Introduction to Operations Management

Ch. 5. Strategic Capacity Planning for Ch. 5. Strategic Capacity Planning for Products and ServicesProducts and Services

Hansoo Kim ( 金翰秀 )Dept. of Management Information Systems,

YUST

What you should have done!

Read Chapter 17 again and Chapter 5, 5s

HW#2 Play with MS-Project®

Important things in Ch.17 What is Project? What is Project Management? Project Planning, Scheduling, and Controlling Matrix Organization, WBS (Work-Breakdown-Structure) Network Diagram

AON, AOA Gantt Chart PERT/CPM

Finding Critical Path Forward Calculation/Backward Calculation

Project Management Problem Is the project on schedule, ahead of schedule, or behind schedule? Is the project over or under cost budget? Are there enough resources available to finish the project on time?

If the project must be finished in less than the scheduled amount of time, what is the way to accomplish this at least cost?

Crashing

OM Overview

Class Overview(Ch. 0)

Project Management

(Ch. 17)

Strategic Capacity Planning(Ch. 5, 5S)

Operations, Productivity, and Strategy

(Ch. 1, 2)

Mgmt of Quality/Six Sigma Quality

(Ch. 9, 10)

Supply Chain Management

(Ch 11)

Location Planning and Analysis

(Ch. 8)

Demand MgmtForecasting

(Ch 3)

Inventory Management

(Ch. 12)

Aggregated Planning

(Ch. 13)

Queueing/ Simulation

(Ch. 18)

MRP & ERP (Ch 14)

JIT & Lean Mfg System

(Ch. 15)

Term Project

Process Selection/

Facility Layout; LP(Ch. 6, 6S)X X X

To be OM Expert !!!

UnderstandingProblem

DevelopingProper Model

Finding SolutionTechnique

Communicable with other OM People

Domain Expert(Studying general

Problems and Working Experience)

Operations Research(경영과학)

Mathematical Programming, and Computational

Methodology

Existing Models:LP Model,

Queueing Model, Simulation Model,PERT/CPM Model

Develop New Models

OM EXPERT!!

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

Terms ( 용어 )영어 중국어 영어 중국어Bottleneck operation 瓶颈作业 Expected monetary

value(EMV)criterion预期币值标准

Break-even point 盈亏平衡点 Expected value of perfect information(EVPI)

完全信息预期价值

Capacity 运营能力 Laplace

Capacity cushion 运营能力缓冲 Maximax

Cash flow 现金流 Maximin

Diseconomies of scale 规模不经济 Minimax regret

Economies of scale 规模经济 Payoff table 结算表Outsource 外包 Regret (opportunity

loss)

Present value 现值 Risk 风险Bounded rationality 有限理性 Sensitivity analysis 灵敏度分析Certainty Suboptimization 局部最优化Decision tree 决策图标 Uncertainty

Capacity Planning Capacity is the upper limit or ceiling on the

load that an operating unit can handle. Capacity also includes

Equipment ( 설비 ) Space ( 공간 ) Employee skills ( 작업능력 )

The basic questions in capacity handling are: What kind of capacity is needed? ( 어떤 종류 ) How much is needed? ( 얼마나 ) When is it needed? ( 언제 )

Importance of Capacity Decisions

1. Impacts ability to meet future demands

2. Affects operating costs3. Major determinant of initial costs4. Involves long-term commitment5. Affects competitiveness6. Affects ease of management7. Globalization adds complexity8. Impacts long range planning

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.

Efficiency( 효율 ) and Utilization(가동률 )

Actual outputEfficiency =

Effective capacity

Actual outputUtilization =

Design capacity

Both measures expressed as percentages

Design capacity = 50 trucks/day

Effective capacity = 40 trucks/day

Actual output = 36 units/day

Example 1

Determinants of Effective Capacity Facilities

Design Location Layout Environment

Product/service Design Product or service mix

Process Quantity capabilities Quality capabilities

Human factors Job content Job design Training and experience Motivation Compensation Learning rates Absenteeism and labor

turnover

Policy Operational

Scheduling Materials management Quality assurance Maintenance policies Equipment breakdowns

Supply chain External factors

Product standards Safety regulations Unions Pollution control

standards

Key Decisions of Capacity Planning

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

2.Timing of changes3.Need to maintain balance4.Extent of flexibility of facilities

Capacity cushion – extra demand intended to offset uncertainty

Steps for Capacity Planning

1.Estimate future capacity requirements2.Evaluate existing capacity3.Identify alternatives4.Conduct financial analysis5.Assess key qualitative issues6.Select one alternative7.Implement alternative chosen8.Monitor results

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

Figure5-1 Common demand patterns

Calculating Processing Requirements

P r o d u c tA n n u a l

D e m a n d

S t a n d a r dp r o c e s s i n g t i m e

p e r u n i t ( h r . )P r o c e s s i n g t i m e

n e e d e d ( h r . )

# 1

# 2

# 3

4 0 0

3 0 0

7 0 0

5 . 0

8 . 0

2 . 0

2 , 0 0 0

2 , 4 0 0

1 , 4 0 0 5 , 8 0 0

P r o d u c tA n n u a l

D e m a n d

S t a n d a r dp r o c e s s i n g t i m e

p e r u n i t ( h r . )P r o c e s s i n g t i m e

n e e d e d ( h r . )

# 1

# 2

# 3

4 0 0

3 0 0

7 0 0

5 . 0

8 . 0

2 . 0

2 , 0 0 0

2 , 4 0 0

1 , 4 0 0 5 , 8 0 0

If annual capacity is 2000 hours/machine, then we need three machines to handle the required volume: 5,800 (hours)/2,000 (hours/mc) = 2.90 machines

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( 휘발성 ) of demand

Peak demand periods

Planning ServiceService Capacity

In-House or Outsourcing*

1. Available capacity2. Expertise3. Quality considerations4. Nature of demand5. Cost6. Risk

Outsource: obtain a good or service from an external provider

Make or Buy?Make or Buy?

Developing Capacity Alternatives

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

3.Take a “big picture” approach to capacity changes (not to be sub-optimal)

4.Prepare to deal with capacity “chunks”

5.Attempt to smooth out capacity requirements

6.Identify the optimal operating level

Bottleneck Operation

Figure 5.2

Bottleneck operation: An operationin a sequence of operations whosecapacity is lower than that of theother operations

Operation 120/hr.

Operation 210/hr.

Operation 315/hr.

10/hr.

BottleneckMaximum output ratelimited by bottleneck

sub optimization

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

Economies of ScaleMinimum cost & optimal operating rate are

functions of size of production unit.

Figure 5.5

Evaluating Alternatives

Cost-volume analysis Break-even point

Financial analysis Cash flow Present value

Decision theory Waiting-line analysis

Cost-Volume Relationships

FC = Fixed costVC = Total variable costv = Variable cost per unitTC = Total costTR = Total revenueR = Revenue per unitQ = Quantity or volume of outputQBEP = Break-even quantityP = Profit

TC=FC+VCVC=Q*v

Break-Even Analysis

Example 3 Adding a new line of pies, which will require leasing

new equipment for a monthly payment of $6,000. Variable costs would be $2.00 per pie, and pies would retail for $7.00 each.

1. How many pies must be sold in order to break even?2. What would the profit (loss) be if 1,000 pies are made and

sold in a month?3. How many pies must be sold to realize a profit of $4,000?4. If 2,000 can be sold, and a profit target is $5,000, what

price should be charged per pie?SOLUTION

Break-Even Problem with Step Fixed Costs

                                                     

        EXAMPLE 4

Decision Theory

Ch. 5S

Decision Theory represents a general approach to decision making which is suitable for a wide range of operations management decisions, including:

Product andservice design

Product andservice design

Equipment selection

Location planning

Capacityplanning

Decision TheoryDecision Theory

Decision Process

1. Identify the problem2. Specify objectives and criteria for a solution3. Develop suitable alternatives4. Analyze and compare alternatives5. Select the best alternative6. Implement the solution7. Monitor to see that the desired result is

achieved

Certainty - Environment in which relevant parameters have known values

Risk - Environment in which certain future events have probable outcomes

Uncertainty - Environment in which it is impossible to assess the likelihood of various future events

Decision EnvironmentsDecision Environments

1. Profit per unit is $5. You have an order for 200 units. How much profit will you make? (This is an example of certainty since unit profits and total demand are known.)

2. Profit is $5 per unit. Based on previous experience, there is a 50 percent chance of an order for 100 units and a 50 percent chance of an order for 200 units. What is expected profit? (This is an example of risk since demand outcomes are probabilistic.)

3. Profit is $5 per unit. The probabilities of potential demands are unknown. (This is an example of uncertainty.)

Decision Making under Certainty

Solution:Choose the alternative with the highest payoffIf demand is low, take “small facility” alternativeIf demand is moderate, take “Medium facility” alternativeIf demand is high, take “Large facility” alternative

Payoff tablePayoff table

Maximin - Choose the alternative with the best of the worst possible payoffs

Maximax - Choose the alternative with the best possible payoff

Laplace - Choose the alternative with the best average payoff of any of the alternatives

Minimax Regret - Choose the alternative that has the least of the worst regrets

Decision Making under Uncertainty

Decision Making under Uncertainty

(a)Maximin

(b) Maximax

(c) Laplace For the Laplace criterion, first find the row totals, and

then divide each of those amounts by the number of states of nature (three in this case).

(d) Minimax Regret (Opportunity Losses)

Decision Making Under Risk Risk: The probability of occurrence for each

state of nature is known Risk lies between the extremes of uncertainty

and certainty Expected monetary value (EMV) criterion:

The best expected value among alternatives Determine the expected payoff of each alternative,

and choose the alternative with the best expected payoffWhen demand

probabilities are distributed as followslow = .30, moderate = .50, and high = .20.

Decision Tree

Decision tree: a Schematic representation of the available alternatives and their possible consequences.

Example A manager must decide on the size of a video arcade to

construct. The manager has narrowed the choices to two: large or small. Information has been collected on payoffs, and a decision tree has been constructed. Analyze the decision tree and determine which initial alternative (build small or build large) should be chosen in order to maximize expected monetary value.

Expected Value of Perfect Information (EVPI)

Expected value of perfect information: the difference between the expected payoff under certainty and the expected payoff under risk

Expected value ofperfect information

Expected payoffunder certainty

Expected payoffunder risk= -

In the previous example,

Sensitivity Analysis Sensitivity Analysis: Determining the range of

probability for which an alternative has the best expected payoff

Useful for decision makers to have some indication of how sensitive the choice of an alternative is to changes in one or more of these values

Example 5s-8

Summary

Capacity Planning Decision Theory

HW#

Review all Solved Problems on Ch. 5, 5s Do not need to hand-in

To be OM Expert !!!

UnderstandingProblem

DevelopingProper Model

Finding SolutionTechnique

Communicable with other OM People

Domain Expert(Studying general

Problems and Working Experience)

Operations Research(경영과학)

Mathematical Programming, and Computational

Methodology

Existing Models:LP Model,

Queueing Model, Simulation Model,PERT/CPM Model

Develop New Models

OM EXPERT!!Capacity Planning& Decision Theory