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    Operations Management 4

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    Kushank Ahuja
    This document discusses capacity planning for products and services. It explains the importance of capacity planning and describes how to define, measure, and determine effective capacity. It also discusses major considerations for developing capacity alternatives and approaches for evaluating different capacity options. The key aspects covered include determining capacity needs, timing, flexibility, alternatives, financial analysis, decision theory, and waiting line analysis.

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    Operations Management 4

    Uploaded by

    Kushank Ahuja
    82 views33 pages
    This document discusses capacity planning for products and services. It explains the importance of capacity planning and describes how to define, measure, and determine effective capacity. It also discusses major considerations for developing capacity alternatives and approaches for evaluating different capacity options. The key aspects covered include determining capacity needs, timing, flexibility, alternatives, financial analysis, decision theory, and waiting line analysis.

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    This document discusses capacity planning for products and services. It explains the importance of capacity planning and describes how to define, measure, and determine effective capacity. It also discusses major considerations for developing capacity alternatives and approaches for evaluating different capacity options. The key aspects covered include determining capacity needs, timing, flexibility, alternatives, financial analysis, decision theory, and waiting line analysis.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    82 views33 pages

    Operations Management 4

    Uploaded by

    Kushank Ahuja
    This document discusses capacity planning for products and services. It explains the importance of capacity planning and describes how to define, measure, and determine effective capacity. It also discusses major considerations for developing capacity alternatives and approaches for evaluating different capacity options. The key aspects covered include determining capacity needs, timing, flexibility, alternatives, financial analysis, decision theory, and waiting line analysis.

    Copyright:

    Attribution Non-Commercial (BY-NC)
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    Download as ppt, pdf, or txt
    of 33

    Operations Management 4

    Capacity Planning For Products and Services (Stevenson Ch 5)

    Learning Objectives
    Explain the importance of capacity planning. Discuss ways of defining and measuring capacity. Describe the determinants of effective capacity. Discuss the major considerations related to developing capacity alternatives. Briefly describe approaches that are useful for evaluating capacity alternatives

    5-2

    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 or supply capabilities and long term demand, as far as predictable, considering changes in

    5-3

    Technology Environment Perceived threats and opportunities

    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


    Stability of demand Rate of technological change in product design Rate of technological change in equipments Competitive factors Product life cycle

    When is it needed? Depends on


    5-4

    Importance of Capacity Decisions


    Impacts ability to meet future demands
    Make provisions in capacity for increased demand in future. Having capacity to meet demand 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
    5-5

    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 decisions important and complex (uncertainty more) Impacts long range planning
    Plan for power plants
    5-6

    Capacity
    Design capacity

    maximum output rate or service capacity an operation, process, or facility is designed for Design capacity minus allowances such as personal time, maintenance, and scrap rate of output actually achieved--cannot exceed effective capacity.

    Effective capacity

    Actual output

    5-7

    Efficiency and Utilization


    Efficiency = Actual output

    Effective capacity
    Actual output Design capacity

    Utilization =

    Both measures expressed as percentages

    5-8

    Efficiency/Utilization Example
    Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 units/day

    Actual output

    36 units/day = 40 units/ day 36 units/day 50 units/day = 90%

    Efficiency = Utilization =

    Effective capacity Actual output Design capacity

    = 72%

    5-9

    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 of large variety (Ex. Restaurant) Process factors quantity capability, quality Human factors training, skill, experience Policy factors overtime, working in shifts
    5-10

    Determinants of Effective Capacity


    Operational factors scheduling with many m/c and inventory shortage Supply chain factors impact on suppliers External factors

    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


    5-12

    Key Decisions of Capacity Planning


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

    2. Timing of changes 3. Need to maintain balance 4. Extent of flexibility of facilities

    Capacity cushion extra demand intended to offset uncertainty


    5-13

    Steps for Capacity Planning


    1. Estimate future capacity requirements 2. 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
    5-14

    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

    5-15

    Calculating Processing Requirements


    Product Annual Demand Standard processing 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
    5-16

    Planning Service Capacity


    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

    5-17

    In-House or Outsourcing
    Outsource: obtain goods or service from an external provider. Decision on outsourcing depends on the following considerations Available capacity dependency on capacity Expertise dependency on knowledge Core competence of the company Quality considerations Nature of demand Cost

    1. 2. 3. 4. 5. 6.
    5-18

    In-House or Outsourcing
    Outsourcing: 1. Benefits : Economy of scale, risk pooling, reduced capital investment, focus on core competency, flexibility 2. Risks : Loss of competitive knowledge, conflicting interests.

    Developing Capacity Alternatives


    1.Design flexibility into systems 2.Take stage of life cycle into account 3.Take a big picture approach to capacity changes 4.Prepare to deal with capacity chunks 5.Attempt to smooth out capacity requirements 6.Identify the optimal operating level

    5-20

    Bottleneck Operation
    Machine #1 Machine #2
    10/hr
    Bottleneck operation: An operation in a sequence of operations whose capacity is lower than that of the other operations

    10/hr

    Bottleneck Operation
    10/hr 10/hr

    30/hr

    Machine #3

    Machine #4
    5-21

    Bottleneck Operation
    Bottleneck

    Operation 1 20/hr.

    Operation 2 10/hr.

    Operation 3 15/hr.

    10/hr.

    Maximum output rate limited by bottleneck

    5-22

    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

    5-23

    Optimal Rate of Output


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

    Minimum average cost per unit

    Minimum cost

    0
    5-24

    Rate of output

    Economies of Scale
    Minimum cost & optimal operating rate are functions of size of production unit. Average cost per unit

    Small
    plant

    Medium plant

    Large plant

    Output rate

    5-25

    Evaluating Alternatives
    Cost-volume analysis
    Break-even point

    Financial analysis
    Cash flow Present value

    Decision theory Waiting-line analysis

    5-26

    Cost-Volume Relationships

    Profit
    Amount ($)

    Fixed cost (FC) 0


    5-27

    BEP Q (volume in units)

    Break-Even Problem with Step Fixed Costs

    3 machines

    2 machines 1 machine Quantity


    Step fixed costs and variable costs.
    5-28

    Break-Even Problem with Step Fixed Costs


    $
    BEP 2 TC BEP
    3

    TC

    3
    TC 2 1

    Quantity Multiple break-even points


    5-29

    Assumptions of Cost-Volume Analysis


    1.One product is involved 2.Everything produced can be sold 3.Variable cost per unit is the same regardless of volume 4.Fixed costs do not change with volume 5.Revenue per unit constant with volume 6.Revenue per unit exceeds variable cost per unit
    5-30

    Financial Analysis
    Cash Flow - the difference between cash received 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.

    5-31

    Decision Theory
    Helpful tool for financial comparison of alternatives under conditions of risk or uncertainty Suited to capacity decisions

    5-32

    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 the process Helps managers plan capacity level that will be cost-effective by balancing the cost of having customers wait in line with the cost of additional capacity
    5-33

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