capacity planning
TRANSCRIPT
What Operations Managers Do?
10 OM Strategy Decisions:• Design of Goods & Services• Managing Quality• Process Strategy• Location Strategies• Layout Strategies• Human Resources• Supply Chain Management• Inventory Management• Scheduling• Maintenance
10 Decision Areas:• service & product design• quality management• process & capacity design• location• layout design• human resources & job design• supply chain management• inventory, MRP, and J-I-T• intermediate, short-term,
and project scheduling• maintenance
Scope of Operations Management
SYSTEM DESIGN – involves decisions relating to the system capacity, geographic locations of facilities, arrangement of departments, layout of equipment, product or service planning, and acquisition of equipment.
SYSTEM OPERATION – involves management of personnel, inventory planning & control, scheduling, project management, and quality assurance
Capacity Decisions
Most fundamental of all design decisions that operations managers must make With long-term consequences for the organization
Affect a large portion of fixed cost Determine if demand will be met or if facilities will be idle
Answer basic capacity planning questions on What kind of capacity is needed? How much is needed? When is it needed?
Made regularly or infrequently (governed by) Products/services design Stability of demand Rate of technological change in equipment Competitive factors
Importance of Capacity Decisions
Real input on the ability of the organization to meet future demands for products and services
Effect on operating costs (attempt to balance the costs of over- and under capacity)
Major determinant of initial cost Long-term commitment of resources Effect on competitiveness (barrier to entry by
competition, delivery speed) Effect on ease of management
Defining Capacity
Capacity – the upper limit or ceiling on the load that an operating unit (plant, department, machine, store, or worker) can handle
Capacity Issues – important for all organizations and at all levels of an organization
important information for planning purposes : to quantify production capability in terms of inputs/outputs make other decisions or plans related to those quantities
The term, “capacity” has different interpretations, leading to difficulties in measuring capacity
Measuring Capacity
Important to choose one that does NOT require updating (ex. dollar amounts)
Basic measure is UNITS of a product OUTPUT ok with single-product operations problems with multi-product operations (product mix will
necessitate frequent change in composite index of capacity) Alternative : refer capacity to AVAILABILITY of
INPUTS (e.g. no. of hospital beds, m/c hours available, # of passenger seats)
“No single measure of capacity will be appropriate in every situation.” Rather the measure of capacity must be TAILORED to the SITUATION.
Useful Definitions of Capacity
DESIGN CAPACITY – theoretical maximum output that can be attained by a system in a given period (achieved under ideal conditions)
EFFECTIVE CAPACITY – capacity a firm can expect to achieve given its product mix, methods of scheduling, m/c maintenance, standards of quality, and so on
Effective Capacity Design Capacity
Actual Output Effective Capacity (due to realities of m/c breakdowns, absenteeism, shortages of materials, quality problems
and outside factors)
Measures of System Effectiveness
Efficiency = Actual Output__ Effective Capacity
Utilization = Actual Output_ Design Capacity
Example : Given the information below, compute the efficiency and utilization of the vehicle repair department:
Design capacity= 50 trucks per dayEffective capacity = 40 trucks per dayActual output = 36 trucks per day
Solution :Efficiency = Actual
Output__ Effective Capacity
36 trucks per day_ 40 trucks per day
= 90%=
Utilization = Actual Output_ Design Capacity
= 36 trucks per day_ 50 trucks per day
= 72%
Solution : Design Capacity = # of lines x # of hours x # of rolls/hr Anticipated Production = (Design capacity) (Effective capacity) (Efficiency)
= [(3 lines)(168 hrs)(120 rolls/hr/line)](0.80)(0.90) = 43,546 rolls/week
(7 days/wk x 3 shifts x 8 hrs/shift)
Example : A bakery with 3 process lines for rolls, each operating 7 days a week and 8 hours per day at 3 shifts. Each line is designed to process 120 rolls per hour. The facility has an efficiency of 90% and expected capacity is 80%. What is the anticipated production?
Actual Output Effective Capacity Design Capacity
Utilization Effective Capacity
QualityM/C Breakdowns
TrainingEquipment Use
(de-bottleneck)Benefits of Utilization are realized only when there is demand, otherwise it is counterproductive Additional variable costs
Inventory carrying costsBottleneck conditions waiting times (WIP)
Determinants of Effective Capacity
I. FACILITIES1. Design (size and provision for expansion) 3. Layout (smooth work flow)2. Location (labor supply, energy sources) 4. Environment (ventilation)
II. PRODUCTS or SERVICES1. Design (more uniform output std. mat’ls & methods greater capacity)2. Product or Service Mix (different items different output rates)
III. PROCESSES (Quantity Capabilities : obvious determinant of capacity) (Quality Capabilities : quality = output rate due to
inspection)
IV. HUMAN FACTORS (job content, job design, training & experience, motivation, compensation, learning rates, absenteeism & turnover)
V. OPERATIONAL FACTORS (scheduling, materials management, QA, maintenance policies and equipment breakdowns)
VI. EXTERNAL FACTORS1. Product standards 3. Unions2. Safety Regulations 4. Pollution control standards
INADEQUATE PLANNING = major limiting determinant of effective capacity
Determining Capacity Requirements
Capacity Planning Decisions involve Long-term considerations (relate to overall level of capacity, e.g. size) Short-term considerations (relate to probable variations in capacity
requirements due to demand fluctuations) Link between Marketing and Operations is crucial to a realistic
determination of capacity requirements Long-Term Capacity : more on cycles and trends Short-Term Capacity : concerned more with seasonal variations or
variations from an average (yearly, monthly, weekly, daily fluctuations)
Forecasting Capacity Requirements 1st phase : future demand is forecast with traditional methods 2nd phase : forecast is used to determine capacity requirements
Planning for Capacity AdditionOnce the rated capacity has been forecast, the next step is to determine the incremental size of each addition to capacity. There are 3 approaches, namely (1) one that leads demand, (2) one that lags demand, and (3) an average.
1 2 3
1 2 3
1 2 3
1 2 3
(a) Leading demand with an
incremental expansion
(b) Leading demand with a one-step expansion
(c) Capacity lags demand with
incremental expansion
(d) Attempts to have an average capacity with incremental
expansion
Expected DemandExpected Demand
Expected Demand
Expected Demand
New Capacity
New Capacity
New Capacity
New Capacity
Dem
an
d
Dem
an
d
Dem
an
d
Dem
an
d
Time (years)
Time (years)Time (years)
Time (years)
Managing DemandEven with good forecasting and facilities built into that forecast,there may be a poor match between actual demand and available capacity
Demand Exceeds Capacity When demand exceeds capacity, the firm may be able to curtail demand by raising prices, scheduling long lead times, and discouraging marginally profitable business.
Capacity Exceeds Demand When capacity exceeds demand, the firm may stimulate demand through price reductions or aggressive marketing, or accommodate product changes.
Adjusting to Seasonal Demands A seasonal or cyclical pattern of demand is another capacity challenge wherein management may find it helpful to offer products with complementary demand patterns.
Tactics for Matching Capacity to Demand1. Making staffing changes (increase/decrease in no. of employees)2. Adjusting equipment and processes (adding a machine/selling
equipment)3. Improving methods to increase throughput4. Redesigning the product to facilitate more throughput
Developing Capacity Alternatives
1. Design flexibility into systems (e.g. provision for future expansion)
2. Differentiate between new and mature products or services
Mature Products predictable demand capacity requirements
limited life spans find alt. use for additional capacity
New Products higher risk in predicting quantity and duration of demand
3. Take a “big picture” approach to capacity changes (important to consider how parts of the system interrelate)
4. Prepare to deal with capacity “chunks” (capacity increases are often acquired in fairly large chunks rather than smooth increments, e.g. required = 55
units/hr but machine is rated at 40 units/hr)
5. Attempt to smooth out capacity requirementsSeasonality Issues under/over utilization overtime, subcontracting, hedging
6. Identify the optimal operating levelChoice of Capacity availability of financial & other resources
forecasts of expected demand
Planning Service Capacity
3 Important Factors:1) Need to be near customers
Convenience – important aspect of service (e.g. hotels)Capacity & Location – are closely tied
2) Inability to store servicesTiming of Demand – must be matched by capacitySpeed of Delivery – major concern in capacity planningService Level – brings into issue the cost of maintaining capacity
3) Degree of volatility of demandNumber of individual customers (ex. Banks experiencing days w/Time to service each customer higher volume of transactions &
varying nature of transactions)(Peak Periods – extra workers, outsourcing, pricing & promotion)
Evaluating Capacity Alternatives
Economic ConsiderationsFeasibility – payback, useful lifeCosts – financing, operations & maintenanceTiming – how soon availableCompatibility with present operations & people
Public OpinionEnvironmental concern, relocation issue, technology upgrade repercussions such as termination of jobs
Capacity Evaluation Techniques Financial Analysis Decision Theory Waiting-Line Analysis Cost-Volume Analysis
Financial Analysis
Need to rank investment proposals via F.A. due to problem of allocating scarce funds
3 most commonly used methods Payback = initial cost net cash flow Present Value = time value of money Internal Rate of Return = equivalent interest rate
2 important terms in financial analysis CASH FLOW - refers to the difference between cash
received (from sales and from other sources like sales of old equipment) and cash outflow for labor, materials,etc.
PRESENT VALUE – expresses in current value the sum of all future cash flows of an investment proposal
Net Present Value
Consider the time value of money: say investing $100 in a bank at 5% for 1 year:
$100(1 + .05)$105 = For the second year:$110.25 = $105(1 + .05) = $100(1 + .05)2
In general, F = P ( 1 + i )N P = F ( 1 + i )N
= FX
where X = a factor from PV of $1 Table defined as 1/( 1+ i )N
In situations of where an investment generates an annual series of uniform and equal cash amounts (called annuity)
A means of determining the discounted value of a series of future cash receipts
The basic relationship is S = RX , whereX = factor from PV of an Annuity of $1 TableS = present value of a series of uniform annual receiptsR = receipts every year for the life of the investment (the annuity)
Present Value Method Example No. 1
Your boss, Mr. La Forge, has told you to evaluate the cost of two machines. After some questioning, you are assured that they have the following costs. Assume:
a) the life of each machine is 3 years, andb) the company thinks it knows how to make 14% on investments no
riskier than this one.
Original cost
Labor cost per yearFloor space per yearEnergy (electricity) per yearMaintenance per yearTotal annual cost
Salvage value
Machine A$ 13,000
2,000500
1,0002,500
$ 6,000======
$2,000
Machine B$ 20,000
3,000600900500
$ 5,000======
$7,000
Present Value Method Example No.1 ….con’t
Solution : Determine via the present value method which machine to purchase.
NowYr. 1Yr. 2Yr. 3
Yr.3
ExpenseExpenseExpenseExpenseSalvage
Revenue
From PV Table of $1
1.000.877.769.675
.675
Machine A
Given$13,000
6,0006,0006,000
$2,000
$13,0005,2624,614
4,050$26,926
-$ 1,350$25,576 ======
Machine B
Given$20,000
5,0005,0005,000
$7,000
$20,0004,3853,845
3,375$31,605
-$ 4,725$26,880======
Machine A is the low-cost purchase since it has the lower sum of net costs.
P V P V
Present Value Method Example No.2
Quality Plastics, Inc. is considering two different investment alternatives. Investment A has an initial cost of $25,000, and investment B has an initial cost of $26,000. Both investments have a useful life of 4 years. The cash flows for these investments are shown below. The cost of capital or the interest rate (i) is 8%.
Investment A’s Cash Flow
Investment B’s Cash Flow
$ 10,0009,0008,0007,000
$ 9,0009,0009,0009,000
Year
1234
Present Value Factor
at 8% .926.857.794.735
PV’s
$ 9,2607,7136,352
5,145
PV’s
$ 8,8347,7137,146
6,615
Totals $28,470 $29,808Minus initial investment - 25,000 - 26,000Net present value $ 3,470 $ 3,808
Based on the NPV criterion, MORE ATTRACTIVE
$9,000
x
3.312
PV of a $1 Annuity
Decision Theory and Waiting-Line Analysis
Decision Theory is helpful for financial comparison of alternatives under conditions of risk or uncertainty; applying decision trees to capacity decisions that maximize the expected value of the alternatives arising from states of nature (usually future demand or market favorability) that are assigned probabilities
Waiting-Line Analysis is often used for designing service systems and helpful in choosing a capacity level that is cost-effective through balancing the cost of having customers wait with the cost of providing additional capacity; also aids in the determination of expected costs for various levels of service capacity
Decision TreeExample
Southern Hospital Supplies, a company that makes hospital gowns, is considering capacity expansion. Its major alternatives are to do nothing, build a small plant, build a medium plant, or build a large plant. The new facility would produce a new type of gown, and currently the potential or marketability for this product is unknown. If a large plant is built and a favorable market exists, a profit of $100,000 could be realized. An unfavorable market would yield a $90,000 loss. However, a medium plant would earn a $60,000 profit with a favorable market. A $10,000 loss would result from an unfavorable market. A small plant, on the other hand, would return $40,000 with favorable market conditions and lose only $5,000 in an unfavorable market. Of course, there is always the option of doing nothing.
Recent market research indicates that there is a 0.4 probability of a favorable market, which means that there is also a 0.6 probability of an unfavorable market. Which alternative is more attractive for Southern?
Decision Tree
Market favorable (.4)
Market favorable (.4)
Market favorable (.4)
Market unfavorable (.6)
Market unfavorable (.6)
Market unfavorable (.6)
Large p
lant
Small plant
Medium plant
Do nothing
$100,000
-$ 90,000
$ 60,000
-$ 10,000
$ 40,000
-$ 5,000
$0
+$ 13,000
+$ 18,000
-$ 14,000
Solution: The alternative that will result in the highest expected monetary value (EMV) can be selected.
?
Calculating Processing Requirements
When evaluating capacity alternatives, a necessary piece of information is the capacity requirements of products that will be processed with a given alternative.
Required for computation: demand forecasts for each product standard processing time per unit of each product on each alternative machine number of work days per year Number of shifts that will be used
Example: A department store works one eight-hour shift, 250 days a year, and has these figures for usage of a machine that is currently being considered:
Product#1#2#3
Annual Demand
400300700
Standard Processing Time per Unit (Hour)
5.08.02.0
Processing Time Needed (Hour)
2,0002,4001,400 5,800Annual capacity
= 1 m/c working 8 hrs/shift x 1 shift/day x 250 days/yr = 2,000 2.90
machines------- =
Calculating Processing RequirementsExample No. 2
A manager must decide which type of machine to buy, A, B, or C.
Machine costs are: MachineABC
Cost$40,000$30,000$80,000
Product forecasts & processing times on the machines are as follows:
Product1234
Annual Demand
16,00012,000
6,00030,000
Processing Time (Minutes) per Unit A
3452
B4462
C2341
Assume that only purchasing costs are being considered. Which machine would have the lowest total cost, and how many of that machine would be needed? Machines operate 10 hours a day, 250 days a year.
Calculating Processing RequirementsSolution to Example No. 2
Calculate demand in total number of processing minutes per product on each machine:
Product1234
A48,00048,00030,00060,000
B64,00048,00036,00060,000
C32,00036,00024,00030,000
Total Minutes 186,000 208,000 122,000
60 (in Hours) 3,100 3,467 2,033
annual capacity = 10 hours / day x 250 days / yr = 2,500
No. of Machines 1.24 2 1.39 2 0.81 1
Purchase Cost $80,000 $60,000 $80,000
Buy 2 machines of B
=======
Cost – Volume Analysis
Focuses on relationships between COST, REVENUE and VOLUME of output
Purpose is to estimate income of an organization under different operating conditions
Tool for comparing alternatives under the following ASSUMPTIONS:1) One product is involved.2) Everything produced can be sold.3) The variable cost per unit is the same regardless of volume.4) Fixed costs do not change with volume changes, or they are step
changes5) The revenue per unit is the same regardless of volume6) Revenue per unit exceeds variable cost per unit.
Provides a conceptual framework for integrating cost, revenue and profit estimates into CAPACITY DECISIONS
Cost – Volume Analysis
Fixed Costs – constant, regardless of volume of output (e..g. rental, taxes, administrative expenses)
Variable Costs – change directly with volume of output (generally materials and labor costs); assumes that variable cost per unit ( ) remains the same regardless of volume of output (Q )
Total Cost = Fixed Costs + Variable Costs or TC = FC + VC , wherevariable cost, VC = Q x
Total Revenue , TR = Q x SP , where SP = selling price per unit or TR = Q x R , where R = revenue per unit
Profit is P = TR – TC= (Q x SP ) - [ FC + (Q x ) ]
P = Q ( SP - ) - FC
required volume to Q = P + FC generate a specified profit SP -
Break – Even Analysis
Objective : To find the point, in dollars and units, at which costs equal revenues.
Graphic Approach
Algebraic Approach
At BEP, TR = TC Break - even in units , BEPQ = F Q x SP = F + (Q x )
SP -
FC
VC$
VolumeVolume
$
TR
TC
VC
FC
Break-Even PointTR = TC
BEPQ
BEP$
Loss Corrid
or
Profit
Break – even in dollars, BEP$ = F
1 - / SP
Break – Even AnalysisExample No. 1 Single-Product Case
Jimmy Stephens, Inc. 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 $4.00 per unit. Determine the break-even point in dollars and units.
BEP$ = F 1 - / SP
Solution: = DL + material = 1.50 + .75 = $2.25
= $10,000 1 - (2.25 / 4.00)
= $22,857.14
BEPQ = F SP -
= $10,000 4.00 - 2.25
= 5,714 units
Break – Even AnalysisExample No. 2 Single-Product Case
The owner of Old Fashioned Berry Pies, S. Simon, is contemplating adding a new machine line of pies, which will require leasing new equipment for a monthly payment of $6,000. Variable costs would be $2 per pie, and pies would retail for $7 each.
a. How many pies must be sold in order to break even?
b. What would the profit (loss) be if 1,000 pies are made and sold in a month?
c. How many pies must be sold to realize a profit of $4,000?Solution: a) BEPQ = FC
SP - = $6,000 $7 - $2
= 1,200 pies / month
b) At Q = 1,000 pies, P = Q ( SP - ) - FC= 1000($7 – $2) - $6,000 = -$ 1,000 (loss)
c) To make a profit (P) of $4,000 , Q = P + FC SP -
= 4,000 + 6,000 7 - 2
= 2,000 pies
Break – Even AnalysisExample No. 3 Step Costs / Multiple B-E Points
A manager has the option of purchasing one, two, or three machines. Fixed costs and potential volume are as follows:
Number of Machines
123
Total Annual Fixed Costs
$ 9,60015,00020,000
Corresponding Range of Output
0 to 300301 to 600601 to 900
Variable cost is $10 per unit, and revenue is $40 per unit.a) Determine the break-even point for each range.b) If projected annual demand is between 580 and 660 units, how many
machines should the manager purchase? Solution: Compute B-E for each range and compare with projected range of demand.BEPQ(1 m/c) = FC / (R - ) = $9,600 / $ (40 –10)/unit = 320 units
[ not in the range, so there is no BEP ]BEPQ(2 m/c) = $15,000 / $(40 – 10)/unit = 500 unitsBEPQ(3 m/c) = $20,000 / $(40 – 10)/unit = 667 units [ not in the range loss ]
[ Buy 2 machines ]
Break – Even AnalysisExample No. 4 Multi-Product Case
Firms offering a variety of products that have different selling prices and variable costs, the break-even point iswhere,
V = variable cost per unitP = price per unitF = fixed costW = percent each product is of total dollar sales i = each product
Illustration: Information for Le Bistro, a French-style deli, follows. Fixed costs are $3,500 per month.
BEP$ = F [ ( 1 – Vi / Pi ) x (Wi) ]
ItemSandwichSoft drinkBaked potatoTeaSalad bar
Price$2.95
.801.55.75
2.85
Cost$1.25
.30
.47
.251.00
Annual Forecasted Sales Units
7,0007,0005,0005,0003,000
Break – Even AnalysisExample No. 4 Multi-Product Case (con’t)
Solution :
Selling Price (P)
$2.95.80
1.55.75
2.85
Item (i)SWSDBPT
SB
Variable Cost (V)
$1.25.30.47.25
1.00
(V / P).42.38.30.33.35
1 - (V/P).58.62.70.67.65
Annual Forecasted Sales ($)
$ 20,6505,6007,7503,7508,550
$46,300
Wi = % of Sales
.446
.121
.167
.081
.1851.000
[1-(V/P)]xW= Weighted
Contribution.259.075.117.054.120.625
BEP$ = F [ ( 1 – Vi / Pi ) x (Wi) ]
= $3,500/mo. X 12 mos. .625
= $67,200
If there are 52 weeks at 6 work days each, determine (a) the total daily sales to break even, and (b) the number of sandwiches that must be sold each day.
(a) BEP$ (daily) = $67,200 312 days
= $215.38(b) No. of = .446 x $215.38 Sandwiches $2.95
= 32.5 or 33 each day