MGMT250 Notes September 28, 20041. Initial Stuf A. Schedule 1. Begin Strategic Capacity Analysis2. H.W. Due next time.3. Tour at Polar Bev. Nov. 92. Strategic Capacity PlanningWhy are we concerned with these issues in operations?This is long-term basic decisions that will drive the organization’s operations.Capacity is how much “load” (in terms of time, volume, etc), that a process or system can handle.Capacity Planning includes:1. Type of capacity required (very dependent on process/product/or service) - e.g. take-out versus sit-down restaurants will require different capacities. One is for atmosphere and quality, the other is capacityto minimize waiting time.2. How much capacity.3. When is it needed. (long-term, short-term capacity planning).When we get to aggregate planning we will discuss some shorter-term capacity planning models. Which include people, equipment, inventory, etc.A. Defining and Measuring Capacity (in more detail).Three types of capacity have been identified by book:1. Design Capacity - which is .....(ideal)2. Effective Capacity - which is ...(real)3. Actual Output - which is the actual output of a system.These definitions are helpful in defining Efficiency and Utilization of Systems (which can also be considered forms of productivity measures).1. Efficiency = actual output/effective capacity2. Utilization = actual output/design capacity.Look at example problem to show you differences (which might be more meaningful?)The issue to improving actual output is improving effective capacity.Efective Capacity may be managed by:1. Facility decisions - Layouts, size, expansion, location, all have implications for capacity.2. Product/Service Factors - mix is important, similar repetitive services/products offer more effective capacity.3. Process Factors - what level of quantity/quality are you looking for and can provide.4. Human Factors - learning, new workers, etc . 5. Operations factors, e.g. scheduling, coordination, 6. External factors.Let us take a look at Tri-state VideoDeveloping Capacity Alternatives:1. Take into consideration future capacity needs by building in flexibility. Golf Course Example.2. Systems perspective, if you increase room capacity, how about parking? (also big picture …e.g. productlife cycle).3. Capacity typically comes in discrete units.4. Capacity needs (e.g. demand) may be volatile. Leveling capacity (complementary products for seasonality).5. Optimal costs may occur at different levels of capacity, make sure you know where optimal is.Evaluating and Selecting Alternativesa. Break Even Analysisb. Financial (NPV – Cashflow Analysis)c. Decision Theory (Covered Already)d. Waiting Line Analysis (queueing theory)What is the BE equation?Look at B.E. Analysis Evaluating and Selecting Alternatives, using Breakeven (BE) analysis (Book Calls it Cost-Volume Analysis).Many approaches for use of BE Analysis.The necessary Equations are:Profit = Total Revenues –Total Costs (or) P = TR – TCTotal Cost = Fixed Costs + Variable Costs * (Quantity) (or) TC = FC + VC (Q)Total Revenues = Price (Quantity) (or) TR = R (Q)Breakeven means that Profit = 0. FCSo at B.E. TR = TC and Q = ----------------- VC - RSteps in Typical Analysis:1. Accumulate Data.2. Put Data into total profit or cost equations.3. Determine which breakeven points to calculate.4. Calculate Breakeven points.5. Evaluate ProblemAnd another use of B.E. analysis to Evaluate Capacity Alternatives.Let’s consider a problem: A company is looking to expand capacity by building a new plant in one of threelocations A, B, or C. If they build in A it will initially cost $90,000 with the cost of producing products at $8per unit. Producing at location B will require that they build the facility for a total cost of $160000 with the cost of $4 per product to produce at that plant. The final location will cost $125,000 to build but the cost per unit to produce a product is $5 per unit.Question that needs to be answered is which plant can be selected based on profit or cost of alternative over range of capacities (volumes). A Breakeven point is the capacity (volume) where one alternative’s cost (profit) is equal to another alternative’s cost (profit). (a little different than book’s, but necessary for HW.) A volume or capacity that is larger or smaller will tend to favor one alternative process versus another.Information needed is: 1) initial investment or fixed cost (fixed cost), and 2) variable cost based on volume produced on system. Assume linear relationships between volume and cost per unit.General Revenue Equation is: TR = Price *(Q)General Total Cost Equations are: Total Cost = Fixed Cost + Variable Costs * (Volume)TC = FC + VC (Q)Three Alternatives available, what are they?Find breakeven find points (along Quantity axis) where TC1 = TC2, TC2 = TC3 and TC1 = TC3 (or do we need to find all breakeven points?) Let’s Graph Lines first.Calculate necessary Breakeven points.Let’s take a look at graph and answer questions.What are limitations of this approach? Other costs? Other