POM - Chapter 5 Capacity Management 271113

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Strategic Capacity Strategic Capacity Strategic Capacity Strategic Capacity ManagementManagementgg

©The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin

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OBJECTIVES

Strategic Capacity Planning Defined Capacity Utilization & Best Operating Level Economies & Diseconomies of Scale The Experience Curve Capacity Focus, Flexibility & Planning Determining Capacity Requirements Decision Trees

l l Capacity Utilization & Service Quality


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Strategic Capacity PlanningStrategic Capacity Planning

Capacity can be defined as the ability to hold, receive, store, or accommodate

Strategic capacity planning is an approach for determining the overall approach for determining the overall capacity level of capital intensive resources, including facilities, resources, including facilities, equipment, and overall labor force size


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Capacity Utilization

usedCapacitylevel operating Best

usedCapacity ratenutilizatioCapacity

Where Capacity usedCapacity used

rate of output actually achieved

Best operating levelp g capacity for which the process was designed


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Best Operating Level

Example: Engineers design engines and assembly lines to operate at an ideal or “best operating level” to maximize output and minimize wareoutput and minimize ware

Averageunit cost

Underutilization

of output

Overutilization

Best OperatingLevel

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Example of Capacity Utilization

During one week of production, a plant d d 8 i f d I hi i produced 83 units of a product. Its historic

highest or best utilization recorded was 120 units per week. What is this plant’s capacity pe wee . at s t s p a t s capac tyutilization rate?

Answer: Capacity utilization rate = Capacity used .

B i l lBest operating level

= 83/120


=0.69 or 69%

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Economies & Diseconomies of Scale

Economies of Scale and the Experience Curve workingp g

100-unitplant

200-unitAverageunit cost 200 unit

plant 300-unitplant

400-unitplant

of output

Diseconomies of Scale start working

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The ExperienceAs plants produce more products, they

The Experience Curve

gain experience in the best production methods and reduce their costs per unit

Yesterday

Cost orprice

it

TodayTomorrow

per unit

T t l l t d d ti f it


Total accumulated production of units

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C i FCapacity Focus

The concept of the focused factory holds e co cept o t e focused facto y o dsthat production facilities work best when they focus on a fairly limited set of

d i bj iproduction objectives

Plants Within Plants (PWP) Plants Within Plants (PWP) Extend focus concept to operating level


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Capacity Flexibility

Flexible plants

Flexible processes Flexible processes

Flexible workers


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Capacity Planning: Balance

Stage 1 Stage 2 Stage 3Units

Unbalanced stages of production

Stage 1 Stage 2 Stage 3permonth

6,000 7,000 5,000Maintaining System Balance: Output of one stage is the

exact input requirements for the next stage

6,000 7,000 5,000

St 1 St 2 St 3Units

Balanced stages of production

Stage 1 Stage 2 Stage 3permonth

6 000 6 000 6 000


6,000 6,000 6,000

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Capacity Planning

Frequency of Capacity Additions

External Sources of Capacity


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Determining Capacity Requirements

1. Forecast sales within each individual d t liproduct line

2. Calculate equipment and labor 2. Calculate equipment and labor requirements to meet the forecasts

P j i d l b il bili 3. Project equipment and labor availability over the planning horizon


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Example of Capacity RequirementsA manufacturer produces two lines of mustard, FancyFine and Generic line. Each is sold in small and family-size plastic bottles.small and family size plastic bottles.

The following table shows forecast demand for the next four yearsthe next four years.

Year: 1 2 3 4Year: 1 2 3 4FancyFineSmall (000s) 50 60 80 100Family (000s) 35 50 70 90Family (000s) 35 50 70 90GenericSmall (000s) 100 110 120 140Family (000s) 80 90 100 110


Family (000s) 80 90 100 110

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Example of Capacity Requirements (Continued): Product from a Capacity Viewpoint

Question: Are we really producing two Question: Are we really producing two different types of mustards from the standpoint of capacity requirements?

Answer: No, it’s the same product just packaged differently.


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Example of Capacity Requirements (Continued) : Equipment and Labor Requirements

Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200

•Three 100,000 units-per-year machines are available f ll b ttl d ti T t i dfor small-bottle production. Two operators required per machine.

•Two 120,000 units-per-year machines are available for family-sized-bottle production. Three operators required per machine.


required per machine.

Question: What are the Year 1 values for capacity, machine, and labor?

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Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6Family-size Mach. Cap. 240,000 Labor 6

Small150,000/300,000=50% At 1 machine for 100,000, it

SmallPercent capacity used 50.00%Machine requirement 1.50

takes 1.5 machines for 150,000

Labor requirement 3.00Family-sizePercent capacity used 47 92%

At 2 operators for 100,000, it takes 3 operators for 150 000Percent capacity used 47.92%

Machine requirement 0.96Labor requirement 2.88

operators for 150,000

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Year: 1 2 3 4

Question: What are the values for columns 2, 3 and 4 in the table below?19

Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6Family-size Mach Cap 240 000 Labor 6Family size Mach. Cap. 240,000 Labor 6

SmallPercent capacity used 50.00%Machine requirement 1.50Labor requirement 3 00

56.67%1.703.40

66.67%2.004.00

80.00%2.404.80Labor requirement 3.00

Family-sizePercent capacity used 47.92% 58.33%

1 1770.83%1 42

83.33%1 67Machine requirement 0.96

Labor requirement 2.881.173.50

1.424.25

1.675.00

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Example of a Decision Tree Problem

A glass factory specializing in crystal is experiencing a substantial backlog, and the firm's management is considering three courses of action:

A) Arrange for subcontractingB) Construct new facilitiesC) Do nothing (no change)C) Do nothing (no change)

The correct choice depends largely upon demand, which may be low medium or high By consensus managementmay be low, medium, or high. By consensus, management estimates the respective demand probabilities as 0.1, 0.5, and 0.4.


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Example of a Decision Tree Problem (Continued): The ff blPayoff Table

The management also estimates the profits h h i f th th lt ti (Awhen choosing from the three alternatives (A,

B, and C) under the differing probable levels of demand These profits in thousands of dollarsdemand. These profits, in thousands of dollars are presented in the table below:

0.1 0.5 0.4Low Medium High

A 10 50 90B -120 25 200


C 20 40 60

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Example of a Decision Tree Problem (Continued): Step 1Example of a Decision Tree Problem (Continued): Step 1. We start by drawing the three decisions

AB

C


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Example of Decision Tree Problem (Continued): Step 2. Add p ( ) pour possible states of nature, probabilities, and payoffs

High demand (0.4)

Medium demand (0.5)

L d d (0 1)

$90k$50k$10k

A

Low demand (0.1) $10k

High demand (0.4) $200k$25kB

C

Medium demand (0.5)

Low demand (0.1)

$25k-$120k

CHigh demand (0.4)

Medium demand (0.5)$60k$40k$20k


Low demand (0.1) $20k

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Example of Decision Tree Problem (Continued): Step 3. Determine the expected value of each decision

High demand (0.4)

Medium demand (0.5)$90k$50k

$62k Low demand (0.1)

A

$10k$62k

EVA=0.4(90)+0.5(50)+0.1(10)=$62k


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Example of Decision Tree Problem (Continued): Step 4. p ( ) pMake decision

High demand (0.4) $90kMedium demand (0.5)

Low demand (0.1)

$50k$10k$62k

High demand (0.4)

Medium demand (0.5)

d d ( )

AB

$200k$25k

$120k

$80.5k

Low demand (0.1)C

High demand (0.4)

-$120k

$60kMedium demand (0.5)

Low demand (0.1)

$40k$20k

$46k


Alternative B generates the greatest expected profit, so our choice is B or to construct a new facility

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Planning Service Capacity vs. ManufacturingPlanning Service Capacity vs. Manufacturing Capacity

Time: Goods can not be stored for later use and capacity must be available to provide a service h it i d d when it is needed

Location: Service goods must be at the customer gdemand point and capacity must be located near the customer

Volatility of Demand: Much greater than in manufacturingg


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Capacity Utilization &Capacity Utilization & Service Quality

Best operating point is near 70% of p g p 7capacity

From 70% to 100% of service capacity, what do you think happens to service what do you think happens to service quality?


POM - Chapter 5 Capacity Management 271113

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