capacity planning - iesliesl.yolasite.com/resources/management -2.pdf · 2013-12-06 · time...

Capacity Planning

1

Capacity

• Capacity is the upper limit or ceiling on the load that an operating unit can handle.

• The basic questions in capacity handling are:• What kind of capacity is needed?

• How much is needed?

• When is it needed?

2

Measure of capacity

• Output rate• Units of outputs produced

• Aggregate output rate• This can be used when there is multiple products as output

• Input availability• Capacity relate to availability of inputs e.g machine hours per day

3

Time horizon of capacity planning

• Long term• Planning duration more than one year. This relates to overall level of capacity

• E.g. Building, equipment or facilities

• Intermediate term• Relates to requirements created by seasonal or random changes in demand

• Short term

• Daily or weekly scheduling process

4

Importance of Capacity Decisions

• Affects operating costs

• Major determinant of initial costs

• Involves long-term commitment

• Affects competitiveness

• Affects ease of management

5

Various Capacities

• Design capacity• Maximum obtainable output

• Effective capacity, expected variations

• Maximum capacity subject to planned and expected variations such as maintenance, coffee breaks, scheduling conflicts.

• Actual output, unexpected variations and demand

• Rate of output actually achieved--cannot exceed effective capacity. It is subject to random disruptions: machine break down, absenteeism, material shortages and most importantly the demand.

6

Efficiency and Utilization

7

Actual outputEfficiency =

Effective capacity

Actual outputUtilization =

Design capacity

Efficiency/Utilization Examplefor a Trucking Company

Design capacity = 50 trucks/day available

Effective capacity = 40 trucks/day, because 20% of truck capacity goes through planned maintenance

Actual output = 36 trucks/day, 3 trucks delayed at maintenance, 1 had a flat tire

8

%72/ 50

/ 36

%90/ 40

/ 36

dayunits

dayunits

CapacityDesign

OutputActualnUtilizatio

dayunits

dayunits

CapacityEffective

OutputActualEfficiency

Determinants of Effective Capacity/Output

• Facilities, layout

• Products or services, product mixes/setups

• Processes, quality

• Human considerations, motivation

• Operations, scheduling and synchronization problems

• Supply Chain factors, material shortages

• External forces, regulations

9

Some Possible Growth/Decline Patterns

10

Vo

lum

e

Vo

lum

e

Vo

lum

e

Vo

lum

e

0 0

0 0

Time Time

Time Time

Growth Decline

Cyclical Stable

1. Calculate current capacity

2. Forecast long future capacity needs

3. Identify sources of capacity• Identify alternative ways of increasing capacity e.g Technology,

subcontracting, decentralized plants

4. Select among those alternatives• Evaluate with economic factors such as cost, revenue, risk and strategic

factors such as competition quality etc.

11

Steps in Strategic capacity planning

Considerations in capacity planning

• Best operating level

• Economies and diseconomies of scale

• Capacity flexibility

• Miaintaining system balance

• Frequency of capacity expansion

• Product life cycle

12

Best operating level

• Output level at which average cost of unit is minimum

Minimum

cost

Ave

rag

e c

os

t p

er

un

it

0 Rate of output13

Economies and diseconomies of scale

Best operating level

Ave

rag

e c

os

t p

er

un

it

0 Operating capacity

Economies of scale

Diseconomies of scale

14

15

Minimum cost & optimal operating rate are

functions of size of production unit.

Ave

rag

e c

os

t p

er

un

it

0

Smallplant Medium

plant Large

plant

Output rate

Capacity flexibility

• Ability of production system to rapidly increase or decrease production level

• Flexible plants

• Movable equipment

• Multi-skill workers

16

Maintaining system balance

Stage 1(10 units/hr)


Stage 2(5 units/hr)




Balanced capacityOutput =10units/hr

Unbalanced capacityOutput =5 units/hr

17

Frequency of capacity expansion• Best size of capacity increase and the time of increment

Demand DemandUnitsUnits

Output Output

CapacityCapacity

18

DemandUnits

Output

Capacity

DemandUnits

Output

Capacity

• Capacity lead strategy • Capacity lag strategy

19

Product life cycle

• Mature products or services –easy to predicts

• Products with short life span-need a alternative use for additional capacity after the product discontinued

20

Example-determine capacity requirement• ABC is going tointroduce two new product lines. i.e plastic container

and plastic bags. ABC wants to estimate the capacity requirement for next five years

• Machine 1 can produces-60,000 plastic containers per year

• Machine 2 can produces-40,000 plastic containers per year

• Company wish to keep a capacity cushion of 20%

Forecast demand (in thousand)

Year1 2 3 4 5

plastic container 50 90 160 230 260

plastic bag 30 70 110 150 165

21

Cost-Volume Relationships

22

Am

ou

nt

($)

0Q (volume in units)

Fixed cost (FC)

Cost-Volume Relationships

23

Am

ou

nt

($)

Q (volume in units)0

Cost-Volume Relationships: Break-even analysis

24

Am

ou

nt

($)

Q (volume in units)0 BEP units

FCvRQP )(cost) Fixed()Margin Toon Contributi)(Quantity(

Break-Even Problem with Multiple Fixed Costs

25

Quantity

1 machine

2 machines

3 machines

Break-Even Problem with Step Fixed Costs

26

Quantity

Step fixed costs and variable costs.

Break even

points.

TR

No break

even points

in this range

Decision Theory

27

Decision Theory represents a general

approach to decision making which is

suitable for a wide range of operations

management decisions, including:

capacity

planning

product and

service design

equipment

selection

location

planning

Decision Theory Elements

• A set of possible future conditions (call them scenarios) exists that will have a bearing on the results of the decision

• Uncertain scenarios

• A list of alternatives for the manager to choose from

• A known payoff for each alternative under each possible future condition

28

Decision tree analysis

Comparison of alternatives under different risk and uncertainty

Example

A factory experiencing a backlog and management considering of three alternatives1. Subcontracting2. Construct new facility3. Do nothing

Correct choice depend largely of demand. Estimate for profit under different demand levels given below

DemandLOW MEDIUM HIGH

A 10 50 90B -120 25 200C 20 40 60Probability 0.1 0.5 0.4 29

A

B

C

High demand(.4) Rs90

30

Facility Location

31

Facility location is geographical positioning of plant or services relative to resources, other operations and customers

32

• The need to produce close to the customer due totime-based competition, trade agreements, andshipping costs.

• The need to locate near the appropriate labour poolto take advantage of low wage costs and/or hightechnical skills.

Competitive Needs Impacting Location

33

Types of Facilities

• Heavy-manufacturing facilities

• large, require a lot of space, and are expensive

• Light-industry facilities

• smaller, cleaner plants and usually less costly

• Retail and service facilities

• smallest and least costly

34

• Proximity to Customers

• Convenience to customers

• Business Climate

• Total Costs

• Infrastructure

• Quality of Labour

• Suppliers

• Other Facilities

Issues in Facility Location

35

• Free Trade Zones

• Political Risk

• Government Barriers

• Trading Blocs

• Environmental Regulation

• Host Community

• Competitive Advantage

Issues in Facility Location (cont’d)

36

• Location of raw materials

• Location of markets

• Labor factors

• Climate and taxes

Regional Factors

37

• Quality of life

• Services

• Attitudes

• Taxes

• Environmental regulations

• Utilities

• Developer support

Community Considerations

38

• Land

• Transportation

• Environmental

• Legal

Site Related Factors

39

Location analysis techniques

Two refineries sites (A and B) are assigned the following range of point

values and respective points, where the more points the better for the

site location.

123

150

54

24

45

4

8

5

5

Fuels in region 0 to 330

Power availability and reliability 0 to 200

Labor climate 0 to 100

Living conditions 0 to 100

Transportation 0 to 50

Water supply 0 to 10

Climate 0 to 50

Supplies 0 to 60

Tax policies and laws 0 to 20

Major factors for site location Pt. Range

156

100

63

96

50

5

4

50

20

Sites

A B

Total pts. 418 544 Best Site is B

1. Location rating factor method

40

Factor Rating Method: Example 2

Labor pool and climate

Proximity to suppliers

Wage rates

Community environment

Proximity to customers

Shipping modes

Air service

LOCATION FACTOR

.30

.20

.15

.15

.10

.05

.05

WEIGHT

80

100

60

75

65

85

50

Site 1

65

91

95

80

90

92

65

Site 2

90

75

72

80

95

65

90

Site 3

SCORES (0 TO 100)

41

• The Centre of Gravity Method is used for locatingsingle facilities that considers existing facilities, thedistances between them, and the volumes of goodsto be shipped between them.

• This methodology involves formulas used to computethe coordinates of the two-dimensional point thatmeets the distance and volume criteria stated above.

Centre of Gravity Method

42

Centre of Gravity Method

C = d V

V x

ix i

i

Where:Cx = X coordinate of centre of gravityCy = X coordinate of centre of gravitydix = X coordinate of the ith locationdiy = Y coordinate of the ith locationVi = volume of goods moved to or from ith location

C = d V

Vy

iy i

i

43

◦ Several automobile showrooms are located according to the following grid which represents coordinate locations for each showroom

Centre of Gravity Method Example

Question: What is the best location for a new Z-Mobile

warehouse/temporary storage facility considering only distances

and quantities sold per month?

S howroom No of Z-Mobile s

s o ld pe r month

A 1250

D 1900

Q 2300X

Y

A(100,200)

D(250,580)

Q(790,900)

(0,0)

44

Determining the Coordinates of the New Facility

C = 100(1250) + 250(1900) + 790(2300)

1250 + 1900 + 2300 =

2,417,000

5,450 = x 443.49

C = 200(1250) + 580(1900) + 900(2300)

1250 + 1900 + 2300 =

3,422,000

5,450 = y 627.89

X

Y

A(100,200)

D(250,580)

Q(790,900)

(0,0)

Z

New location of

facility Z about

(443,627)

45

Center of Gravity Method - Example

The firm’s store locations are in Chicago, Pittsburgh, New York, and Atlanta; they are currently being supplied out of an old and inadequate warehouse in Pittsburgh, the site of the chain’s first store.

Store Location Number of containers shipped pre month

Chicago 2000

Pittsburgh 1000

New York 1000

Atlanta 2000

46

Center of Gravity Method - Example

30

60

90

120

30 60 90 120 150

Chicago (30,120)New York (130,130)

Pittsburgh (90,110)

Atlanta (60,40)

Center of gravity (66.7, 93.3)

47

Materials Requirements Planning

48

Material Requirements PlanningDefined

• Materials requirements planning (MRP) is a meansfor determining the number of parts, components,and materials needed to produce a product.

• MRP provides time scheduling information specifyingwhen each of the materials, parts, and componentsshould be ordered or produced.

• Dependent demand drives MRP.

• MRP is a software system.

49

Objective of MRP

• Reduce inventory cost

• Improve plant operating efficiency

• Improve customer service

50

Advantages of an MRP System

• Ability to price more competitively

• Reduced sales price

• Reduced inventory

• Better customer service

• Better response to market demands

• Ability to change the master schedule

• Reduced setup and tear down costs

• Reduced idle time

51

Firm orders

from known

customers

Forecasts

of demand

from random

customers

Aggregate

product

plan

Bill of

material

file

Engineering

design

changes

Inventory

record file

Inventory

transactions

Master production

Schedule (MPS)

Primary reports

Secondary reports

Planned order schedule for

inventory and production

control

Exception reports

Planning reports

Reports for performance

control

Material

planning

(MRP

computer

program)

52

Bill of Materials

Seat cushion

Seat-frame

boards

Front

legs

A

Ladder-back

chair

Back

legs

Leg supports

Back slats

53

Back slats Seat cushion

Seat-frame

boards

Leg supports

Front

legs

Back

legs A

Ladder-back

chairJ (4)

Seat-frame

boards

C (1)

Seat

subassembly

D (2)

Front

legs

B (1)

Ladder-back

subassembly

E (4)

Leg

supports

A

Ladder-back

chair

I (1)

Seat

cushion

H (1)

Seat

frame

G (4)

Back

slats

F (2)

Back

legs

Bill of Materials

54

Bill of Materials (BOM) FileA Complete Product Description

• Materials

• Parts

• Components

• Production sequence

• Modular BOM • Subassemblies

• Super BOM• Fractional options

55

Primary MRP Reports

Planned orders to be released at a future timeOrder release notices to execute the planned

ordersChanges in due dates of open orders due to

rescheduling Cancellations or suspensions of open orders

due to cancellation or suspension of orders on the master production schedule

Inventory status data

56

Secondary MRP Reports

Planning reports, for example, forecasting inventory requirements over a period of time.

Performance reports used to determine agreement between actual and programmed usage and costs.

Exception reports used to point out serious discrepancies, such as late or overdue orders.

57

MRP Example

A(2) B(1)

D(5)C(2)

X

C(3)

Item On-Hand Lead Time (Weeks)

X 50 2

A 75 3

B 25 1

C 10 2

D 20 2

Requirements include 95 units of X in week 10

BOM

Inventory Record

MPS

58

X

Day: 1 2 3 4 5 6 7 8 9 10

X Gross requirements 95

LT=2 Scheduled receipts

Proj. avail. balance 50 50 50 50 50 50 50 50 50 50

On- Net requirements 45

hand Planned order receipt 45

50 Planner order release 45

A Gross requirements 90


Proj. avail. balance 75 75 75 75 75 75 75 75




B Gross requirements 45






C Gross requirements 45 40


Proj. avail. balance 10 10 10 10 10

On- Net requirements 35 40

hand Planned order receipt 35 40

10 Planner order release 35 40

D Gross requirements 100


Proj. avail. balance 20 20 20 20 20 20 20




59

A(2)

X

Day: 1 2 3 4 5 6 7 8 9 10































It takes

2 A’s for

each X

60

Day: 1 2 3 4 5 6 7 8 9 10































B(1)A(2)

X

It takes

1 B for

each X

61

A(2) B(1)

X

C(3)

Day: 1 2 3 4 5 6 7 8 9 10































It takes 3

C’s for

each A

C(2)

It takes 2

C’s for

each B62

A(2) B(1)

D(5)C(2)

X

C(3)

Day: 1 2 3 4 5 6 7 8 9 10































63

Relaxing MRP Assumptions

• Material is not always the most constraining resource

• Lead times can vary

• Not every transaction needs to be recorded

• Shop floor may require a more sophisticated scheduling system

• Scheduling in advance may not be appropriate for on-demand production.

64

Enterprise Resource Planning (ERP)

Software that organizes and manages a company’s business processes by

sharing information across functional areas

integrating business processes

facilitating customer interaction

providing benefit to global companies

65

ERP Modules

BA 320

67

• Lot Sizing Methods

– Lot-for-Lot (L4L)

– EOQ

MATERIAL REQUIREMENTS PLANNING: LOT SIZING

68

Lot-Sizing

• Some methods:

• Lot-for-Lot (L4L): • Order as much as it is needed.

• L4Lminimizes inventory holding cost, but maximizes ordering cost.

• EOQ: • Every time it is required to place an order, lot size equals EOQ.

• EOQ method may choose an order size that covers partial demand of a period. For example, suppose that EOQ is 15 units. If the demand is 12 units in period 1 and 10 units in period 2, then a lot size of 15 units covers all of period 1 and only (15-12)=3 units of period 2. So, one does not save the ordering cost of period 2, but carries some 3 units in

69

Example 2: The MRP gross requirements for Item A are

shown here for the next 10 weeks. Lead time for A is three

weeks and setup cost is $10. There is a carrying cost of

$0.01 per unit per week. Beginning inventory is 90 units.

Week Gross requirements Week Gross requirements

1 30 6 80

2 50 7 20

3 10 8 60

4 20 9 200

5 70 10 50

Determine the lot sizes.

Lot-Sizing

70

Period 1 2 3 4 5 6 7 8 9 10

Gross

Requirements

30 50 10 20 70 80 20 60 200 50

Beginning

Inventory

90 60 10 0

NetRequirements

0 0 0 20

Time-phased Net

Requirements

Planned order

Release

Planned

Deliveries

EndingInventory

60 10 0

Lot-Sizing: Lot-for-Lot

Use the above table to compute ending inventory of various periods.

71

Period 1 2 3 4 5 6 7 8 9 10

Gross

Requirements

30 50 10 20 70 80 20 60 200 50

Beginning

Inventory

90 60 10 0

NetRequirements

0 0 0 20

Time-phased Net

Requirements

Planned order

Release

Planned

Deliveries

EndingInventory

60 10 0


20

Week 4 net requirement = 20 > 0. So, an order is required.

72

Period 1 2 3 4 5 6 7 8 9 10

Gross

Requirements

30 50 10 20 70 80 20 60 200 50

Beginning

Inventory

90 60 10 0

NetRequirements

0 0 0 20

Time-phased Net

Requirements

Planned order

Release

Planned

Deliveries

EndingInventory

60 10 0


20

20

20

A delivery of 20 units is planned for the 4th period..

73

Period 1 2 3 4 5 6 7 8 9 10

Gross

Requirements

30 50 10 20 70 80 20 60 200 50

Beginning

Inventory

90 60 10 0

NetRequirements

0 0 0 20

Time-phased Net

Requirements

Planned order

Release

Planned

Deliveries

EndingInventory

60 10 0


0

70

20

20

0

20

The net requirement of the 5th period is 70 periods.

Exercise

74

Lot-Sizing: EOQ

• First, compute EOQ

– Annual demand is not given. Annual demand is estimated from the known demand of 10 weeks.

– Compute annual holding cost per unit

units/year

502006020807020105030

r weeks/yea weeks10 over demand Total

demand, annual Estimated

068,3

5210

590

5210

5210

/year$0.52/unit/unit/week 01.0$h

75

Lot-Sizing: EOQ

• First, compute EOQ

• Therefore, whenever it will be necessary to place an order, the order size will be 344 units. This will now be shown in more detail.

units EOQ

/unit/year$

/order

units/year

34451.34352.0

068,31022

52.0

10$

068,3

h

K

h

K

76

Period 1 2 3 4 5 6 7 8 9 10

Gross

Requirements

30 50 10 20 70 80 20 60 200 50

Beginning

Inventory

90 60 10 0

NetRequirements

0 0 0 20

Time-phased Net

Requirements

Planned order

Release

Planned

Deliveries

EndingInventory

60 10 0

Lot-Sizing: EOQ

Use the above table to compute ending inventory of various periods.

77

Period 1 2 3 4 5 6 7 8 9 10

Gross

Requirements

30 50 10 20 70 80 20 60 200 50

Beginning

Inventory

90 60 10 0

NetRequirements

0 0 0 20

Time-phased Net

Requirements

Planned order

Release

Planned

Deliveries

EndingInventory

60 10 0

Lot-Sizing: EOQ

20

Week 4 net requirement = 20 > 0. So, an order is required.

78

Period 1 2 3 4 5 6 7 8 9 10

Gross

Requirements

30 50 10 20 70 80 20 60 200 50

Beginning

Inventory

90 60 10 0

NetRequirements

0 0 0 20

Time-phased Net

Requirements

Planned order

Release

Planned

Deliveries

EndingInventory

60 10 0

Lot-Sizing: EOQ

20

344

344

Order size = EOQ = 344, whenever it is required to place an order.

79

Period 1 2 3 4 5 6 7 8 9 10

Gross

Requirements

30 50 10 20 70 80 20 60 200 50

Beginning

Inventory

90 60 10 0

NetRequirements

0 0 0 20

Time-phased Net

Requirements

Planned order

Release

Planned

Deliveries

EndingInventory

60 10 0

Lot-Sizing: EOQ

20

344

324

344

324

Week 5 b. inv=344-20=324>70= gross req. So, no order is required.

Exercise

ReferenceOperation management concept and application-Prof.chandana perera

80

capacity planning - iesliesl.yolasite.com/resources/management -2.pdf · 2013-12-06 · time...

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