Chapter 5
Capacity Planning
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Capacity Planning
Capacity is the upper limit or ceiling on the load that an operating unit can handle. The basic questions in capacity handling are:
What kind of capacity is needed? How much is needed? When is it needed?
Importance of Capacity Decisions
Impacts ability to meet future demands Affects operating costs Major determinant of initial costs Involves long-term commitment Affects competitiveness Affects ease of management
Various Capacities
Design capacity
Maximum obtainable output
Effective capacity, expected variations
Maximum capacity subject to planned and expected variations such as maintenance, coffee breaks, scheduling conflicts.
Actual output, unexpected variations and demand
Rate of output actually achieved--cannot exceed effective capacity. It is subject to random disruptions: machine break down, absenteeism, material shortages and most importantly the demand.
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Efficiency and Utilization
Actual output
Efficiency =
Effective capacity
Actual output
Utilization = Design capacity
This definition of efficiency is not used very much. Utilization is more important.
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Efficiency/Utilization Example for a Trucking Company
Design capacity = 50 trucks/day available Effective capacity = 40 trucks/day, because 20% of truck capacity goes through planned maintenance Actual output = 36 trucks/day, 3 trucks delayed at maintenance, 1 had a flat tire
Actual Output 36 units / day Efficiency 90% EffectiveCapacity 40 units / day Actual Output 36 units / day Utilization 72% Design Capacity 50 units / day
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Determinants of Effective Capacity/Output
Facilities, layout Products or services, product mixes/setups Processes, quality Human considerations, motivation Operations, scheduling and synchronization problems Supply Chain factors, material shortages External forces, regulations
Caution: While discussing these the book considers effective capacity almost synonymous to output.
Some Possible Growth/Decline Patterns
Volume
Volume
Growth
Time
Decline
Time
Figure 5-1
Volume Volume
Cyclical
Stable
Time
Time
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Developing Capacity Alternatives
Design flexibility into systems,
modular expansion
Take a big picture approach to capacity changes,
hotel rooms, car parks, restaurant seats
Differentiate new and mature products,
pay attention to the life cycle, demand variability vs. discontinuation
Prepare to deal with capacity chunks,
no machine comes in continuous capacities
Attempt to smooth out capacity requirements,
complementary products, subcontracting
Identify the optimal operating level,
facility size
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Outsourcing: Make or Buy
Outsourcing: Obtaining a good or service from an external provider Decide on outsourcing by considering
Available capacity Expertise Quality considerations The nature of demand: Stability Cost Risk: Loss of control over operations with outsourcing; loss of know-how. Loss of revenue.
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Evaluating Alternatives: Facility Size
Production units have an optimal rate of output for minimal cost. Average cost per unit Minimum cost
Rate of output
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Evaluating Alternatives: Facility Size
Minimum cost & optimal operating rate are functions of size of production unit.
Average cost per unit
Small
plant
Medium plant
Large plant
Output rate
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Planning Service Capacity
Need to be near customers
Capacity and location are closely tied
Inability to store services
Capacity must me matched with timing of demand
Degree of volatility of demand
Peak demand periods
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Example: 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
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Cost-Volume Relationships
Amount ($)
Fixed cost (FC) 0 Q (volume in units)
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Cost-Volume Relationships
Amount ($) 0
Q (volume in units)
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Cost-Volume Relationships: Break-even analysis
Amount ($)
BEP units Q (volume in units)
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P (Quantity)(Contribution To Margin) (Fixed cost) Q( R v) FC
Break-Even Problem with Multiple Fixed Costs
3 machines
2 machines 1 machine
Quantity Fixed costs and variable costs. Thick lines are fixed costs.
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Break-Even Problem with Step Fixed Costs
TR
No break even points in this range
Break even points.
Quantity Step fixed costs and variable costs.
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Cost-Volume(Break-even) Analysis
Break-even quantity: Level of production that equates total costs to total revenues Assumptions: One product is involved Everything produced can be sold Variable cost per unit is the same with volume Fixed costs do not change with volume Revenue per unit constant with volume Revenue per unit exceeds variable cost per unit
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Summary Capacity types Efficiency, utilization Break-even analysis
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Decision Theory
Decision Theory represents a general
approach to decision making which is suitable for a wide range of operations management decisions, including:
capacity planning location planning product and service design
equipment selection
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Decision Theory Elements A set of possible future conditions (call them scenarios) exists that will have a bearing on the results of the decision
Uncertain scenarios
A list of alternatives for the manager to choose from
A known payoff for each alternative under each possible future condition
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Payoff Table Input or implied by the problem set up
Possible future demand Alternatives Low Moderate High
Small facility $10 $10 $10
Medium facility Large facility
$7 $-4
$12 $2
$12 $16
Present value in $ millions. This payoff table is given as an input.
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Decision Making under Uncertainty
When maximizing an objective: MaxiMin - Choose the alternative which has the maximum of minimum possible payoffs for each alternative. Conservative strategy because tries to make the best of the worst possible outcome (for each decision). Which facility? MaxiMax - Choose the alternative with the largest possible payoff. Radical strategy. Which facility? Average(Laplace) - Choose the alternative with the best average payoff of any of the alternatives. Which facility?
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Decision Making under Uncertainty
When minimizing an objective: Say cost. MiniMax - Choose the alternative which has the minimum of the maximum possible costs for each alternative. Conservative strategy. MiniMin - Choose the alternative with the least possible cost. Radical strategy. Average(Laplace) - Choose the alternative with the minimum average cost of any of the alternatives.
Average cost may not be a good indicator. Some alternatives may have more risk than others. In that case, it is ok to choose a slightly costly alternative with low risk.
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Example: Hyatt at the Airport some time ago Construct the payoff matrix
Airport location Airport Location Las Colinas Richardson
Purchase Price PV of hotel if airport is built here $18 $31 $12 $23
PV of hotel if airport is $6 built at the other location
$4
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Payoff Matrix for MaxiMax, MaxiMin
Airport location Las Colinas Buy Las Colinas Buy Richardson Buy Both Buy None $13 -$8 $5 $0 Airport location Richardson -$12 $11 -$1 $0
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Regret: What I have done against what I could have done. MiniMax Regret.
Airport location Las Colinas Buy Las Colinas Buy Richardson Buy Both Buy None $0=no regret $21 $8 $13 Airport location Richardson $23 $0=no regret $12 $11
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Summary Capacity types Efficiency, utilization Break-even analysis Decision Theory (decision making under uncertainty)
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