03 Capacity 08
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Strategic Capacity
Management
Dr. Ron Tibben-LembkeOperations Management
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Ideal Capacity of a Process
What is the capacity of the system?
Should we add any capacity?
How should we run the system? Where should we keep inventory?
50/hr 20/hr 10/hr40/hr
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Ideal Capacity of a Process
What is the capacity of the system?
6 min 5 min 4 min 5 min
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Productivity
Productivity = Outputs / Inputs
Partial: Output/Labor or Output/Capital
Multifactor:
Output / (Labor + Capital + Energy )
Total Measure:
Output / Inputs
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Automotive Productivity
Book Data:
Jaguar: 14 cars/employee
Volvo: 29 cars/employee
Mini: 39 cars/employee
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Growth of Service Economy
0
1020
30
40
50
60
70
80
185
0 75
190
0 25 50 75
200
0
Services
Industry
Farming
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US Productivity Growth
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Improving Productivity
Develop productivity measurements youcant improve what you cant measure
Identify and Improve bottleneck operationsfirst
Establish goals, document and publicize
improvements
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U.S. Work and Productivity
0
500
1000
1500
2000
2500
US Japan France Germany Norway
0%
5%
10%
15%
20%
25%
30%
35%
40%
Hours
Prod Growth
Source: International Labor Organization, 1999
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What Would Henry Say?
Ford introduced the $5 (per day) wage in 1914
He introduced the 40 hour work week
so people would have more time to buy It also meant more output: 3*8 > 2*10
Now we know from our experience in changing fromsix to five days and back again that we can get at
least as great production in five days as we can in six,and we shall probably get a greater, for the pressurewill bring better methods.
Crowther, Worlds Work, 1926
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Forty Hour Week
Ernst Abbe, Karl Zeissoptics
1896: as much done in9 as in 8.
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Marginal Output of Time
As you work more hours, your productivityper hour goes down
Eventually, it goes negative.
Chapman, 1909
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Crunch Mode
Ea_spouse: 12/04Pre-crunch
SO was working 7 * 13: 91 per week!Maybe time off at 6pm Saturday
$5k signing bonus, couldnt quit
Class action: April 06 $14.9m
Igda.org Why Crunch Mode DoesntWork: 6 Lessons
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Learning Curves
time/unit goes down consistently
Down by 10% as output doubles
We can use Logarithms to approximatethis
If you ever need this, email me, and wecan talk as much as you want
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Example 3.3
Pauls 1 2 3 4 5
Bottles 60 100 150 200 250
Bags 100 200 300 400 500
Newmans
Bottles 75 85 95 97 98
Bags 200 400 600 650 680
0
100
200
300
400
500
600
1 2 3 4 5
Bottles
Bags
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Example 3.3
Bottles 135 185 245 297 348
Bags 300 600 900 1,050 1,180
3 bottle machines 150k each/yr = 450k
5 bag machines, 250k each/yr = 1,250k
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Example 3.3
Bottles 135 185 245 297 348 Machines 1 2 2 2 3 Mach. usage 0.9 1.23 1.63 1.98 2.32 Workers 1.8 2.46 3.27 3.96 4.64
Bags 300 600 900 1,050 1,180
Machines 2 3 4 5 5 Mach Usage 1.2 2.4 3.6 4.2 4.7 Workers 3.6 7.2 10.8 12.6 14.1
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Capacity Tradeoffs
Can we make combinations in between?
150,000
Two-door cars
120,000
4-door
cars
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How much do we have?
We can only sustain so much effort.
Best Operating Level
Output level process designed for
Lowest cost per unit
Capacity utilization = capacity used
best operating level
Hard to run > 1.0 for long
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Time Horizons
Long-Range: over a year acquiring,disposing of production resources
Intermediate Range: Monthly or quarterlyplans, hiring, firing, layoffs
Short Range less than a month, daily or
weekly scheduling process, overtime,worker scheduling, etc.
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Service Differences
Arrival Rate very variable
Cant store the products - yesterdays
flight? Service times variable
Serve me Right Now!
Rates change quickly Schedule capacity in 10 minute intervals,
not months
How much capacity do we need?
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Capacity Levels in Service
Zone of non-service
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Adding Capacity
Expensive to add capacity
A few large expansions are cheaper (per
unit) than many small additions
Large expansions allow of clean sheet ofpaper thinking, re-design of processes
Carry unused overhead for a long time
May never be needed
Small expansions may pave the cow path
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Capacity Planning How much capacity should we add? Conservative Optimistic
Forecast possible demand scenarios(Chapter 10)
Determine capacity needed for likely levels
Determine capacity cushion desired
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Reengineering Business Process Reengineering
(Hammer and Champy)
Companies grow over time, adding plants,lines, facilities, etc.
Growth may not end in optimal form
Re-design processes from ground up
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Capacity Sources
In addition to expanding facilities:
Two or three shifts
Outsourcing non-core activitiesTraining or acquisition of faster equipment
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Decision Trees
Consider different possible decisions, anddifferent possible outcomes
Compute expected profits of each decision
Choose decision with highest expectedprofits, work your way back up the tree.
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Decision Trees Example 3.4, p.65
Computer store thinks demand may grow. Expansion costs $87k, new site $210k, and would cost same if
wait a year New site:
55% chance of profits of $195k. 45% chance of $115k profits.
Expand Current 55% chance of $190k profits 45% chance of $100k profits
Wait and see- enlarge store next year if demand grows If high demand, $190k with expanded store If high demand, $170 with current store If weak demand, $105k with current store
Find the expected profits over 5 years, choose best one.
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Decision Trees
Decision point
Chance events
Outcomes
Calculate expected value of each chanceevent, starting at far right
Working our way back toward thebeginning, choosing highest expectedoutcome at each decision
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Decision Trees
Revenue - Move Cost
Revenue - Move Cost
Revenue Expand Cost
Revenue Expand CostWeak Growth
Weak Growth
Strong Growth
Strong Growth
Move
Expand
Revenue
Rev Expand Cost
Rev - Expand Cost
0.45
0.55
0.55
0.45
WaitandSee
Weak Growth
Strong Growth0.55
0.45
Expand
Do nothing
HackersComputerStore
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Possible 5 year Revenues
New, growth: 195*5 210 = 765
New, low: 115*5 210 = 365 Expand, growth: 190*5 87 = 863
Expand, low: 100*5 87 = 413
Wait, strong, expand: 170+190*4-87=843 Wait, strong, do nothing: 170*5 = 850
Wait, low, do nothing: 105*5 = 525
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Decision Trees
765
365
863
413Weak Growth
Weak Growth
Strong Growth
Strong Growth
Move
Expand
525
843
850
0.45
0.55
0.55
0.45
WaitandSee
Weak Growth
Strong Growth0.55
0.45
Expand
Do nothing
HackersComputerStore
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Making the Decision
Starting at the far right, look at the Waitand See option. If demand is strong, we
would obviously not expand. $850k is better than $843.
Eliminate the Expand option
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Decision Trees
765
365
863
413Weak Growth
Weak Growth
Strong Growth
Strong Growth
Move
Expand
525
843
850
0.45
0.55
0.55
0.45
WaitandSee
Weak Growth
Strong Growth0.55
0.45
Expand
Do nothing
HackersComputerStore
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Expected Values
Move:
0.55* 765 + 0.45*365 = $585,000
Wait and See:0.55*850 + 0.45*525 = $703,750
Expand:
0.55 * 863 + 0.45 * 413 = $660,500
Highest expected value is to Wait and see,and either way, do nothing!
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Decision Trees
765
365
863
413Weak Growth
Weak Growth
Strong Growth
Strong Growth
Move
Expand
525
843
850
0.45
0.55
0.55
0.45
WaitandSee
Weak Growth
Strong Growth0.55
0.45
Expand
Do nothing
HackersComputerStore
$585,000
660,500
703,750
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Other considerations
Another criteria to use is to pick the onewith the highest down side.
Under this, do nothing still wins.
We could also consider the expectedvalue of the future cash streams.
PV = $100/(1+r) = $100/(1.16)=$86.27
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Present Values - p.377
At 16%, Next year is worth 0.862
=(1+rate)^(-years)
Year 2: 0.743Year 3: 0.641
Year 4: 0.552
Year 5: 0.476 195 per year for 5 years: 195 * (3.274)
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Real Options
Assess the value to me of being able tochange my mind in the future
Changed problem slightly -Reduced benefit doing nothing, high demand
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Decision Trees765
365
863
413
Weak
StrongMove
Expand
525
843
820
0.25
0.75
Wait and See
Expand
Do nothing
Hackers
ComputerStore
Weak
Strong0.25
0.75
Weak
Strong0.25
0.75
$465,000
533,000
604,500
820
525Weak
Strong0.25
0.75
Do Nothing
598,750
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Real Options
If we didnt have the wait and see option,we would Do Nothing.
Option to wait and see is worth $5,750
Move
Expand
Wait and See
465,000
533,000
604,500
Do Nothing 598,750$5,750