»Dr.

Waqas Ahmed

Capacity
 The throughput, or the number of units a facility
can hold, receive, store, or produce in a period of
time
 Determines capital requirements and, therefore,
fixed costs
 Determines if demand
will be satisfied
 Three time horizons

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 »Dr. Waqas Ahmed

Planning Over a Time Horizon

Options for Adjusting Capacity
Long-range Add facilities
planning Add long lead time *
equipment
Intermediate- Subcontract Add personnel
range planning Add equipment Build or use inventory
Add shifts
Short-range Schedule jobs
planning * Schedule personnel
Allocate machinery
Modify capacity Use capacity
* Difficult to adjust capacity as limited options exist
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 »Dr. Waqas Ahmed

Design and Effective Capacity

 Design capacity is the maximum theoretical output of a system

in a given period
 Normally expressed as a rate
 Effective capacity is the capacity a firm expects to achieve
given current operating constraints
 Often lower than design capacity
 Measuring Capacity: maximum number of units produced in a
specific time

© Dr. Waqas Ahmed 3

Utilization and Efficiency
»Dr. Waqas Ahmed

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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 »Dr. Waqas Ahmed

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

© Dr. Waqas Ahmed 5

 »Dr. Waqas Ahmed

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%

© Dr. Waqas Ahmed 6

Bakery Example »Dr. Waqas Ahmed

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%

© Dr. Waqas Ahmed 7

Bakery Example
»Dr. Waqas Ahmed

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

© Dr. Waqas Ahmed 8

 »Dr. Waqas Ahmed

Capacity and Strategy

 Sustained profits come from building competitive advantage, not

just from a good financial return on a specific process.
 Capacity decisions impact all 10 decisions of operations
management as well as other functional areas of the
organization
 Capacity decisions must be integrated into the organization’s
mission and strategy

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 »Dr. Waqas Ahmed

Capacity Considerations
1. Forecast demand accurately: whatever the new product, its prospects
and the life cycle of existing products must be determined.
2. Understand the technology and capacity increments: Aid technology
decisions by analysis of cost, human resources, quality, and reliability.
3. Find the optimum operating level
(volume): If smaller, fixed cost is too burdensome, if larger, the facility
becomes more than one manger task
4. Build for change: Build flexibility into facility and equipment

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 »Dr. Waqas Ahmed

Economies and Diseconomies of Scale

(dollars per room per night)

Average unit cost
25 - room 75 - room
roadside 50 - room roadside
motel roadside motel
motel

Economies of Diseconomies of
scale scale
25 50 75
Number of Rooms

© Dr. Waqas Ahmed 11

 »Dr. Waqas Ahmed

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

© Dr. Waqas Ahmed 12

Complementary Demand Patterns »Dr. Waqas Ahmed

© Dr. Waqas Ahmed 13

 »Dr. Waqas Ahmed

Tactics for Matching Capacity to Demand

1. Making staffing changes
2. Adjusting equipment
 Purchasing additional machinery
 Selling or leasing out existing equipment
3. Improving processes to increase throughput
4. Redesigning products to facilitate more throughput
5. Adding process flexibility to meet changing product
preferences
6. Closing facilities

© Dr. Waqas Ahmed 14

Demand and Capacity Management in the »Dr. Waqas Ahmed

Service Sector

 Demand management
 Appointment, reservations, FCFS rule
 Capacity
management
 Full time,
temporary,
part-time
staff
© Dr. Waqas Ahmed 15
 »Dr. Waqas Ahmed

Bottleneck Analysis and Theory of Constraints

 Each work area can have its own unique capacity

 Capacity analysis determines the throughput capacity of
workstations in a system
 A bottleneck is a limiting factor or constraint
 A bottleneck has the lowest effective capacity in a system

© Dr. Waqas Ahmed 16

Process Times for Stations, Systems, and »Dr. Waqas Ahmed

Cycles

 The process time of a station is the time to produce a unit at

that single workstation
 The process time of a system is the time of the longest process
in the system … the bottleneck
 The process cycle time is the time it takes for a product to go
through the production process with no waiting
T
two hese
be might
diff quite
ere
nt!

© Dr. Waqas Ahmed 17

A Three-Station Assembly Line
»Dr. Waqas Ahmed

A B C
2 min/unit 4 min/unit 3 min/unit

© Dr. Waqas Ahmed 18

Process Times for Stations, Systems, and »Dr. Waqas Ahmed

Cycles

 The system process time is the process time of the bottleneck

after dividing by the number of parallel operations
 The system capacity is the inverse of the system process time
 The process cycle time is the total time through the longest
path in the system

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 »Dr. Waqas Ahmed

Capacity Analysis

 Two identical sandwich lines

 Lines have two workers and three operations
 All completed sandwiches are wrapped

Bread Fill Toast

15 sec/sandwich 20 sec/sandwich 40 sec/sandwich
Order Wrap
30 sec/sandwich 37.5 sec/sandwich
Bread Fill Toast
15 sec/sandwich 20 sec/sandwich 40 sec/sandwich

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 »Dr. Waqas Ahmed

Capacity Analysis
Bread Fill Toast
15 sec 20 sec 40 sec
Order Wrap
30 sec 37.5 sec
Bread Fill Toast
15 sec 20 sec 40 sec

 Toast work station has the longest processing time – 40 seconds

 The two lines each deliver a sandwich every 40 seconds so the process time of
the combined lines is 40/2 = 20 seconds
 At 37.5 seconds, wrapping and delivery has the longest processing time and is
the bottleneck
 Capacity per hour is 3,600 seconds/37.5 seconds/sandwich = 96 sandwiches
per hour
 Process cycle time is 30 + 15 + 20 + 40 + 37.5 = 142.5 seconds

© Dr. Waqas Ahmed 21

 »Dr. Waqas Ahmed

Capacity Analysis

 Standard process for cleaning teeth

 Cleaning and examining X-rays can happen simultaneously

Cleaning

Takes Develops 24 min/unit Check

Check in Dentist
X-ray X-ray out

2 min/unit 2 min/unit 4 min/unit X-ray 8 min/unit 6 min/unit

exam

5 min/unit

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 »Dr. Waqas Ahmed

Capacity Analysis
Cleaning

Check Takes Develops 24 min/unit Check

Dentist
in X-ray X-ray out

2 min/unit 2 min/unit 4 min/unit X-ray 8 min/unit 6 min/unit

exam

5 min/unit

 All possible paths must be compared

 Cleaning path is 2 + 2 + 4 + 24 + 8 + 6 = 46 minutes
 X-ray exam path is 2 + 2 + 4 + 5 + 8 + 6 = 27 minutes
 Longest path involves the hygienist cleaning the teeth
 Bottleneck is the hygienist at 24 minutes
 Hourly capacity is 60/24 = 2.5 patients
 Patient should be complete in 46 minutes

© Dr. Waqas Ahmed 23

 »Dr. Waqas Ahmed

Theory of Constraints

 Five-step process for recognizing and managing limitations

Step 1: Identify the constraint

Step 2: Develop a plan for overcoming the constraints
Step 3: Focus resources on accomplishing Step 2
Step 4: Reduce the effects of constraints by offloading work or
expanding capability
Step 5: Once overcome, go back to Step 1 and find new constraints

© Dr. Waqas Ahmed 24

 »Dr. Waqas Ahmed

Bottleneck Management

1. Release work orders to the system at the pace of set by the

bottleneck
2. Lost time at the bottleneck represents lost time for the whole
system
3. Increasing the capacity of a non-bottleneck station is a mirage
4. Increasing the capacity of a bottleneck increases the capacity
of the whole system

© Dr. Waqas Ahmed 25

 »Dr. Waqas Ahmed

Break-Even Analysis

 Technique for evaluating process and equipment

alternatives
 Objective is to find the point in dollars and units at
which cost equals revenue
 Requires estimation of fixed costs, variable costs,
and revenue

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 »Dr. Waqas Ahmed

Break-Even Analysis

 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
 Contribution is the difference between selling price and
variable cost

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 »Dr. Waqas Ahmed

Break-Even Analysis

Assumptions
 Costs and revenue are linear functions
 Generally not the case in the real world
 We actually know these costs
 Very difficult to verify
 Time value of money is often ignored

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 »Dr. Waqas Ahmed

Break-Even Analysis
–
Total revenue line
900 –

800 – i dor
r Total cost line
Break-even point
cor
Total cost = Total revenue it
700 –
rof
Cost in dollars P
600 –

500 –
Variable cost
400 –

300 –
o ss or
200 – L rid
r
co
100 – Fixed cost
| | | | | | | | | | | |
–
0 100 200 300 400 500 600 700 800 900 10001100
Volume (units per period)

© Dr. Waqas Ahmed 29

Break-Even Analysis
»Dr. Waqas Ahmed

BEPx= break-even x= number of units

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

© Dr. Waqas Ahmed 30

 »Dr. Waqas Ahmed

Break-Even Analysis

BEPx= break-even x= number of units produced

point in units
BEP$= break-even TR = total revenue = Px
point in dollars F= fixed costs
P = price per unit (after V= variable cost per unit
all discounts) TC = total costs = F + Vx
BEP$ = BEPx P
F
= P-V P Profit = TR - TC
F = Px - (F + Vx)
= (P - V)/P = Px - F - Vx
F = (P - V)x - F
= 1 - V/P
© Dr. Waqas Ahmed 31
Break-Even Example »Dr. Waqas Ahmed

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)

© Dr. Waqas Ahmed 32

Break-Even Example
»Dr. Waqas Ahmed

50,000 –

Revenue
40,000 –
Break-
30,000 – even Tota
Dollars

point l
20,000 –
cost
s
Fixed costs
10,000 –

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

© Dr. Waqas Ahmed 33

Break-Even Example
»Dr. Waqas Ahmed

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

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

© Dr. Waqas Ahmed 34

 »Dr. Waqas Ahmed

Multiproduct Example

Fixed costs = $3,000 per month

Annual Forecasted
Item Price Cost Sales Units
Sandwich $5.00 $3.00 9,000
Drink 1.50 .50 9,000
Baked potato 2.00 1.00 7,000

© Dr. Waqas Ahmed 35

 »Dr. Waqas Ahmed

Multiproduct Example

Fixed costs = $3,000 per month

Annual Forecasted
Item Price Cost Sales Units
Sandwich $5.00 $3.00 9,000
Drink 1.50 .50 9,000
Baked potato 2.00 1.00 7,000

Annual Weighted
Selling Variable Forecasted % of Contribution
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)
Sandwich $5.00 $3.00 .60 .40 $45,000 .621 .248
Drinks 1.50 .50 .33 .67 13,500 .186 .125
Baked 2.00 1.00 .50 .50 14,000 .193 .096
potato
$72,500 1.000 .469

© Dr. Waqas Ahmed 36

 »Dr. Waqas Ahmed

Multiproduct
F
BEP$ =
∑ 1-
Vi
Pi
x (Wi)
Fixed costs = $3,000 per month
Annualx Forecasted
$3,000 12
Item Price Cost = Sales Units
= $76,759
.469
Sandwich $5.00 $3.00 9,000
Drink 1.50 .50
Daily 9,000
$76,759
Baked potato 2.00 sales = 312 days
1.00 = $246.02
7,000
Annual Weighted
Selling Variable .621 x $246.02% of Contribution
Forecasted
= 30.6  31
Item (i) $5.00$ Sales (col 5 x col
Price (P) Cost (V) (V/P) 1 - (V/P) Sales
7)
Sandwich $5.00 $3.00 .60 .40 $45,000 sandwiches
.621 .248
Drinks 1.50 .50 .33 .67 13,500 per day
.186 .125
Baked 2.00 1.00 .50 .50 14,000 .193 .096
potato

$72,500 1.000 .469

© Dr. Waqas Ahmed 37

Expected Monetary Value (EMV) and »Dr. Waqas Ahmed

Capacity Decisions
 Determine states of nature
 Future demand
 Market favorability
 Analyzed using decision trees
 Hospital supply company
 Four alternatives

© Dr. Waqas Ahmed 38

Expected Monetary Value (EMV) and »Dr. Waqas Ahmed

Capacity Decisions
Market favorable (.4)
$100,000

Market unfavorable (.6)

l ant -$90,000
p
a rge
L
Market favorable (.4)
$60,000
Medium plant
Sm Market unfavorable (.6)
all -$10,000
pla
nt
Do Market favorable (.4)
no $40,000
th
in
g
Market unfavorable (.6)
-$5,000

$0

© Dr. Waqas Ahmed 39

Expected Monetary Value (EMV) and Capacity »Dr. Waqas Ahmed

Decisions
Market favorable (.4)
$100,000

Market unfavorable (.6)

l ant -$90,000
p
a rge
L
Market favorable (.4)
$60,000
Medium plant
SmLarge Plant
all
Market unfavorable (.6)
-$10,000
pla
nt
EMV = (.4)($100,000) Market favorable (.4)
Do
no $40,000
+ (.6)(-$90,000)
th
in
g
Market unfavorable (.6)
EMV = -$14,000 -$5,000

$0

© Dr. Waqas Ahmed 40

Expected Monetary Value (EMV) and »Dr. Waqas Ahmed

Capacity Decisions

-$14,000
Market favorable (.4)
$100,000

Market unfavorable (.6)

l ant -$90,000
e p
rg $18,000
La
Market favorable (.4)
$60,000
Medium plant
Sm Market unfavorable (.6)
all -$10,000
pla
nt $13,000
Do
Market favorable (.4)
no $40,000
t hi
ng
Market unfavorable (.6)
-$5,000

$0

© Dr. Waqas Ahmed 41