6 – 1 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Capacity Planning 6 For Operations Management, 9e by Krajewski/Ritzman/Malhotra © 2010 Pearson Education Homework 5, 14, Sup1, Sup2

6 – 2 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Sup Homework #1 The following diagram shows a 4-step process that begins with Operation 1 and ends with Operation 4. The rates shown in each box represent the effective capacity of that operation. a.Determine the capacity of this process. b.Which action would yield the greatest increase in process capacity?1. increase the capacity of operation 1 by 15% 2. increase the capacity of operation 2 by 10% 3. increase the capacity of operation 3 by 10% c.What is the new capacity of the process for each scenario? /hr /hr /hr /hr.

6 – 3 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Sup Homework #2 A producer of pottery is considering the addition of a new plant to absorb the backlog of demand that now exists. The primary location being considered will have fixed costs of $9,200 per month and variable costs of 70 cents per unit produced. Each item is sold to retailers at a price that averages 90 cents. a.What volume per month is required in order to break even? b.What profit would be realized on a monthly volume of 61,000 units, 87,000 units? c.What volume is needed to obtain a profit of $16,000 per month? d.What volume is needed to provide a revenue of $23,000 per month? e.Plot the total cost and total revenue lines.

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6 – 6 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Planning Capacity Capacity Utilization  Overview of capacity planning  Utilization  Cushion  Capacity Bottlenecks  Estimating Capacity Requirements  Decision Trees  Cost-Volume Analysis o Break Even Point  Choosing Capacity (In / Out) Learning Objectives

6 – 7 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Planning Capacity Utilization =  100% Average output rate Maximum capacity Ex: Barbershop – 2 barbers. Capacity is defined as cutting hours per week. Under peak conditions the effective capacity is 100 cutting hours per week. Design cap. Average cutting hours per week or Actual output = 70 hours. Capacity Cushion = 1 – Utilization Idea of Cushion

6 – 8 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Cushion High Cushion Low Cushion

6 – 9 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Bottleneck Operation Operation 1 20/hr. Operation 2 10/hr. Operation 3 15/hr. Bottleneck Maximum output rate limited by bottleneck

6 – 10 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. The following diagram describes a process that consists of eight separate operations, with sequential relationships and capacities (units per hour) as shown. a. What is the current capacity of the entire process? b. If you could increase the capacity of only two operations through process improvement efforts, which two operations would you select, how much additional capacity would you strive for in each of those operations, and what would the resulting capacity of the entire process be? /hr /hr /hr /hr /hr /hr /hr /hr.

6 – 11 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Tools for Capacity Planning Waiting-line models  Useful in high customer-contact processes  Supplement C, “Waiting Lines” is a fuller treatment of the models Simulation  Can be used when models are too complex for waiting-line analysis Decision trees  Useful when demand is uncertain and sequential decisions are involved

6 – 12 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Decision Theory  Helpful tool for financial comparison of alternatives under conditions of risk or uncertainty  Suited to capacity decisions  See Supplement Decision Making

6 – 13 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Waiting-Line Analysis  Useful for designing or modifying service systems  Waiting-lines occur across a wide variety of service systems  Waiting-lines are caused by bottlenecks in the process  Helps managers plan capacity level that will be cost-effective by balancing the cost of having customers wait in line with the cost of additional capacity

6 – 14 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Planning Service Capacity  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 of demand  Peak demand periods

6 – 15 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. In-House or Outsourcing 1.Available capacity 2.Expertise 3.Quality considerations 4.Nature of demand 5.Cost 6.Risk Outsource: obtain a good or service from an external provider

6 – 16 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Determine the Break Even Quantity for purchasing 1, 2, and 3 machines. For all possible demand scenarios, determine profits. Number of Machines Total Annual Fixed Costs Corresponding Range of Output 1$ 9,600 0 to , to , to 900

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6 – 18 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Capacity and Scale Economies of scale  Spreading fixed costs  Reducing construction costs  Cutting costs of purchased materials  Finding process advantages Diseconomies of scale  Complexity  Loss of focus  Inefficiencies

6 – 19 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Capacity and Scale Figure 6.1 – Economies and Diseconomies of Scale 250-bed hospital 500-bed hospital 750-bed hospital Output rate (patients per week) Average unit cost (dollars per patient) Economies of scale Diseconomies of scale

6 – 20 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Capacity Timing and Sizing Sizing capacity cushions Capacity cushions are the amount of reserve capacity a process uses to handle sudden changes Capacity cushion = 100% – Average Utilization rate (%) Expansionist strategies Wait-and-see strategies Combination of strategies

6 – 21 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Capacity Timing and Sizing Planned unused capacity Time Capacity Forecast of capacity required Time between increments Capacity increment (a) Expansionist strategy Figure 6.2 – Two Capacity Strategies

6 – 22 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Time Capacity (b) Wait-and-see strategy Planned use of short-term options Time between increments Capacity increment Capacity Timing and Sizing Forecast of capacity required Figure 6.2 – Two Capacity Strategies

6 – 23 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Systematic Approach For one service or product processed at one operation with a one year time period, the capacity requirement, M, is Capacity requirement = Processing hours required for year’s demand Hours available from a single capacity unit (such as an employee or machine) per year, after deducting desired cushion M = Dp N[ 1 – ( C /100) ] where D =demand forecast for the year (number of customers serviced or units of product) p =processing time (in hours per customer served or unit produced) N =total number of hours per year during which the process operates C =desired capacity cushion (expressed as a percent)

6 – 24 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Systematic Approach Setup times may be required if multiple products are produced Capacity requirement = Processing and setup hours required for year’s demand, summed over all services or products Hours available from a single capacity unit per year, after deducting desired cushion M = [Dp + ( D / Q ) s] product 1 + [Dp + ( D / Q ) s] product 1 + … + [Dp + ( D / Q ) s] product n N[ 1 – ( C /100) ] where Q =number of units in each lot s =setup time (in hours) per lot

6 – 25 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Estimating Capacity Requirements EXAMPLE 6.1 A copy center in an office building prepares bound reports for two clients. The center makes multiple copies (the lot size) of each report. The processing time to run, collate, and bind each copy depends on, among other factors, the number of pages. The center operates 250 days per year, with one 8-hour shift. Management believes that a capacity cushion of 15 percent (beyond the allowance built into time standards) is best. It currently has three copy machines. Based on the following table of information, determine how many machines are needed at the copy center. ItemClient XClient Y Annual demand forecast (copies)2,0006,000 Standard processing time (hour/copy) Average lot size (copies per report)2030 Standard setup time (hours)

6 – 26 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Estimating Capacity Requirements SOLUTION M = [Dp + ( D / Q ) s] product 1 + [Dp + ( D / Q ) s] product 1 + … + [Dp + ( D / Q ) s] product n N[ 1 – ( C /100) ] Rounding up to the next integer gives a requirement of ____ machines.

6 – 27 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Solved Problem 1 You have been asked to put together a capacity plan for a critical operation at the Surefoot Sandal Company. Your capacity measure is number of machines. Three products (men’s, women’s, and children’s sandals) are manufactured. The time standards (processing and setup), lot sizes, and demand forecasts are given in the following table. The firm operates two 8-hour shifts, 5 days per week, 50 weeks per year. Experience shows that a capacity cushion of 5 percent is sufficient. a.How many machines are needed? If no setup or production in lots? b.If the operation currently has two machines, what is the capacity gap? Time Standards Product Processing (hr/pair) Setup (hr/pair) Lot size (pairs/lot) Demand Forecast (pairs/yr) Men’s sandals ,000 Women’s sandals ,000 Children’s sandals ,000

6 – 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Solved Problem 1 SOLUTION a.The number of hours of operation per year, N, is N = (2 shifts/day)(8 hours/shifts) (250 days/machine-year) = 4,000 hours/machine-year The number of machines required, M, is the sum of machine- hour requirements for all three products divided by the number of productive hours available for one machine: M =M = [Dp + ( D / Q ) s] men + [Dp + ( D / Q ) s] women + [Dp + ( D / Q ) s] children N[ 1 - ( C /100) ]