krajewski om9 ppt 06
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61Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
Capacity Planning
6
For Operations Management, 9ebyKrajewski/Ritzman/Malhotra 2010 Pearson Education
PowerPoint Slides
by Jeff Heyl
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62Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
Planning Capaci ty
Capacity is the maximum rate of output of aprocess or system
Accounting, finance, marketing, operations,purchasing, and human resources all need
capacity information to make decisions.Accounting needs to provide cost information
needed to evaluate expansion decisions.
Finance performs the financial analysis of the
proposed capacity expansion decision investmentsand raises funds to support them.
Marketing provides demand forecasts needed toindentify capacity gaps.
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63Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
Planning Long -Time Capaci ty
1. Long-term capacity planning
A. Deals with investment in new facilities andequipment
B. Plans cover a minimum of two years into thefuture
C. When choosing a capacity strategy, managersmust consider questions such as the following
How much of a cushion is needed to handle variableor uncertain demand?
Should we expand capacity ahead of demand, or waituntil demand is more certain?
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Planning Long -Time Capaci ty
2. Measures of capacity and utilizationA. Output measures of capacity
are best utilized when applied to individual processeswithin the firm
when the firm provides a relatively small number ofstandardized services and products
B. Input measures of capacity
Generally used in low-volume, flexible processes
C. Utilization The degree to which equipment, space, or workforce is
currently being used.
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Planning Long -Time Capaci ty
Expressed as a percentage:
The average output rate and the capacity must bemeasured in the same terms.
Utilization = 100%Average output rate
Maximum capacity
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66Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
Capac ity and Scale
3. Economies of scaleA. Occur when the average unit cost of a service
or good can be reduced by increasing itsoutput rate.
B. Four principle reasons Spreading fixed costs
Reducing construction costs
Cutting costs of purchased materials
Finding process advantages
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Capac ity and Scale
4. Diseconomies of scaleA. Occur when the average per unit costs
increases as the facilityssize increases
B. Excessive size can bring complexity, loss of
focus, and inefficiencies that raise the averageunit cost.
C. A less agile organization loses the flexibilityneeded to respond to changing demand.
D. Many large companies become so involved inanalysis and planning that they innovate lessand avoid risk.
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Capac ity and Scale
Figure 6.1Economies 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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9/3869Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
Capaci ty Tim ing and Sizing Strateg ies
Three dimensions to capacity strategy: sizingcapacity cushion, timing and sizingexpansions, and linking process capabilityand other operating decisions.
1. Sizing capacity cushions:
Capacity cushions are the amount of reservecapacity a process uses to handle suddenchanges.
A. Average utilization rates for any resourceshould not get close to 100 percent over thelong term.
Capacity cushion = 100%Average Utilization rate (%)
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Capaci ty Tim ing and Sizing Strateg ies
B. When average utilization rates approach 100% itis usually a signal: Need to increase capacity Decrease order acceptance to avoid poor
customer service or declining productivity
C. Appropriate size varies by industry Utilization rates tend to be higher in capital-
intensive industries and low cushions arepreferred
Large cushions are particularly vital for front-office processes where customers expect fastdelivery times
Large cushions are necessary when futuredemand is uncertain, particularly if resourceflexibility is low
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Capaci ty Tim ing and Sizing
Strategies
Factors Leading to Large Capacity Cushions When demand is variable, uncertain, or product mix
changes
When finished goods inventory cannot be stored
When customer service is important
When capacity comes in large increments
When supply of material or human resources is uncertain
Factors leading to small capacity cushions
Unused capacity costs money. Large cushions hide inefficiencies, absenteeism, and
unreliable material supply.
When subcontractors are available to handle demandpeaks
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Capaci ty Tim ing and Sizing
Strategies2. Timing and sizing expansions
A. Expansionist strategy
Economies of scale may reduce fixed cost per unit
Might increase the firms market share or act as a form ofpreemptive marketing
B. Wait-and-see strategy
Lags behind demand, relying on short-term peak capacityoptions (overtime, subcontractors) to meet demand
Lower financial risk associated with overly optimistic
demand forecast Lower risk of a technological advancement making a new
facility obsolete
Higher risk of losing market share
C. An intermediate strategy, could be to fo l low theleader, expanding when others do
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13/38613Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
Capaci ty Tim ing and Sizing
Planned unusedcapacity
Time
Capac
ity
Forecast of capacityrequired
Time betweenincrements
Capacityincrement
(a) Expansionist strategy
Figure 6.2Two Capacity Strategies
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Time
Capac
ity
(b) Wait-and-see strategy
Planned use ofshort-term options
Time betweenincrements
Capacityincrement
Capaci ty Tim ing and Sizing
Forecast of capacityrequired
Figure 6.2Two Capacity Strategies
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Link ing Capaci ty
Linking process capacity and otheroperating decisions
Capacity decisions should be linked to
processes and supply chains throughout theorganization
Important issues are:
competitive priorities,
quality,
process design
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16/38616Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
Systemat ic App roach to Long -Term
Capaci ty Decis ions
1. Estimate future capacity requirements
2. Identify gaps by comparing requirementswith available capacity
3. Develop alternative plans for reducing thegaps
4. Evaluate each alternative, both qualitativelyand quantitatively, and make a final choice
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Systemat ic App roach
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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18/38618Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
Systemat ic App roach
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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Systemat ic App roach
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]product n
N[1(C/100)]
whereQ= number of units in each lots= setup time (in hours) per lot
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Est imat ing Capaci ty Requ irements
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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Est imat ing Capaci ty Requ irements
SOLUTION
M=[Dp+ (D/Q)s]product 1+ [Dp+ (D/Q)s]product 1+ + [Dp+ (D/Q)s]product n
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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22/38622Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
Systemat ic App roach
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 theconsequences
Many different alternatives are possible
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Systemat ic App roach
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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Evaluat ing the A lternat ives
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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Evaluat ing the A lternat ives
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(90,00080,000)($2) = $20,000. For subsequent years, thefigures are as follows:
Year 2: Demand = 100,000; Cash flow = (100,00080,000)$2 = $40,000
Year 3: Demand = 110,000; Cash flow = (110,00080,000)$2 = $60,000
Year 4: Demand = 120,000; Cash flow = (120,00080,000)$2 = $80,000
Year 5: Demand = 130,000; Cash flow = (130,00080,000)$2 = $100,000
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Evaluat ing the A lternat ives
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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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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628Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
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 (105,00010,000) instead of 30,000meals (110,00080,000) 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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629Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
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 90,00080,000 = (10,000 meals)($2/meal) = $20,000
2 100,000 105,000 100,00080,000 = (20,000 meals)($2/meal) = $40,000
3 110,000 105,000 105,00080,000 = (25,000 meals)($2/meal) = $50,000
Increase total capacity to 130,000 meals = ($170,000)
($120,000)
4 120,000 130,000 120,00080,000 = (40,000 meals)($2/meal) = $80,000
5 130,000 130,000 130,00080,000 = (50,000 meals)($2/meal) = $100,000
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630Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
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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631Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
Too ls fo r Capaci ty Plann ing
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 trees
Useful when demand is uncertain andsequential decisions are involved
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632Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
Wait ing Line Models
Figure 6.3POMS for Windows Output for Waiting Lines during Office Hours
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633Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
Dec ision 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 6.4A Decision Tree for Capacity Expansion
$135,000
$109,000
$148,000
$148,000
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634Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
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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635Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
Solved Problem 1
SOLUTION
a. The number of hours of operation per year, N, is N= (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 the
number 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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636Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
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 Requ irements Solver in OM Explorer confirmsthese calculations, as Figure 6.5 shows, using only theExpected scenario for the demand forecasts.
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637Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
Solved Problem 1
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