Capacity and Constraint

S7 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

3
 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
Options for Adjusting Capacity

Long-range Add facilities

planning Add long lead time equipment
*
Intermediate- Subcontract Add personnel
range Add equipment Build or use inventory
planning Add shifts

Schedule jobs
Short-range
planning
* Schedule personnel
Allocate machinery

Modify capacity Use capacity

* Difficult to adjust capacity as limited options exist

Figure S7.1

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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

Utilization = Actual output/Design capacity

Efficiency is the percent of effective capacity

achieved

Efficiency = Actual output/Effective capacity

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 Bakery Example

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery 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 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts

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

9
 Bakery Example

Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery 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 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery 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 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery 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 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery 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 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Efficiency = 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 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Efficiency = 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
Combining both
demand patterns
reduces the
variation
4,000 –
Sales in units

Snowmobile
3,000 – motor sales

2,000 –
Jet ski
1,000 – engine
sales

JFMAMJJASONDJFMAMJJASONDJ
Time (months)
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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 Break-Even Analysis
–
Total revenue line
900 –

800 – i d or
r Total cost line
Break-even point
cor
700 – Total cost = Total revenue fit
P ro
Cost in dollars

600 –

500 –
Variable cost
400 –

300 –
o ss or
200 – L ri d
r
co
100 – Fixed cost
| | | | | | | | | | | |
–
0 100 200 300 400 500 600 700 800 900 1000 1100
Figure S7.5 Volume (units per period)

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 Break-Even Analysis
BEPx = break- x = number of units
even point in units produced
BEP$ = break- TR = total revenue =
even point in dollars Px
P = price per unit F = fixed costs
(after all discounts) V = variable cost per
unit
TC = total costs = F +
Vx
Break-even point occurs when

TR = TC F
or BEPx =
P-V
Px = F + Vx

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 Break-Even Analysis
BEPx = break- x = number of units
even point in units produced
BEP$ = break- TR = total revenue =
even point in dollars Px
P = price per unit F = fixed costs
(after all discounts) V = variable cost per
unit
TC = total costs = F +
BEP$ = BEPx P Vx
F Profit = TR - TC
= P - VP = Px - (F + Vx)
F
= (P - V)/P = Px - F - Vx
F = (P - V)x - F
= 1 - V/P
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 Break-Even Example

Fixed costs = $10,000 Material = $.75/unit

Direct labor = $1.50/unit Selling price = $4.00 per unit

F $10,000
BEP$ = =
1 - (V/P) 1 - [(1.50 + .75)/(4.00)]

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 Break-Even Example

Fixed costs = $10,000 Material = $.75/unit

Direct labor = $1.50/unit Selling price = $4.00 per unit

F $10,000
BEP$ = =
1 - (V/P) 1 - [(1.50 + .75)/(4.00)]
$10,000
= = $22,857.14
.4375

F $10,000
BEPx = = = 5,714
P-V 4.00 - (1.50 + .75)

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 Break-Even Example
50,000 –

Revenue
40,000 –
Break-even
point Total
30,000 –
Dollars

costs

20,000 –

Fixed costs
10,000 –

| | | | | |
0– 2,000 4,000 6,000 8,000 10,000
Units

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 Break-Even Example

Multiproduct Case
F
BEP$ =
∑ 1-
Vi
Pi
x (Wi)

where V = variable cost per unit

P = price per unit
F = fixed costs
W = percent each product is of total dollar sales
i = 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.

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