To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Chapter 6 Capacity

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Learning Objectives Be Able to Apply Concepts in Learning Goals Be Able to Use Equations Listed in End of Chapter Equation Summary

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Bottlenecks Inputs To customers (a) Operation 2 a bottleneck 50/hr /hr

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. (b) All operations bottlenecks Capacity Bottlenecks

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Theory of Constraints 1.Identify the system bottleneck(s) 2.Exploit the bottleneck(s) 3.Subordinate all other decisions to step 2 4.Elevate the bottleneck(s) 5.Do not let inertia set in

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Output rate (patients per week) Economies and Diseconomies of Scale Average unit cost (dollars per patient)

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. 250-bed hospital Output rate (patients per week) Economies and Diseconomies of Scale Average unit cost (dollars per patient)

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Economies and Diseconomies of Scale 250-bed hospital 500-bed hospital Output rate (patients per week) Average unit cost (dollars per patient)

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Economies and Diseconomies of Scale 250-bed hospital 500-bed hospital Output rate (patients per week) Economies of scale Average unit cost (dollars per patient)

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Economies and Diseconomies of Scale 250-bed hospital 750-bed hospital 500-bed hospital Output rate (patients per week) Economies of scale Average unit cost (dollars per patient)

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Economies and Diseconomies of Scale Average unit cost (dollars per patient) Output rate (patients per week) 250-bed hospital 750-bed hospital 500-bed hospital Diseconomies of scale Economies of scale

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Strategies Time Forecast of capacity required Capacity

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Strategies Planned unused capacity Time (a) Expansionist strategy Forecast of capacity required Capacity

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Strategies Planned unused capacity Time (a) Expansionist strategy Forecast of capacity required Capacity

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Strategies Time between increments Capacity increment Planned unused capacity Time (a) Expansionist strategy Forecast of capacity required Capacity

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Strategies Time Forecast of capacity required Capacity (b) Wait-and-see strategy

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Strategies Time Forecast of capacity required Capacity (b) Wait-and-see strategy Planned use of short-term options

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Strategies Time between increments Capacity increment Time Forecast of capacity required Capacity Planned use of short-term options (b) Wait-and-see strategy

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Estimate Capacity Requirements ItemClient XClient Y Annual demand forecast (copies) Standard processing time (hour/copy) Average lot size (copies per report) Standard setup time (hours)

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Estimate Capacity Requirements ItemClient XClient Y Annual demand forecast (copies) Standard processing time (hour/copy) Average lot size (copies per report) Standard setup time (hours) [Dp + (D/Q)s] product [Dp + (D/Q)s] product n N[1 – (C/100)] M =

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Estimate Capacity Requirements ItemClient XClient Y Annual demand forecast (copies) Standard processing time (hour/copy) Average lot size (copies per report) Standard setup time (hours) [2000(0.5) + (2000/20)(0.25)] client X + [6000(0.7) + (6000/30)(0.4)] client Y (250 days/year)(1 shift/day)(8 hours/shift)(1.0 – 15/100) M =

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Estimate Capacity Requirements ItemClient XClient Y Annual demand forecast (copies) Standard processing time (hour/copy) Average lot size (copies per report) Standard setup time (hours) M = = 3.12  4 machines

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Forecast Meals = 80,000 this year –Increases 10,000 for next 5 years Kitchen working at capacity now Dining room has 105,000 capacity Alternative –$200,000 initial investment for 130,000 capacity –$2 profit per meal Evaluate Alternatives at Grandmother’s Chicken

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Evaluate Alternatives Expand capacity to meet expected demand through Year 5

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Evaluate Alternatives Expand capacity to meet expected demand through Year 5 YearDemandCash Flow

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Evaluate Alternatives Expand capacity to meet expected demand through Year 5 YearDemandCash Flow 190,000(90,000 – 80,000)2 = $20,000

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Evaluate Alternatives Expand capacity to meet expected demand through Year 5 YearDemandCash Flow 190,000(90,000 – 80,000)2 = $20, ,000(100,000 – 80,000)2 = $40, ,000(110,000 – 80,000)2 = $60, ,000(120,000 – 80,000)2 = $80, ,000(130,000 – 80,000)2 = $100,000

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Simulation & Waiting Lines Not Covered and Not Testable

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees 1 Small expansion Large expansion

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand High demand 1 Small expansion Large expansion

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand High demand Don’t expand Expand 1 2 Small expansion Large expansion

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] High demand [0.60] Don’t expand Expand 1 2 Small expansion Large expansion

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] Don’t expand Expand $135 $ Small expansion Large expansion

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] Don’t expand Expand $135 $ Small expansion Large expansion

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Don’t expand Expand $135 $ Small expansion Large expansion

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Don’t expand Expand $135 $ Small expansion Large expansion

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Don’t expand Expand $135 $ Small expansion Large expansion Expected Payoff = Event * Event Probability

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Don’t expand Expand $135 $ Small expansion Large expansion Expected Payoff = Event * Event Probability Small/Low = $70 (0.40)

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Don’t expand Expand $135 $ Small expansion Large expansion Expected Payoff = Event * Event Probability Small/Low = $70 (0.40) = $28

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Don’t expand Expand $135 $ Small expansion Large expansion Expected Payoff = Event * Event Probability Small/Low = $70 (0.40) = $28 Small/High = $135 (0.60)

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Don’t expand Expand $135 $ Small expansion Large expansion Expected Payoff = Event * Event Probability Small/Low = $70 (0.40) = $28 Small/High = $135 (0.60) = $81

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Don’t expand Expand $135 $ Small expansion Large expansion Expected Payoff = Event * Event Probability Small/Low = $70 (0.40) = $28 Small/High = $135 (0.60) = $81 Small = $28 + $81 = $109

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Don’t expand Expand $135 $ Small expansion Large expansion Expected Payoff = Event * Event Probability Small/Low = $70 (0.40) = $28 Small/High = $135 (0.60) = $81 Small = $28 + $81 = $109 $109

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Don’t expand Expand $135 $ Small expansion Large expansion Expected Payoff = Event * Event Probability Small/Low = $70 (0.40) = $28 Small/High = $135 (0.60) = $81 Small = $28 + $81 = $109 $109

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Don’t expand Expand $135 $ Small expansion Large expansion Expected Payoff = Event * Event Probability Large/Low = $40 (0.40) = $16 Large/High = $220 (0.60) = $132 Large = $16 + $132 = $148 $109

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Don’t expand Expand $135 $ Small expansion Large expansion Expected Payoff = Event * Event Probability Large/Low = $40 (0.40) = $16 Large/High = $220 (0.60) = $132 Large = $16 + $132 = $148 $109 $148

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 $148 $109 High demand [0.60] $135 Don’t expand Expand $135 $ Small expansion Large expansion

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 $148 $109 High demand [0.60] $135 Don’t expand Expand $135 $ Small expansion Large expansion

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 $148 $109 $148 High demand [0.60] $135 Don’t expand Expand $135 $ Small expansion Large expansion

To Accompany Ritzman & Krajewski, Foundations of Operations Management © 2003 Prentice-Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 $148 $109 $148 High demand [0.60] $135 Don’t expand Expand $135 $ Small expansion Large expansion