Operations Management 4

8/3/2019 Operations Management 4

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Operations Management 4

Capacity Planning

For Products and Services(Stevenson Ch 5)


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5-2

Learning Objectives

Explain the importance of capacity planning.

Discuss ways of defining and measuringcapacity.

Describe the determinants of effectivecapacity.

Discuss the major considerations related to

developing capacity alternatives. Briefly describe approaches that are useful

for evaluating capacity alternatives


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5-3

Capacity Planning

Capacity is the upper limit or ceiling on the load

that an operating unit can handle physical units produced or services performed

Capacity includes

Equipments available and capacity of each

Space available

Employee skills available

Achieve a match between long term production orsupply capabilities and long term demand, as far as

predictable, considering changes in Technology

Environment

Perceived threats and opportunities


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5-4

Capacity Planning

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

Products and services to be produced or provided

How much is needed?

Forecasts are key inputs Seasonality factors have to be considered

When is it needed? Depends on

Stability of demand

Rate of technological change in product design

Rate of technological change in equipments

Competitive factors

Product life cycle


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Impacts ability to meet future demands

Make provisions in capacity for increaseddemand in future. Having capacity to meetdemand is advantageous.

Affects operating costs

Matching supply and demand (ideal situation)

Balance the costs of over and under capacity

Major determinant of initial costs

Initial costs are higher for larger units

Per unit production cost of larger unit is less

Importance of Capacity Decisions


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Importance of Capacity Decisions

Involves long-term commitment

Changing capacity decisions involves major cost

Affects competitiveness

Large capacity or ability to add capacity is entry

barrier for competitors Affects ease of management

Matched capacity is easier to manage

Globalization has made capacity decisionsimportant and complex (uncertainty more)

Impacts long range planning

Plan for power plants5-6


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Capacity

Design capacity maximum output rate or service capacity an

operation, process, or facility is designed for

Effective capacity Design capacity minus allowances such as

personal time, maintenance, and scrap

Actual output

rate of output actually achieved--cannot

exceed effective capacity.


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Efficiency and Utilization

Actual outputEfficiency =Effective capacity

Actual outputUtilization =

Design capacity

Both measures expressed as percentages


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5-9

Actual output 36 units/day

Efficiency = = = 90%

Effective capacity 40 units/ day

Utilization = Actual output 36 units/day= = 72%

Design capacity 50 units/day

Efficiency/Utilization Example

Design capacity = 50 trucks/day

Effective capacity = 40 trucks/day

Actual output = 36 units/day


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Determinants of Effective Capacity

Design of facilities, size, expansion provision Production of similar products will be more

than when successive products differ

Service of limited items will be faster than oflarge variety (Ex. Restaurant)

Process factors quantity capability, quality

Human factors training, skill, experience

Policy factors overtime, working in shifts


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Determinants of Effective Capacity

Operational factors scheduling with many

m/c and inventory shortage

Supply chain factors impact on suppliers

External factors


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Strategy Formulation

Capacity strategy for long-term demand Demand patterns

Growth rate and variability

Facilities Cost of building and operating

Technological changes

Rate and direction of technology changes

Behavior of competitors

Availability of capital and other inputs


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Key Decisions of Capacity Planning

1. Amount of capacity needed Capacity cushion (100% - Utilization)

2. Timing of changes

3. Need to maintain balance4. Extent of flexibility of facilities

Capacity cushion extra demand intended to offset uncertainty


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5-14

Steps for Capacity Planning

1. Estimate future capacity requirements2. Evaluate existing capacity

3. Identify alternatives

4. Conduct financial analysis

5. Assess key qualitative issues

6. Select one alternative

7. Implement alternative chosen

8. Monitor results


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5-15

Forecasting Capacity Requirements

Long-term vs. short-term capacity needs

Long-term relates to overall level of capacity

such as facility size, trends, and cycles

Short-term relates to variations from seasonal,

random, and irregular fluctuations in demand


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Calculating Processing Requirements

ProductAnnual

Demand

Standardprocessing time

per unit (hr.)Processing time

needed (hr.)

#1

#2

#3

400

300

700

5.0

8.0

2.0

2,000

2,400

1,400

5,800

If annual capacity is 2000 hours, then we need three machines to handle the

required volume: 5,800 hours/2,000 hours = 2.90 machines


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5-17

Need to be near customers Capacity and location are closely tied

Inability to store services

Capacity must be matched with timing of demand Degree of volatility of demand

Peak demand periods

Planning Service Capacity


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In-House or Outsourcing

Decision on outsourcing depends on the

following considerations

1. Available capacity dependency on capacity

2. Expertise dependency on knowledge

3. Core competence of the company

4. Quality considerations5. Nature of demand

6. Cost

Outsource: obtain goods or service from an external

provider.


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Outsourcing:

1. Benefits : Economy of scale, risk pooling,reduced capital investment, focus on core

competency, flexibility2. Risks : Loss of competitive knowledge,

conflicting interests.

In-House or Outsourcing


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Developing Capacity Alternatives

1.Design flexibility into systems2.Take stage of life cycle into account

3.Take a big picture approach to capacity

changes4.Prepare to deal with capacity chunks

5.Attempt to smooth out capacity requirements

6.Identify the optimal operating level


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Bottleneck Operation

Machine #2 BottleneckOperation

Machine #1

Machine #3

Machine #4

10/hr

10/hr

10/hr

10/hr

30/hr

Bottleneck operation: An operation

in a sequence of operations whose

capacity is lower than that of theother operations


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Bottleneck Operation

Operation 1

20/hr.

Operation 2

10/hr.

Operation 3

15/hr.10/hr.

Bottleneck

Maximum output rate

limited by bottleneck


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Economies of Scale

Economies of scale If the output rate is less than the optimal level,

increasing output rate results in decreasing

average unit costs

Diseconomies of scale

If the output rate is more than the optimal level,

increasing the output rate results in increasing

average unit costs


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Optimal Rate of Output

Minimumcost

Averagecos

tperunit

0 Rate of output

Production units have an optimal rate of output for minimal cost.

Minimum average cost per unit


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Economies of Scale

Minimum cost & optimal operating rate arefunctions of size of production unit.

A

veragecostperunit

0

Smallplant Medium

plant Large

plant

Output rate


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Evaluating Alternatives

Cost-volume analysis

Break-even point

Financial analysis

Cash flow

Present value

Decision theory

Waiting-line analysis


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Cost-Volume Relationships

Amoun

t($)

0BEP

Q (volume in units)

Fixed cost (FC)

Profit


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Break-Even Problem with Step FixedCosts

Quantity

Step fixed costs and variable costs.

1 machine

2 machines

3 machines


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Break-Even Problem with Step FixedCosts

$

TC

TC

TCBEP

2

BEP3

Quantity

1

2

3

Multiple break-even points


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1.One product is involved

2.Everything produced can be sold

3.Variable cost per unit is the same regardless

of volume4.Fixed costs do not change with volume

5.Revenue per unit constant with volume

6.Revenue per unit exceeds variable cost perunit

Assumptions of Cost-Volume Analysis


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Financial Analysis

Cash Flow - the difference between cashreceived from sales and other sources, and

cash outflow for labor, material, overhead,

and taxes.

Present Value - the sum, in current value, of

all future cash flows of an investment

proposal.


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Decision Theory

Helpful tool for financial comparison of

alternatives under conditions of risk or

uncertainty

Suited to capacity decisions


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Waiting-Line Analysis

Useful for designing or modifying service systems Waiting-lines occur across a wide variety of

service systems

Waiting-lines are caused by bottlenecks in theprocess

Helps managers plan capacity level that will be

cost-effective by balancing the cost of havingcustomers wait in line with the cost of additional

capacity

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Operations Management 4