Lecture Principle of inventory and material management - Lecture 12

Lecture 12 - Capacity Management and Planning (continued). The contents of this chapter include all of the following: Managing demand, tactics for managing demand, approaches to capacity expansion, breakeven analysis, decision tree and capacity expansion, net present value, capacity planning issues.

Capacity Management and Planning (continued)

Books

• Introduction to Materials Management, Sixth Edition, J. R. Tony Arnold, P.E., CFPIM, CIRM, Fleming  College, Emeritus, Stephen N. Chapman, Ph.D., CFPIM, North Carolina State University, Lloyd M.  Clive, P.E., CFPIM, Fleming College

• Operations Management for Competitive Advantage, 11th Edition, by Chase, Jacobs, and Aquilano, 2005,  N.Y.: McGraw­Hill/Irwin.

• Operations Management, 11/E, Jay Heizer, Texas Lutheran University, Barry Render, Graduate School of  Business, Rollins College, Prentice Hall

þ Demand exceeds capacity

þ Curtail demand by raising prices, scheduling

longer lead time

þ Long term solution is to increase capacity

þ Capacity exceeds demand

þ Stimulate market

þ Product changes

þ Adjusting to seasonal demands

þ Produce products with complementary

demand patterns

1. Making staffing changes

2. Adjusting equipment

þ Purchasing additional machinery

þ 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

New

capacity

(b) Leading demand with one- step expansion

Expected demand

(d) Attempts to have an average capacity with incremental expansion

(c) Capacity lags demand

with incremental expansion

(a) Leading demand with incremental

expansion

Expected demand

New capacity

(b) Leading demand with one-step

expansion

New capacity

Expected demand

(c) Capacity lags demand with

incremental expansion

Expected demand

(d) Attempts to have an average capacity

with incremental expansion

Expected demand

New capacity

and equipment alternatives

dollars and units at which cost

equals revenue

variable costs, and revenue

even if no units are produced

payments

with the volume of units produced

selling price and variable cost

Assumptions

Total revenue line

Total cost line

Variable cost

Fixed cost

Break-even point Total cost = Total revenue

BEPx = even point in units BEP$ = break- even point in dollars

break-P = price per unit (after all discounts)

x = number of units produced

BEPx = even point in units BEP$ = break- even point in dollars

break-P = price per unit (after all discounts)

x = number of units produced

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

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

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

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

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

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

= = $22,857.14$10,000.4375

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

Revenue Break-even

point

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

Fixed costs = $3,500 per month

.446 x $215.38

$2.95 = 32.6 33

sandwiches per day

-$90,000 Market unfavorable (.6)

$60,000 -$10,000 Medium plant

Market favorable (.4) Market unfavorable (.6)

$40,000 -$5,000

Small pla

nt

$0

Do no thing

-$90,000 Market unfavorable (.6)

$60,000 -$10,000 Medium plant

Market favorable (.4) Market unfavorable (.6)

$40,000 -$5,000

Small pla

nt

$0

Do no thing

EMV = (.4)($100,000)

+ (.6)(-$90,000)

Large Plant

EMV = -$14,000

$60,000 -$10,000 Medium plant

Market favorable (.4) Market unfavorable (.6)

$40,000 -$5,000

Small pla

nt

$0

Do no thing

return-on-investment (ROI)

should include capital investment, variable cost, cash flows, and net present value

P = = FX F

(1 + i)N

from Table S7.1 defined as

= 1/(1 + i)N and F = future value

R = receipts that are received every year of the life of the investment

$7,000 in receipts per for 5 years Interest rate = 6%

From Table S7.2

X = 4.212

S = RX

S = $7,000(4.212) = $29,484

• To determine the capacity required to achieve the MPS relative to the capacity available

• To make necessary capacity adjustments before creating crises

• To determine an the appropriate level of safety capacity

• To determine the required level of detail and the critical machines and work centers

• To use an appropriate technique given the tradeoff 

between accuracy and computational effort

The Single Square Company summarizes the capacity 

requirements for three of its key resources from each of its three product lines. A typical report (before any action is taken) is shown on the next slide

Finite Capacity  Planning  Example: 

Single Square Company  (continued)

a There is enough capacity now in the Drill and Filer areas. To correct  the imbalance in the Drills, it is necessary to move some of the load  from Drill 2 to Drill 1. In the case of the Dryers, it is necessary to  increase capacity. Adding shifts will provide enough for the current  load.

b Why is there so much capacity for the Filers? They can be brought  back to one shift and are okay. Secondly, if there is any upward trend 

in the loads for the Dryers, it behooves management to begin to 

worry about where they can get additional dryer capacity.

Twin Disc Capacity Bill Report

Suppose, in the Twin Disc example, it was decided to move all production for product lines F and I from the Maag grinder (CEA) to the Reishauer grinder (CAB). What's the resulting total percentage of capacity for each machine and the amount for 

product lines F and I? (Note the Reishauer is three times faster than the Maag grinder so the Maag takes three times as many 

hours to complete a job.) Assume setup time is negligible

Applicon Capacity Status Report

Applicon has the following capacity bills for items 207 and 208:

207        208Work center Hours/unit Work center Hours/unit

a. A customer wants to know if Applicon can deliver 100 units 

each of items 207 and 208 during the next month (20 

working days). Assume there are adequate materials, work center MVX­T'S crew has been increased to one full person (making standard capacity = 160), the increase has come by reducing MVX­A to 6.5 persons. and no other orders have been booked. Use the standard capacity data and conditions 

in the previous slides as the basis for your analysis

b. Suppose the customer (in part a. above) decided to delay 

the order for several months. How many units of item 207 alone could be added to the MPS in the next month? How about item 208?

Analysis:For Item 207

Work Center Units Possible

ALF­A          (480 ­ 70)/0.5 = 820 units HLT­A        (800 ­ 438)/1.0 = 362 units MIS­A        (800 ­ 270)/0.8 = 662 units MVX­A (1120 ­ 80 ­ 399)/0.8 = 801 units PCB­A          (160 ­ 52)/0.5 = 216 units PCB­P        (960 ­ 408)/1.0 = 552 units BUT this is if only item 207 is made.

If BOTH items are made in equal quantities, PCB­P is a shared work center so:

greater productivity can be gained in some other  way.

b. The analysis shows that 216 units of item 207 or 

a total of 94 units of item 208 can be made.

• Capacity plans must be developed concurrently with material plans if the material plans are to be realized

• The capacity measure should reflect realizable output from the key resources. 

• It's not always capacity that should change when capacity 

availability doesn't equal need. 

• Capacity not only must be planned, but use of that capacity must also be monitored and controlled

• Capacity planning techniques can be applied to selected key 

resources (which need not correspond to production work 

centers)

• The particular capacity planning technique(s) chosen must match the level of detail and actual company circumstances to permit 

making effective management decisions

• The more detail in the capacity planning system, the more data and data base maintenance are required

• The better the resource and production planning process, the less difficult the capacity planning process

• The better the shop­floor system, the less short­term capacity 

planning is required. 

• Capacity planning can be simplified in a JIT environment

End of Lecture 12