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M213 OPERATIONS MANAGEMENT

Capacity Planning

Facility Planning
Facility planning answers:
How much long-range capacity is needed
When more capacity is needed
Where facilities should be located
(location)
How facilities should be arranged (layout)

Capacity Planning Process


Forecast
Demand

Develop
Alternative
Plans

Quantitative
Factors
(e.g., Cost)

Compute
Rated
Capacity

Evaluate
Capacity
Plans

Qualitative
Factors
(e.g., Skills)

Compute
Needed
Capacity

Select Best
Capacity
Plan

Implement
Best Plan

Definition and Measures of Capacity


Capacity:

The throughput, or number of units a


facility can hold, receive, store, or
produce in a period of time.

Effective
capacity:

Capacity a firm can expect to receive


given its product mix, methods of
scheduling, maintenance, and
standards of quality.

Utilization:

Actual output as a percent of design


capacity.

Efficiency: Actual output as a percent of effective


capacity.

Actual or Expected Output


Actual (or Expected) Output = (Effective Capacity)(Efficiency)

Utilization
Measure of planned or actual capacity
usage of a facility, work center, or
machine
Actual Output
Utilization =
Design Capacity
Planned hours to be used
=
Total hours available

Efficiency
Measure of how well a facility or
machine is performing when used
Actual
output
Efficiency =
Effective Capacity
Actual
output
in
units
=
Standard output in units
Average actual time
=
Standard time

Breakeven Analysis
Technique for evaluating process &
equipment alternatives
Objective: Find the point (currency or units)
at which total cost equals total revenue
Assumptions
Revenue & costs are related linearly to volume
All information is known with certainty
No time value of money

Breakeven Analysis
Fixed costs:
costs costs that continue even if no
units are produced: depreciation, taxes,
debt, mortgage payments
Variable costs:
costs costs that vary with the
volume of units produced: labor, materials,
portion of utilities

Breakeven Chart

Cost in Currency

Total revenue line


Profit

Breakeven point
Total cost = Total revenue

Total cost line


Variable cost

Loss

Fixed cost

Volume (units/period)

Breakeven Volume
Fixed
Cost
BEV =
Selling Price Variable Cost

Breakeven Sales
Fixed
Cost
BES =
1 (Variable Cost/Selling Price)

Net Present Value


This measure shows the profit of an investment
after funding costs have been deducted. It uses
the principle of discounting cash flows.
For example, if someone is offered $100 now or
$100 in one years time, they will choose to
receive $100 today, because if interest rates are
10% and the $100 is invested, in one year it will
have grown to $110. This is the concept of the
time value of money.

Net Present Value (NPV)


F = future value
P = present value
i = interest rate
N = number of years

F
(i 1)

Net Present Value (NPV)


Present value of $1.00

F
(i 1)

Year
1
2
3
4
5
6
7
8
9

5%
0.952
0.907
0.864
0.823
0.784
0.746
0.711
0.677
0.645

6%
0.943
0.890
0.840
0.792
0.747
0.705
0.665
0.627
0.592

7%
0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544

8%
0.857
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500

Limitations of Net Present Value


Investments with the same present value may
have significantly different project lives and
different salvage values
Investments with the same net present values
may have different cash flows
We assume that we know future interest rates which we do not
We assume that payments are always made at
the end of the period - which is not always the
case