PRODUCTIONS/OPERATIONS MANAGEMENT
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Transcript PRODUCTIONS/OPERATIONS MANAGEMENT
CAPACITY PLANNING
FOR PRODUCTS AND SERVICES
FACILITY PLANNING
Facility planning answers:
What kind of capacity is needed?
How much capacity is needed to match demand?
When more capacity is needed?
Where facilities should be located (location)
How facilities should be arranged (layout)
CAPACITY (DEFINITION OF)
The number of units a facility can hold, receive, store
or produce in a period of time
It is the upper limit or ceiling on the load that an
operating unit can handle. It includes
equipment,
space,
employee skills
STRATEGIC CAPACITY PLANNING
Goal
To achieve a match between the long-term supply
capabilities of an organization and the predicted
level of long-run demand
Overcapacity operating costs that are too
high
Undercapacity strained resources and
possible loss of customers
CAPACITY PLANNING QUESTIONS
Key Questions:
What kind of capacity is needed?
How much capacity is needed to match demand?
When is it needed?
Related Questions:
How much will it cost?
What are the potential benefits and risks?
Are there sustainability issues?
Should capacity be changed all at once, or through
several smaller changes
Can the supply chain handle the necessary changes?
ISSUES TO BE CONSIDERED IN
STRATEGY FORMULATION
Capacity strategy
Demand patterns
Growth rate and variability
Facilities
(Cost of the building and operating)
Technological changes
(Rate and direction of technology changes)
Behavior of competitors
Availability of capital and other inputs.
TYPES OF PLANNING OVER A
TIME HORIZON
Long Range
Planning
Intermediate
Range Planning
Add Facilities
Add long lead time equipment *
Sub-Contract
Add Equipment
Add Shifts
*
Short Range
Planning
*Limited options exist
Add Personnel
Build or Use Inventory
Modify Capacity
Schedule Jobs
Schedule Personnel
AllocateMachinery
Use Capacity
IMPORTANCE OF CAPACITY
DECISIONS
1. impact the ability of the organization to meet future
demands
2. affect operating costs
3. affect lead time responsiveness
4. are a major determinant of initial costs
5. involve long-term commitment of resources
6. affect competitiveness
7. affect ease of management
8. are more important and complex due to globalization
9. need to be planned for in advance due to their
consumption of financial and other resources
CAPACITY MEASURES
Design capacity
Maximum output rate or service capacity an
operation, process, or facility is designed for
Effective capacity
Capacity a firm can expect to attain given its
product mix, methods of scheduling, maintenance
and standards of quality. Design capacity minus
allowances such as personal time, maintenance and
scrap
CAPACITY RELATED CONCEPTS
Actual output
Rate of output actually achieved—cannot exceed
effective capacity
Utilization
Actual output as a percent of design capacity
Efficiency
Actual output as a percent of effective capacity
EFFICIENCY
Measure of how well a facility or machine is performing
when used
Efficiency =
Actual output
Effective Capacity
(expressed as a percentage)
UTILIZATION
Measure of actual capacity usage of a facility, work
center, or machine
Utilization =
Actual Output
Design Capacity
(expressed as a percentage)
EXAMPLE- EFFICIENCY/UTILIZATION
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
Actual output
=
36 units/day
Efficiency =
= 90%
Effective capacity
Utilization =
Actual output
Design capacity
40 units/ day
=
36 units/day
50 units/day
= 72%
DETERMINANTS OF EFFECTIVE
CAPACITY
Facilities
Product and Service Factors
Process Factors
Human Factors
Policy Factors
Operational Factors
Supply Chain Factors
External Factors
STRATEGY FORMULATION
Strategies are typically based on assumptions and
predictions about:
Long-term demand patterns
Technological change
Competitor behavior
SPECIAL REQUIREMENTS FOR
MAKING GOOD CAPACITY
DECISIONS
Forecasting the demand accurately
Understanding the technology and capacity
increments
Finding the optimal operating level (volume)
Building for change
KEY DECISIONS IN CAPACITY
PLANNING
Amount of capacity needed
Timing of changes (frequency of capacity additions)
Extent of flexibility of facilities
External sources of capacity
Need to maintain balance
AMOUNT OF CAPACITY NEEDED
STEPS OF CAPACITY PLANNING
Estimate future capacity requirements
Evaluate existing capacity and facilities and
identify gaps
Identify alternatives for meeting requirements
Conduct financial analysis
Assess key qualitative issues
Select the best alternative for the long term
Implement the alternative chosen
Monitor results
FORECASTING CAPACITY
REQUIREMENTS
Long-term considerations relate to overall level of
capacity requirements
Short-term considerations relate to probable variations
in capacity requirements
CALCULATING PROCESSING
REQUIREMENTS
Forecast sales within each individual product line
Calculate equipment and labor requirements to
meet the forecasts
CALCULATING PROCESSING
REQUIREMENTS
Calculating processing requirements requires reasonably
accurate demand forecasts, standard processing times, and
available work time
k
NR
pD
i
i 1
i
T
where
N R number of required machines
pi st andardprocessingt imefor product i
Di demandfor product i during t heplanninghorizon
T processingt imeavailableduring t heplanninghorizon
CALCULATING PROCESSING
REQUIREMENTS: EXAMPLE 1 (1 of 2)
Standard
processing time
per unit (hr.)
Product
Annual
Demand
Processing time
needed (hr.)
#1
400
5.0
2,000
#2
300
8.0
2,400
#3
700
2.0
1,400
5,800
CALCULATING PROCESSING
REQUIREMENTS: EXAMPLE 1 (2 of 2)
If the department works one eight hour shift, 250 days a
year, calculate the number of machines that would be
needed to handle the required volume.
Solution:
5800/(250)(8) = 2.9 (3 machines are needed)
CAPACITY CUSHION
Capacity Cushion
Extra capacity used to offset demand uncertainty
Capacity cushion = 100% - Utilization
Capacity cushion strategy
Organizations that have greater demand
uncertainty typically have greater capacity cushion
Organizations that have standard products and
services generally have greater capacity cushion
SERVICE CAPACITY PLANNING
Service capacity planning can present a number of
challenges related to:
The inability to store services
The need to be near customer
The degree of demand volatility
SERVICE CAPACITY PLANNING
Time: Inability to store services for later consumption.
Capacity must be available to provide a service when it is
needed (capacity must be matched with the timing of
demand)
Location: Need to be near customers for convenience.
Capacity and location are closely tied. Service goods must
be at the customer demand point and capacity must be
located near the customer
Volatility of Demand: (Much greater than in
manufacturing)
Volume and timing of demand
Time required to service individual customers
CAPACITY UTILIZATION &
SERVICE QUALITY
Best operating point is near 70% of capacity
From 70% to 100% of service capacity, what do
you think happens to service quality?
TIMING AND SIZE OF CHANGES
(FREQUENCY OF CAPACITY
ADDITIONS)
CAPACITY EXPANSION
Factors to be considered:
Volume
and certainty of anticipated demand
Strategic objectives for growth
Costs of expansion and operation
Incremental or one-step expansion
Frequency of capacity additions
CAPACITY EXPANSION STRATEGIES
(1 of 5)
Expected Demand
Expected Demand
New Capacity
Demand
Demand
New Capacity
Time in Years
Capacity leads demand with an incremental expansion
Time in Years
Capacity leads demand with a one-step expansion
Expected Demand
New Capacity
New Capacity
Time in Years
Capacity lags demand with an incremental expansion
Demand
Demand
Expected Demand
Time in Years
Attempts to have an average capacity, with
an incremental expansion
CAPACITY EXPANSION STRATEGIES
(2 of 5)
Expected Demand
Demand
New Capacity
Time in Years
Capacity leads demand with an incremental expansion
CAPACITY EXPANSION STRATEGIES
(3 of 5)
Expected Demand
Demand
New Capacity
Time in Years
Capacity leads demand with a one-step expansion
CAPACITY EXPANSION STRATEGIES
(4 of 5)
Expected Demand
Demand
New Capacity
Time in Years
Capacity lags demand with an incremental expansion
CAPACITY EXPANSION STRATEGIES
(5 of 5)
Demand
New Capacity
Expected Demand
Time in Years
Attempts to have an average capacity, with an incremental
expansion
MAKE OR BUY?
1.
2.
3.
4.
5.
6.
Available capacity
Expertise
Quality considerations
Nature of demand
Cost
Risk
OPTIMAL OPERATING LEVEL
Average cost per room
OPTIMAL OPERATING LEVEL
Best operating
level
Economies
of scale
250
Diseconomies
of scale
500
# Rooms
1000
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
Reasons for economies of scale:
Fixed costs are spread over a larger number of
units
Construction costs increase at a decreasing rate as
facility size increases
Processing costs decrease due to standardization
DISECONOMIES OF SCALE
Diseconomies of scale
If the output rate is more than the optimal level,
increasing the output rate results in increasing average unit
costs
Reasons for diseconomies of scale
Distribution costs increase due to traffic congestion and
shipping from a centralized facility rather than multiple
smaller facilities
Complexity increases costs
Inflexibility can be an issue
Additional levels of bureaucracy
ECONOMIES OF SCALE
Average cost per unit
Minimum cost & optimal operating rate are
functions of size of production unit.
0
Small
plant
Medium
plant
Large
plant
Volume or output rate
ECONOMIES AND DISECONOMIES OF
SCALE
Economies of Scale and the Experience Curve working
Average
unit cost
of output
100-unit
plant
200-unit
plant
300-unit
plant
400-unit
plant
Diseconomies of Scale start working
Volume
THE
EXPERIENCE
CURVE
As plants produce more products, they gain
experience in the best production methods
and reduce their costs per unit
Yesterday
Cost or
price
per unit
Today
Tomorrow
Total accumulated production of units
EXTERNAL SOURCES OF CAPACITY
IN-HOUSE OR OURSOURCE?
Once capacity requirements are determined, the
organization must decide whether to produce a good or
service itself or outsource
Factors to consider:
Available capacity
Expertise
Quality considerations
The nature of demand
Cost
Risks
NEED TO MAINTAIN BALANCE
CAPACITY PLANNING: BALANCE
Unbalanced stages of production
Units
per
month
Stage 1
Stage 2
Stage 3
6,000
7,000
5,000
Maintaining System Balance: Output of one stage is the
exact input requirements for the next stage
Balanced stages of production
Units
per
month
Stage 1
Stage 2
6,000
6,000
Stage 3
6,000
BOTTLENECK OPERATION
Machine #1
Machine #2
Bottleneck operation: An operation
in a sequence of operations whose
capacity is lower than that of the
other operations
10/hr
10/hr
Machine #3
Bottleneck
Operation
10/hr
Machine #4
10/hr
30/hr
BOTTLENECK OPERATION
Bottleneck
Operation 1
20/hr.
Operation 2
10/hr.
Operation 3
15/hr.
Maximum output rate
limited by bottleneck
10/hr.
CONSTRAINT MANAGEMENT
Constraint
Something that limits the performance of a process or
system in achieving its goals
Categories
Market
Resource
Material
Financial
Knowledge or competency
Policy
RESOLVING CONSTRAINT ISSUES
Identify the most pressing constraint
Change the operation to achieve maximum benefit,
given the constraint
Make sure other portions of the process are supportive
of the constraint
Explore and evaluate ways to overcome the constraint
Repeat the process until the constraint levels are at
acceptable levels
STRATEGIES FOR MATCHING
CAPACITY TO DEMAND
DEMAND MANAGEMENT
STRATEGIES
Strategies used to offset capacity limitations and
that are intended to achieve a closer match
between supply and demand
Pricing
Promotions
Backorders
Offering complementary products
Discounts
Other tactics to shift demand from peak periods
into slow periods
COMPLEMENTARY PRODUCTS
Sales (Units)
5,000
4,000
3,000
2,000
1,000
0
Total
Snowmobiles
Jet Skis
J M M J S N J M M J S N J
Time (Months)
CAPACITY MANAGEMENT
STRATEGIES
1. Adjusting equipment and processes – which might
include purchasing additional machinery or selling
or leasing out existing equipment
2. Making staffing changes (increasing or decreasing
the number of employees)
3. Improving methods to increase throughput
4. Redesigning the product to facilitate more
throughput (for faster processing)
THINGS THAT CAN BE DONE TO
ENHANCE CAPACITY MANAGEMENT
1.
2.
3.
4.
5.
6.
7.
Design flexibility into systems
Take stage of life cycle into account
Take a “big picture” approach to capacity changes
Prepare to deal with capacity “chunks”
Attempt to smooth out capacity requirements
Identify the optimal operating level
Choose a strategy if expansion is involved
CAPACITY FLEXIBILITY
CAPACITY FLEXIBILITY
Flexible plants
Flexible processes
Flexible workers
EVALUATING ALTERNATIVES
Alternatives should be evaluated from varying
perspectives
ECONOMIC
Cost-volume analysis
Break-even point
Financial analysis
Cash flow
Present value
Decision theory
Waiting-line analysis
Simulation
NON-ECONOMIC
Public opinion
Amount ($)
COST-VOLUME RELATIONSHIPS
(1 OF 3)
Fixed cost (FC)
0
Q (volume in units)
Amount ($)
COST-VOLUME RELATIONSHIPS
(2 OF 3)
0
Q (volume in units)
Amount ($)
COST-VOLUME RELATIONSHIPS
(3 OF 3)
0
BEP units
Q (volume in units)
BREAK-EVEN POINT (BEP)
BEP
The volume of output at which total cost and total
revenue are equal
Profit (P) = TR – TC = R x Q – (FC +v x Q)
= Q(R – v) – FC
QBEP
FC
Rv
COST-VOLUME RELATIONSHIPS
BREAK-EVEN PROBLEM WITH STEP
FIXED COSTS (1 of 2)
3 machines
2 machines
1 machine
Quantity
Step fixed costs and variable costs.
BREAK-EVEN PROBLEM WITH STEP
FIXED COSTS (2 of 2)
$
BEP
3
TC
BEP2
TC
3
TC
2
1
Quantity
Multiple break-even points
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 is the same regardless of
volume
6. Revenue per unit exceeds variable cost per unit
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.