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Capacity
The throughput, or the number of units a facility can hold, receive, store, or produce in a period of time Determines fixed costs
*
Add personnel Build or use inventory Schedule jobs Schedule personnel Allocate machinery Use capacity
Effective capacity is the capacity a firm expects to achieve given current operating constraints
Often lower than design 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
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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
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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
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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
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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)
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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, three- 8 hour shifts Efficiency = 84.6% Efficiency of new line = 75% Expected Output = (Effective Capacity)(Efficiency)
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Managing Demand
Demand exceeds capacity
Curtail demand by raising prices, scheduling longer lead time
Product changes
Economies of scale
Diseconomies of scale
25
50 Number of Rooms
75
Figure S7.2
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Capacity Considerations
Forecast demand accurately
Understanding the technology and capacity increments Find the optimal operating level (volume)
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Figure S7.4
2006 Prentice Hall, Inc. S7 17
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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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
2006 Prentice Hall, Inc. S7 19
Break-Even Analysis
Assumptions Costs and revenue are linear functions
Generally not the case in the real world
Break-Even Analysis
900 800 700 Cost in dollars 600 Total revenue line
500
400 300 200 100
|
Variable cost
Fixed cost
Figure S7.5
2006 Prentice Hall, Inc.
| | | | | | | | | | | 0 100 200 300 400 500 600 700 800 900 1000 1100
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 costs TC = Total costs = F + Vx
TR = TC or Px = F + Vx
2006 Prentice Hall, Inc.
F BEPx = P-V
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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 costs TC = Total costs = F + Vx
Break-Even Example
Fixed costs = $10,000 Direct labor = $1.50/unit Material = $.75/unit Selling price = $4.00 per unit
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Break-Even Example
Fixed costs = $10,000 Direct labor = $1.50/unit Material = $.75/unit Selling price = $4.00 per unit
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Break-Even Example
Multiproduct Case
BEP$ = F
Vi 1x (Wi) Pi
where
V P F W i
= variable cost per unit = price per unit = fixed costs = percent each product is of total dollar sales = each product
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Multiproduct Example
Fixed costs = $3,500 per month Item Sandwich Soft drink Baked potato Tea Salad bar Price $2.95 .80 1.55 .75 2.85 Cost $1.25 .30 .47 .25 1.00 Annual Forecasted Sales Units 7,000 7,000 5,000 5,000 3,000
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Multiproduct Example
Fixed costs = $3,500 per month Annual Forecasted Item Price Cost Sales Units Sandwich $2.95 $1.25 7,000 Soft drink .80 .30 7,000 Baked potato 1.55 .47 Annual 5,000 Weighted % of Tea Selling Variable .75 .25Forecasted 5,000 Contribution Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7) Salad bar 2.85 1.00 3,000
Sandwich Soft drink Baked potato Tea Salad bar $2.95 .80 1.55 .75 2.85 $1.25 .30 .47 .25 1.00 .42 .38 .30 .33 .35 .58 .62 .70 .67 .65 $20,650 5,600 7,750 3,750 8,550 $46,300 .446 .121 .167 .081 .185 1.000 .259 .075 .117 .054 .120 .625
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Fixed costs = $3,500 per month $3,500 x Forecasted Annual 12 = $67,200 = .625 Units Item Price Cost Sales Sandwich $2.95 $1.25 7,000 $67,200 Daily Soft drink .80 .30 7,000 = sales 312 days = $215.38 Baked potato 1.55 .47 Annual 5,000 Weighted % of Tea Selling Variable .75 .25Forecasted 5,000 Contribution Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7) Salad bar 2.85 1.00 x $215.38 3,000 .446 = 33 Sandwich $2.95 $1.25 .42 .58 $20,650 .44632.6 .259 $2.95 sandwiches
Soft drink Baked potato Tea Salad bar .80 1.55 .75 2.85 .30 .47 .38 .30 .33 .35 .62 .70 .67 .65 5,600 7,750 .121 .075 per day .167 .117 .054 .120 .625
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.25 1.00
$100,000 -$90,000
$60,000 -$10,000
Strategy-Driven Investment
Operations may be responsible for return-on-investment (ROI) Analyzing capacity alternatives should include capital investment, variable cost, cash flows, and net present value
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where
F P i N
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Year 1 2 3 4 5
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Volume Low Volume Repetitive Process High Volume Mass Customization (difficult to achieve, but huge rewards) Dell Computer Co.
High Variety one or few units per run, high variety (allows customization) Changes in Modules modest runs, standardized modules Changes in Attributes (such as grade, quality, size, thickness, etc.) long runs only
2006 Prentice Hall, Inc.
Process Focus projects, job shops (machine, print, carpentry) Standard Register
Repetitive (autos, motorcycles) Harley Davidson Product Focus (commercial baked goods, steel, glass) Nucor Steel
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