Production & Operation

Management:
Group 4
- Dessy Adiasti H.
(014201600025)
- Inanda Meitasari
(014201600071)
- Liu Thong
(014201600118)
- Made Satya Viharini
(014201600009)
- Vincent Ignatius
(014201600027)

MGT1_2016
WHAT WILL WE LEARN?

Define Design & Capacity, Break-Even

Capacity & Effective Strategy, & Analysis
Capacity Capacity Managing
Planning Demand
Capacity
The throughput, or the number of
units a facility can hold, receive,
store, or produce in a period of time.
Capacity decisions often determine
capital requirements and therefore a
large portion of fixed cost. Capacity
also determines whether demand will
be satisfied or whether facilities will
be idle. Capacity also includes
Equipment, Space, and Employee
Skill.
Planning Over a Time Horizon
Design Capacity
Design capacity is the maximum
theoretical output of a system in a given
period under ideal conditions. It is normally
expressed as a rate, such as the number of
tons of steel that can be produced per week,
per month, orHow
permany
year. For instance:
beds in
hospital
OR
Max. number
of units to
produce
Effective Capacity
Effective capacity is the capacity a firm
expects to achieve given the current
operating constraint (given its product mix,
methods of scheduling, maintenance, and
standards of quality). It is often lower than
design capacity because the facility may have
been designed for an earlier version of the
product or a different product mix than is
For instance,
currently being produced.chairs available
sometimes not
fully seated by
the students at
school.
Utilization & Efficiency
Utilization is simply the percent of design
capacity actually achieved.

Utilization = Actual output/Design

capacity

Efficiency is the percent of effective

capacity actually achieved. Depending on how
facilities are used and managed, it may be
difficult or impossible to reach 100%
efficiency.

Efficiency = Actual
output/Effective capacity
Utilization & Efficiency: Bakery Case
Sara James Bakery has a plant for
processing Deluxe breakfast rolls and wants
to better understand its capability. Last
week the facility produced 148,000 rolls.
The effective capacity is 175,000 rolls. The
production line operates 7 days per week,
with three 8-hour shifts per day. The line
was designed to process the nut-filled,
cinnamon-flavored Deluxe roll at a rate of
1,200 per hour. Determine the design
capacity, utilization, and efficiency for this
plant when producing this Deluxe roll.
Utilization & Efficiency: Bakery Case
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 days3 shifts8 hours)(1,200
rolls /hour)
= 201,600 rolls
Utilization = Actual output/Design capacity
= 148,000/201,600 = 73.4%
Efficiency = Actual output/Effective capacity
= 148,000/175,000 = 84.6%
Utilization & Efficiency: Bakery Case
The manager of Sara James Bakery
needs to increase production of the
increasingly popular Deluxe roll. To meet
this demand, the operations manager will
be adding a second production line.
Effective capacity on second line is the
same as on first line, which is 175,000
Deluxe rolls. However, hire new employees
can make the output could be less than
before due to lack of experience.
Expected
Determine Output = (Effectiveoutput
the expected Capacity)(Efficiency)
if the
efficiency=is(175,000)(0.75)
75% (assuming).= 131,250 rolls
Capacity & Strategy
Capacity decisions must be integrated
into the organizations mission and
strategy. Investments are not to be made
as isolated expenditures, but as part of a
coordinated plan that will place the firm
in an advantageous position. Change in
capacity will have sales and cash flow
implications, just as capacity changes
have quality, supply chain, human
resource, and maintenance implications.
Capacity Considerations
1. Forecast demand accurately: the new
product may be hard for the company to
places added demands on the product line.
2. Match technology increments and sales
volume: Capacity options are often
constrained by technology. Some capacity
increments may be large (e.g., steel mills or
power plants), while others may be small
(hand-crafted Louis Vuitton handbags).
3. Find the optimum operating size
(volume): Economies and diseconomies of
scale often dictate an optimal size for a
facility.
4. Build for change: Managers build
flexibility into facilities and equipment;
changes will occur in processes, as well as
products, product volume, and product mix
Capacity Considerations:
Economies and Diseconomies of Scale

(dollars per room per night)

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

Economies Diseconomies
of scale of scale
25 50 75
Number of Rooms
In terms of motel, it may require 50 rooms increments
oftten dictate an optimal size for a facility. If its smaller, it
can over charge the fixed costs. If its to large, it needs
another supervisor so those are incured additional costs.
Managing Demand
Demand exceeds capacity
Curtail demand by raising prices,
scheduling longer lead time
Long term solution is to increase
capacity
Capacity exceeds demand
Price reductions or agressive marketing
Product changes

Adjusting to seasonal
demands
Produce products with complementary demand
patterns
Managing Demand: Complementary Demand Patterns

Combining both
demand patterns
reduces the variation
4,000

3,000
Sales in units

Snowmobile
motor sales
2,000

1,000
Jet ski
engine
sales

JFMAMJJASONDJFMAMJJASONDJ
Time (months)
Tactics for Matching Capacity to
Demand
1. Making staffing changes (+/-
employees)
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
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
Fixed costs are costs that continue even if no
units are produced
Depreciation,
Variabletaxes, debt,
costs are mortgage
costs that vary with the
payments
volume of units produced
Labor, materials, portion of utilities
Contribution is the difference between
selling price and variable cost
Break-Even Analysis

900 Total revenue line

800
i dor
700 Break-even point rr Total cost line
t co
Total cost = Total revenue
rofi
P

Cost in dollars
600

500

400
Variable cost
300

200
o s s or
L rid
r
100 co
Fixed cost

| | | | | | | | | | | |
0 100 200 300 400 500 600 700 800 900 1000 1100
Volume (units per period)
 Break-Even Analysis: Formula
Single-Product Case
Break-Even Analysis: Example
Jimmy Stephens, Inc., wants to determine the
minimum dollar volume and unit volume needed at
its new facility to break even. It has fixed costs of
$10,000 this period. Direct labor is $ 1.50 per unit,
and material is $0.75 per unit. The selling price is
$4.00 per unit.
Solutions: F $10,000
BEP$ = =
1 - (V/P)1 - [(1.50 + 0.75)/(4.00)]

= $10,000 = $22,857.14
0.4375

F $10,000
BEPx = = = 5,714 units
P - V 4.00 - (1.50 + 0.75)
Break-Even Analysis: Example
50,000

40,000
Revenue

30,000 Break-even
point Total

Dollars
costs
20,000

10,000
Fixed costs

| | | | | |
0 2,000 4,000 6,000 8,000 10,000
Units
Thank You
QnA session
1. Name: Audrey Sodyanata
Question: Why does the effective capacity remain the same
whether they want to increase the production?
Answered by Inanda Meitasari
2. Name: Meta Restiawati
Question: What is competitive competition?
Answered by Made Satya Viharini
3. Name: Thami Tri Rafiani
Question: Please give the factors that affecting capacity
planning?
Answered by Inanda Meitasari