCX::ESSSTRATEGYANDCAPACITY PLANNING
Basic H)veatk-lEven Point
Totalrevenueline
Totalcostline
Br'aK-e"tet1 point
lTfldJaiI coot=Tetalrevel1iWe
\
f
HX) 200 300 400 500 00fiJ 7'@(j)- 8GO 900 10001100
VolumefWll'lilbsflll1!r flleni0d)
.!:
iii
V'alifiabtecost
0
4 ~
o
300
~ .
200
100
.Fi"ed!cost
l<.----'_--l_-.L_-'-,_-"-_....L._-'I__~ . _ ~ _ _ _
I!l
.+.
'.
303
BREAK-EVENANM.SIIi$
Therespecsive rhebueadt-evenpointin unitsanddollarsare devel-
opedasfollows:
BEP(x)== break-evenpointin UlI!llutS
BEP($)== break-evenpointin dIo,Uh<!lluS
P== priceperunit(dollars receevedwerunitafterall discO,Wilil,tS)
x== numberofunitsproduced
l
TR=totalrevenue=Px
,F fixed costs
V== variablecostsper unit
TC== totalcosts=F+Vx
Setting.totalrevenueeqUtal to totalCOSES, weget
fTR==TCJ
or
Px=IF -It- Vx
JF ___8 F _
- p- v - (P- V)/P
,JF
1- V!{ll?
Profit== TR- lrC
=Px -+
= P:x-f - Vx
Usingthese equations, we cansolvedite id 11 pobJDl,l[ <illFtdJ g&'til ili@.lli :wt1<Dfr-
itability,Thetwoformulas thatare of ;ue
'xed' cosr
BEP(x)=Break-evenin "" ,',.. ' . hi
" ' pnlCe - vana eOO$ltI
totalfixed cost
, BgP($)=Break-evenin dollars==
, ' , I _ -variableCO$I\i:
sellingptiicl

04
CHAPTER7 li\JRlOOItSS STRATEGY ANDCAPACITYPLANNII'
Thesepapermachines,recendyupgradedatacostof$500 Paperin
Texarkana,Texas,producebleachedboard, whichisusediom dgalienue ca,1i1l@li1!S,
pharmaceuticalboxes,andsoon.Thishugecapitalexp 'md1ltulie w,i!}I] nestl1t i!m ahighfixed cosr,!lDl!JX
will allowproductionoftheseproducts. ata very 10-111' 'fiaJDoaljj!c C0St. .pr..<Dcll\I1 JtiJ@n manager's
tomaintainutilizationabovethebreak-evenpoastto !'r.0firt ::lfuilbi1lly. .
dressingbothissues cantheprocessdeds'iiOlffi besuccesstul. Figure 1.5 shows&Feeail-
ternative processes compared on a $,i'IllWlie cihawt. Such a chart is sometimes
overchart crossoverchart.ProcessA hasthelowest,notalcostfor volumesbelowVI- Proeess B
has the lowest cost between VI and VI' Process C has the lowest COSt atvolhl!lllililieS
aboveVI',
ProductC'12e
In Example3we determinethebreak-evenpointin doiUars mod unitsforoneprOOlUiCr.
EXAMPLE3
JimmyStephens, hasfixed costsof$i0,000thisperiod. Di,rect laborisS1.50
perunit,and is$.75perunit.Thesellingprice is$4.00perunit.
r: Thebreak-evenpointindollarsiscomputedasfollows:
BEP($) = F. , = $10,000' _ $10,000 __
(l- VlP) 1 - [(1.50+.75)I(4.00)] - .4375 = $22,8)'.14
andthebreak-even{'JOVIillt kl \!llwilts is
F $1O,CXX) =5714
BiEP>;(x) = P-v= 4.,00--(1.50+.75)
Note that in thiseX<lINil\piFe, we lililll!J!st use thetotal variablecosts (thatis, bothLaiIDor
andmaterial}.
.\
,
!
..
\ .
. " .. '-,- ..-
:IGURE 7.5 Crossover Charts. Three can be expected to have
hree different costs. However, at any ghreil.\l v0'[ume, <Dlililiy one will have the lowest C06lt.
$
Volume
Low-volume, high-variety
Process A
.
. i
. . j
.. I


to (even fast food illaJ3ive a va-
Vdf hialve a different selling pd.o<ll.ltU!I1 \\f.;j)jfitable cost.
modify 6:tIwtion (7.2) to teC1toc!lI it.Jllate IPlFoportion of
, V(e JOl:his by "wetghting" each product's i@II!\![lrtlJution by its
iortion If(@lFilimIMffi a afl.\e\l!l .
(7.3)

CHAPTER7 PROCESS STRATEGYANDCAPACITYPLANNJiJNG
wh\fe V == coot per unit
IP ==WJl',il e WltiF l!ItIll!i\t
IF == cost
W == p!e'licI1l\I.t eadillD1i0mlWct isof total dioHaif sales
i == .W!li<D<rtwct
case.
r.The costs fFIl!li!. ILe 'ffiis'lili<D, a Wrench-style.dlIUh, fl0iUlloiW. HXted COO'as are $3,500 per
Imonth. .
FORECASTED
ilnJE'N1' PRICE COST UNIT SALES
$2.95 $1.25 7,000
$@iltclbink .80 .30 7,000
l\B'a'lQeclLIll0tJaitJ0 1.55 .47 5,cro
lfea .75 .25 5,{XX)
2.85 1.00 3,000
,----'----- _._-- --.--
Withavarilel1iVoiF<D;{fflefiiiJJJ.gs, we proceedwithbreak-evenanalysisjustas in asingle-
productcase, weighteachoftheproductsbyrtsproportionoftotal
sales here.
MULTIPRODUCT lililRlEV"lK-jE\\fiEj'N;---ililiEmElllllll'UNING CONTRIBUTION
2 3 4 5 6 7
{3

WEl>GiR'T1lD
SiE!LlJINi; F(M;lECASTEIil %(;)F COHTRllB\l!IT'lIlllill'.
ITEM (I) ,piim:iE,(iFi,). Gos,'r,(M) ('1""') I - (VIP) SAiLES ,5<Aucs (= COL. 5 X t:iGlIl>.. :7')'
Sandwich $;2'.@5 $i\i.2
15
.4li2
-
.259

Softdrink
':$0 .J!(\) .31& 5,600 .IDn .075
Baked potato '11.5\5 .4t7
.]It)
.7/0 7,75fJ .ID6i7 .1l7
Tea .115 .i'5 .]\3' .617 J,,75t .05;
$alad bar iZ'JlR\5
;J,l;(j)(j)
.J!5 iji5

.Al'lll!

.120
-"-
$416'-'
[IAil'tillil
--.----------. "
STlR.ATEGY-DRIVEN lNVESTMiENTS 3f


'If
BEP($) == [( Vi)"
,_---', ,f; " ,
L "1 Fi,'!X, iWII! i
e
$3,5tOlD x 12 $42.,DOO
== .,(ii,z'5 == .(ij15
==
..
Theinformationgivenin this salest52 \IV,;eIKS @.Itt 6days
each)of

312$\)'.5 "
Break-evenfigures byproduce withadded as to the
realismofhisorhersales forecast. iim.(j{lita\t\e whatmu-n be$Old eachday,
as we havedonein Example5. .
EXAMPLE 5
. .
. Usingthedata inExample4, ;ff@[i:il5lt s<IDFKlwich salesof44.6% times
the daily break-even of$215.38: 'liillte price ofeach sandwich
($2.95).Thent.hesand\\ichsales
A.lA,:: <ltlldiiI1( )'0
"1i ... X J)l . I(til' '. .
'. . . .U ' 1,11 '},"'), c "3 dwi h ..
... .....'Iii. :''\).Iilm!c( . SIIDDWJ,\W11(t!lms == .!)\L;.jJ' "".. J san WlC eseacn Gay .
. .z:;. .
.. _. .
tlIIlmiiS iliQJI aim, prepared,analyzed, andjudged
:0be of equipmentneeded.
1 aklreli'hO'EJidof ; it, enterpnsecannow e ma e.
INVESTMENTS
Jetus nowaddress the integrationof :mod investmentwithourptrOISS
ion. Increasingly,managersrealize thaitSl\ll!$Itt<lliilIDlled profitscomefrom
tive advantage, not from a good return on a spedic
ecommend thatthe traditional '\t@' liftVestment analy:;;i.lS (jitlliJtt li@(9!lt'ilmJg alii ifii,-
tancia! returns) be enhanced by srrateJglUc 'ellJ\iSiderations. slt:r:illltgk
.onsiderationswe suggestare .
1. thatinvestments be made3S part @j'@];({1r!)l/i'dinated strategic f?Ilieoo. arethese
. taking'the organizatioll!ll'!< should I!OOII !bem.i<lde as iso-.
butas partofa strategicplalil! placethe
'tM adva:uageous position. The q/liiteS{ion to be asked!ics,",*!m these in-
wincustomers]"

:or an 'iltll''I'<:srmenrs rhae support 'O'l1I1l!peririve advantage,seeTerrv Hill, Manufacllring
:raregJ; IL: IrmA,1989}. Afuosee"Selling Rockwell onAutomation," Business
'eek iUljj!l&6D': iJ.f<!Jll!.
-. ;->_r, . ;. . __ . -..,__.r'"_---.----- -_.