OPERATIONS MANAGEMENT for MBAs Fourth Edition Meredith and Shafer John Wiley and Sons, Inc. Topic 2: Capacity Planning & Forecasting Chapters 8 & 8S : Capacity, Forecasting

Outline Capacity Planning Overview Utilization & Efficiency Effectively Utilizing Capacity / Resource Planning & Scheduling Production Planning Aggregate Plan Master Production Schedule The Learning Curve Forecasting Homework

Capacity Planning Decisions Demand Estimates Forecast Market Corporate Strategy Skills Suppliers & Customers

Capacity Maximum rate outputs can be produced or services delivered. Maximum amount of availability for a product or service.

Capacity Timing Planned unused capacity Forecast of capacity required Time Capacity Forecast of capacity required Time between increments Capacity increment (a) Preceding Demand or Expansionist strategy

Planned use of short-term options Capacity Timing Time Capacity Planned use of short-term options Forecast of capacity required Time between increments Capacity increment (b) Following Demand or Wait-and-see strategy

Location Planning Strategies Possible Factors affecting location decisions

Breakeven Location Model FC VC A 150000 62 B 300000 38 C 500000 24 D 600000 30

Breakeven Location Model Q (thousands of units) 200 400 600 800 1000 1200 1400 1600 2 4 6 8 10 12 14 16 18 20 22 A best B best C best Break-even point 6.25 14.3 A D B C (20, 1390) (20, 1200) (20, 1060) (20, 980) Annual cost (thousands of dollars) Break-even point

Weighted Score Location Method Factor Wt A B C D Tax environment 20 5 1 4 3 Employee preference 2 Accessibility Community 25 Costs 30   370 180 275 300

Utilization Time Busy / Time Available Actual output / capacity Average output rate / capacity Occupied (in use) / amount available

Efficiency total task time / (N X cycle time) 15 units/hr 20 units/hr Capacity or Output Rates: 15 units/hr 20 units/hr 6 units/hr 30 units/hr Littlefield Utilization: 100% 75% 100% 20% Utilization: 40% 30% 100% 20% Efficiency = 19 / (4 X 10) = .475 = average utilization based on cycles cycle time  time at which every workstation can pass its completed part to the next station

Efficiency total task time / (N X cycle time) 5 15 units/hr 2nd Machine C 5 Capacity or Output Rates: 15 units/hr 20 units/hr 12 units/hr 30 units/hr 100% Utilization: 80% 60% 100% 40% Efficiency = 19 / (5 X 5) = .76 = average utilization based on cycles cycle time  time at which every workstation can pass its completed part to the next station

Bottlenecks 5 per hour 15 per hour 7 per hour

Bottlenecks Operation 1 20/hr. Operation 2 10/hr. Operation 3 15/hr. Maximum output rate limited by bottleneck

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? 1 15/hr. 2 10/hr. 3 20/hr. 7 34/hr. 8 30/hr. 4 5/hr. 5 8/hr. 6 12/hr.

Cushion High Cushion Low Cushion

Resource Planning Long-Range Capacity Planning Aggregate Chase Plan Level Plan Master Production Schedule Master Production Schedule Inventory Information Production Planning

Resource Planning

Resource Planning MPS gets further broken down in the MRP.

Resource Planning At the heart of any organization Starts with sales and operations plans (or aggregate plan) and plans the input requirements A process relative to the firm’s competitive priorities and an important part of managing supply chains

Resource Planning Aggregate Plan

Materials Requirements Planning An information system that translates master schedule requirements for end items into time-phased requirements for subassemblies, components, and raw materials. Aids in managing dependent demand inventory. Primary Inputs: Master Production Schedule Bill of Materials Inventory Records

MRP Inputs Other sources of demand Authorized master production schedule Inventory transactions records MRP explosion Bills of materials Engineering and process designs Material requirements plan

Master Production Schedule MPS for a single end item Aggregate Plan

Bill of Materials A record of all components of an item Shows the parent-component relationship The usage quantities are derived from engineering and process design Five common terms End items Intermediate items Subassemblies Purchased items Part commonality (sometimes called standardization of parts or modularity)

Bill of Materials A Ladder-back chair Seat cushion Seat-frame boards Front legs A Ladder-back chair Back legs Leg supports Back slats BOM for a Ladder-Back Chair

Bill of Materials A Ladder-back chair C (1) Seat subassembly D (2) Front legs B (1) Ladder-back E (4) Leg supports G (4) Back slats F (2) Back legs I (1) Seat cushion H (1) Seat frame J (4) Seat-frame boards

Bill of Materials If 50 units of of end item A are to be assembled, how many additional units of D are needed? Of E? Item A B C D E F G LT (wks) 1 2 3 6 Amt. OH 10 15 100 5 A B(3) C(1) D(1) E(2) F(1) D(1) G(1)

Inventory Record Inventory transactions are the basic building blocks of up-to-date records Transactions include releasing new orders, receiving scheduled receipts, adjusting due dates for scheduled receipts, withdrawing inventory, canceling orders, correcting inventory errors, rejecting shipments, and verifying losses and stock returns Inventory records divide the future into time periods called time buckets Keep track of inventory levels and component replenishment needs

Inventory Record The time-phase information contained in the inventory record consists of: Gross requirements Scheduled receipts Projected on-hand inventory Planned receipts Planned order releases = + – Projected on-hand inventory balance at end of week t Inventory on hand at end of week t–1 Scheduled or planned receipts in week t Gross requirements in week t

Planning Factors Lot-sizing rules Fixed order quantity (FOQ) rule maintains the same order quantity each time an order is issued Lot for lot (L4L), order what is necessary Periodic order quantity (POQ), order what is necessary to handle P periods

MRP Example, Given MPS, Inv Records, BOM MPS for End Item A, LT=1, Beg Inv=0 Inventory Records Item A B C D LT 1 2 3 Sch Rec 200 wk 1, 100 wk 6 Amt OH 20 425 Rule L4L, min 120 L4L Lot Size, Q=500 A B(1) C(2) D(1) BOM

MRP Example, Solution

The Learning Curve The ability to increase productive capacity through “learning.” Each time the output doubles, the labor hours decrease by a fixed percentage of their previous value. Common LC values are 70 to 95 percent. Units Hours (.9) Hours (.8) 1 100 2 90 80 4 81 64 8 72.9 51.2 16 65.61 40.96 32 59.049 32.768

LC Application A customer support center has a 90 (or 0.90) percent learning curve rate for handling customer issues. A new rep has just begun work. Her first support call required 2000 seconds. Estimate the time needed to complete her first 5 calls. Estimate the time needed to complete her 5th call. Estimate the time needed to complete calls 21 through 25. 0.9 1 2000.00 2 1800.00 3 1692.41 4 1620.00 5 1565.97 21 1259.07 22 1250.19 23 1241.78 24 1233.77 25 1226.14 Using the Tables 2000 X 4.339 = 8,678 2000 X 0.783 = 1,566 Using the Tables 2000 X 17.71 = 35,420 (length of first 25 calls) 2000 X 14.61 = 29,220 (length of first 20 calls) 6,200

LC Application Call Number Length Cumulative 1 2000.00 2 1800.00 3800.00 3 1692.41 5492.41 4 1620.00 7112.41 5 1565.97 8678.39 6 1523.17 10201.56 7 1487.90 11689.45 8 1458.00 13147.45 9 1432.13 14579.58 10 1409.38 15988.96 11 1389.11 17378.06 12 1370.85 18748.92 13 1354.28 20103.19 14 1339.11 21442.30 15 1325.14 22767.43 16 1312.20 24079.63 17 1300.16 25379.80 18 1288.92 26668.71 19 1278.37 27947.08 20 1268.44 29215.52 21 1259.07 30474.59 22 1250.19 31724.78 23 1241.78 32966.56 24 1233.77 34200.32 25 1226.14 35426.46

LC Application A manager wants to estimate an appropriate LC rate for a new type of work his firm will undertake. He has obtained the following completion times for the initial 8 repetitions of a job of this type. What learning curve rate is appropriate? Estimate the duration to complete job unit 45. Unit Time (hrs) 1 15.90 2 12.00 3 10.10 4 9.10 5 8.40 6 7.50 7 7.40 8 6.90

Factors that may affect the LC rate Complexity of the task Human component