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6 1Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
Capacity Planning
6
For Operations Management, 9e byKrajewski/Ritzman/Malhotra 2010 Pearson Education
PowerPoint Slides
by Jeff Heyl
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6 2Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
Planning Capacity
Capacity is the maximum rate of output ofa process or system
Accounting, finance, marketing,operations, purchasing, and humanresources all need capacity information tomake decisions
Capacity planning is done in the long-term
and the short-termQuestions involve the amount of capacity
cushion and expansion strategies
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Planning Capacity
Capacity planning
(long-term) Economies and
diseconomies of scale
Capacity timing and sizingstrategies
Systematic approach to
capacity decisions
Constraint management
(short-term) Theory of constraints
Identification andmanagement ofbottlenecks
Product mix decisions
using bottlenecks Managing constraints in a
line process
Capacity management
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Measures of Capacity Utilization
Output measures of capacity
Input measures of capacity
Utilization
Utilization = 100%Average output rate
Maximum capacity
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Capacity and Scale
Economies of scaleSpreading fixed costs
Reducing construction costs
Cutting costs of purchased materials Finding process advantages
Diseconomies of scale
Complexity
Loss of focus
Inefficiencies
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Capacity and Scale
Figure 6.1 Economies and Diseconomies of Scale
250-bedhospital
500-bedhospital
750-bedhospital
Output rate (patients per week)
Averageunit
cost
(dollarsperpatient)
Economiesof scale Diseconomiesof scale
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Faisal Saeed
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Capacity Timing and Sizing
Sizing capacity cushionsCapacity cushions are the amount of
reserve capacity a process uses to handlesudden changes
Capacity cushion = 100% Average Utilization rate (%)
Expansionist strategies
Wait-and-see strategies
Combination of strategies
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Capacity Timing and Sizing
Planned unusedcapacity
Time
Capac
ity
Forecast of capacityrequired
Time betweenincrements
Capacityincrement
(a) Expansionist strategy
Figure 6.2 Two Capacity Strategies
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Time
Capac
ity
(b) Wait-and-see strategy
Planned use ofshort-term options
Time betweenincrements
Capacityincrement
Capacity Timing and Sizing
Forecast of capacityrequired
Figure 6.2 Two Capacity Strategies
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Linking Capacity
Capacity decisions should be linked toprocesses and supply chains throughoutthe organization
Important issues are competitive priorities,quality, and process design
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Systematic Approach
1. Estimate future capacity requirements
2. Identify gaps by comparing requirementswith available capacity
3. Develop alternative plans for reducing thegaps
4. Evaluate each alternative, bothqualitatively and quantitatively, and makea final choice
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Systematic Approach
Step 1 is to determine the capacity requiredto meet future demand using anappropriate planning horizon
Output measures based on rates ofproduction
Input measures may be used when
Product variety and process divergence is high
The product or service mix is changing
Productivity rates are expected to change
Significant learning effects are expected
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Systematic Approach
For one service or product processed atone operation with a one year time period,the capacity requirement,M, is
Capacity
requirement =
Processing hours required for years demand
Hours available from a single capacity unit(such as an employee or machine) per year,
after deducting desired cushion
M=Dp
N[1 (C/100)]
where
D = demand forecast for the year (number of customers serviced orunits of product)
p = processing time (in hours per customer served or unit produced)
N= total number of hours per year during which the process operates
C= desired capacity cushion (expressed as a percent)
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Systematic Approach
Setup times may be required if multipleproducts are produced
Capacityrequirement =
Processing and setup hours required foryears demand, summed over all services
or productsHours available from a single capacity unitper year, after deducting desired cushion
M=
[Dp + (D/Q)s]product 1 + [Dp + (D/Q)s]product 1+
+ [Dp + (D/Q)s]productn
N[1 (C/100)]
whereQ = number of units in each lots = setup time (in hours) per lot
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Bashir Ahmad
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Estimating Capacity Requirements
EXAMPLE 6.1
A copy center in an office building prepares bound reports fortwo clients. The center makes multiple copies (the lot size) ofeach report. The processing time to run, collate, and bind eachcopy depends on, among other factors, the number of pages.The center operates 250 days per year, with one 8-hour shift.
Management believes that a capacity cushion of 15 percent(beyond the allowance built into time standards) is best. Itcurrently has three copy machines. Based on the followingtable of information, determine how many machines are neededat the copy center.
Item Client X Client Y
Annual demand forecast (copies) 2,000 6,000
Standard processing time (hour/copy) 0.5 0.7
Average lot size (copies per report) 20 30
Standard setup time (hours) 0.25 0.40
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Estimating Capacity Requirements
SOLUTION
M=[Dp + (D/Q)s]product 1 + [Dp + (D/Q)s]product 1+ + [Dp + (D/Q)s]productn
N[1 (C/100)]
=[2,000(0.5) + (2,000/20)(0.25)]client X + [6,000(0.7) + (6,000/30)(0.40)]client Y
[(250 day/year)(1 shift/day)(8 hours/shift)][1.0 - (15/100)]
= = 3.125,305
1,700
Rounding up to the next integer gives a requirement offour machines.
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Systematic Approach
Step 2 is to identify gaps betweenprojected capacity requirements (M) andcurrent capacity
Complicated by multiple operations andresource inputs
Step 3 is to develop alternatives
Base case is to do nothing and suffer the
consequencesMany different alternatives are possible
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Systematic Approach
Step 4 is to evaluate the alternatives
Qualitative concerns include strategic fit anduncertainties
Quantitative concerns may include cash flowsand other quantitative measures
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Evaluating the Alternatives
EXAMPLE 6.2
Grandmothers Chicken Restaurant is experiencing a boom inbusiness. The owner expects to serve 80,000 meals this year.Although the kitchen is operating at 100 percent capacity, thedining room can handle 105,000 diners per year. Forecasteddemand for the next five years is 90,000 meals for next year,
followed by a 10,000-meal increase in each of the succeedingyears. One alternative is to expand both the kitchen and thedining room now, bringing their capacities up to 130,000 mealsper year. The initial investment would be $200,000, made at theend of this year (year 0). The average meal is priced at $10, andthe before-tax profit margin is 20 percent. The 20 percent figure
was arrived at by determining that, for each $10 meal, $8 coversvariable costs and the remaining $2 goes to pretax profit.
What are the pretax cash flows from this project for the nextfive years compared to those of the base case of doingnothing?
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Evaluating the Alternatives
SOLUTION
Recall that the base case of doing nothing results in losing allpotential sales beyond 80,000 meals. With the new capacity, thecash flow would equal the extra meals served by having a130,000-meal capacity, multiplied by a profit of $2 per meal. Inyear 0, the only cash flow is$200,000 for the initial investment.
In year 1, the 90,000-meal demand will be completely satisfiedby the expanded capacity, so the incremental cash flow is(90,000 80,000)($2) = $20,000. For subsequent years, thefigures are as follows:
Year 2: Demand = 100,000; Cash flow = (100,000 80,000)$2 = $40,000
Year 3: Demand = 110,000; Cash flow = (110,000 80,000)$2 = $60,000
Year 4: Demand = 120,000; Cash flow = (120,000 80,000)$2 = $80,000
Year 5: Demand = 130,000; Cash flow = (130,000 80,000)$2 = $100,000
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Evaluating the Alternatives
If the new capacity were smaller than the expected demand inany year, we would subtract the base case capacity from thenew capacity (rather than the demand). The owner shouldaccount for the time value of money, applying such techniquesas the net present value or internal rate of return methods (seeSupplement F, Financial Analysis, in myomlab). For instance,
the net present value (NPV) of this project at a discount rate of10 percent is calculated here, and equals $13,051.76.
NPV = 200,000 + [(20,000/1.1)] + [40,000/(1.1)2] +[60,000/(1.1)3] + [80,000/(1.1)4] + [100,000/(1.1)5]
= $200,000 + $18,181.82 + $33,057.85 + $45,078.89 +$54,641.07 + $62,092.13
= $13,051.76
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6 24
Mumtaz
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Tools for Capacity Planning
Waiting-line modelsUseful in high customer-contact processes
Supplement C, Waiting Lines is a fullertreatment of the models
Simulation
Can be used when models are too complex forwaiting-line analysis
Decision treesUseful when demand is uncertain and
sequential decisions are involved
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Waiting Line Models
Figure 6.3 POMS for Windows Output for Waiting Lines during Office Hours
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Decision Trees
1
Low demand [0.40]
High demand [0.60]
Low demand [0.40]
High demand [0.60]
$70,000
$220,000
$40,000
$135,000
$90,000Dont expand
Expand
2
Figure 6.4 A Decision Tree for Capacity Expansion
$135,000
$109,000
$148,000
$148,000
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Solved Problem 1
You have been asked to put together a capacity plan for a
critical operation at the Surefoot Sandal Company. Yourcapacity measure is number of machines. Three products(mens, womens, and childrens sandals) are manufactured.The time standards (processing and setup), lot sizes, anddemand forecasts are given in the following table. The firmoperates two 8-hour shifts, 5 days per week, 50 weeks per year.
Experience shows that a capacity cushion of 5 percent issufficient.
a. How many machines are needed?
b. If the operation currently has two machines, what is the
capacity gap?
Time Standards
ProductProcessing
(hr/pair)Setup
(hr/pair)Lot size
(pairs/lot)Demand Forecast
(pairs/yr)
Mens sandals 0.05 0.5 240 80,000
Womens sandals 0.10 2.2 180 60,000
Childrens sandals 0.02 3.8 360 120,000
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Solved Problem 1
SOLUTION
a. The number of hours of operation per year,N, isN= (2shifts/day)(8 hours/shifts) (250 days/machine-year) = 4,000hours/machine-year
The number of machines required,M, is the sum of machine-hour requirements for all three products divided by thenumber of productive hours available for one machine:
M=[Dp+ (D/Q)s]men + [Dp+ (D/Q)s]women + [Dp+ (D/Q)s]children
N[1 - (C/100)]
=
[80,000(0.05) + (80,000/240)0.5] + [60,000(0.10) + (60,000/180)2.2]+ [120,000(0.02) + (120,000/360)3.8]
4,000[1 - (5/100)]
= = 3.83 or 4 machines14,567 hours/year
3,800 hours/machine-year
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Solved Problem 1
b. The capacity gap is 1.83 machines (3.832). Two more
machines should be purchased, unless managementdecides to use short-term options to fill the gap.
The Capacity RequirementsSolver in OM Explorer confirmsthese calculations, as Figure 6.5 shows, using only theExpected scenario for the demand forecasts.
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Solved Problem 1
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Solved Problem 2
The base case for Grandmothers Chicken Restaurant (seeExample 6.2) is to do nothing. The capacity of the kitchen in thebase case is 80,000 meals per year. A capacity alternative forGrandmothers Chicken Restaurant is a two-stage expansion.This alternative expands the kitchen at the end of year 0, raisingits capacity from 80,000 meals per year to that of the dining
area (105,000 meals per year). If sales in year 1 and 2 live up toexpectations, the capacities of both the kitchen and the diningroom will be expanded at the end of year 3 to 130,000 meals peryear. This upgraded capacity level should suffice up throughyear 5. The initial investment would be $80,000 at the end ofyear 0 and an additional investment of $170,000 at the end of
year 3. The pretax profit is $2 per meal. What are the pretaxcash flows for this alternative through year 5, compared withthe base case?
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Solved Problem 2
SOLUTIONTable 6.1 shows the cash inflows and outflows. The year 3 cashflow is unusual in two respects. First, the cash inflow fromsales is $50,000 rather than $60,000. The increase in sales overthe base is 25,000 meals (105,000 10,000) instead of 30,000meals (110,000 80,000) because the restaurants capacity falls
somewhat short of demand. Second, a cash outflow of $170,000occurs at the end of year 3, when the second-stage expansionoccurs.
The net cash flow for year 3 is $50,000 $170,000 =$120,000.
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Solved Problem 2
TABLE 6.1 | CASH FLOWS FOR TWO-STAGE EXPANSION AT GRANDMOTHERS CHICKEN RESTAURANT
Year
ProjectedDemand
(meals/yr)
ProjectedCapacity
(meals/yr)
Calculation of Incremental Cash FlowCompared to Base Case
(80,000 meals/yr)
CashInflow
(outflow)
0 80,000 80,000 Increase kitchen capacity to 105,000 meals = ($80,000)
1 90,000 105,000 90,000 80,000 = (10,000 meals)($2/meal) = $20,000
2 100,000 105,000 100,000 80,000 = (20,000 meals)($2/meal) = $40,000
3 110,000 105,000 105,000 80,000 = (25,000 meals)($2/meal) = $50,000
Increase total capacity to 130,000 meals = ($170,000)
($120,000)
4 120,000 130,000 120,000 80,000 = (40,000 meals)($2/meal) = $80,000
5 130,000 130,000 130,000 80,000 = (50,000 meals)($2/meal) =$100,000
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Solved Problem 2
NPV = 80,000 + (20,000/1.1) + [40,000/(1.1)2] [120,000/(1.1)3] +[80,000/(1.1)4] + [100,000/(1.1)5]
= $80,000 + $18,181.82 + $33,057.85 $90,157.77 +$54,641.07 + $62,092.13
= $2,184.90
For comparison purposes, the NPV of this project at a discountrate of 10 percent is calculated as follows, and equals negative$2,184.90.
On a purely monetary basis, a single-stage expansion seemsto be a better alternative than this two-stage expansion.However, other qualitative factors as mentioned earlier must beconsidered as well.
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