1. Operations Management
William J. Stevenson
8th edition

16. The Hyatt Regency Walkway Collapse, Kansas City, USA
July 17, 1981, 7:05 pm
114 people dead and over 200 injured.
Rod that suspended the beam could only carry load of 90kN, against the 151kN building code requirement.

17. Sampoong Department Store, Seoul, S. Korea
June 29, 1995.
501 people killed and over 900 injured.
Originally designed as an office building, but redesigned as a department store
A load of four times the design limit

18. Charles de Gaulle Airport-Terminal 2E , Paris
May 23, 2004
4 people died, 3 injured.
The building was not designed to support the stress it was put under, and the concrete used in its shell weakened gradually to a point that pillars pierced through it

19. Interstate-35 Bridge August 1, 2007 Minneapolis, USA
13 people killed and 100 injured
A design flaw
Gusset plates holding the angled beams were not thick nor strong enough to meet safety margins when the bridge was built in 1960s

20. For Products and Services
CHAPTER 5
Capacity Planning
For Products and Services
Operations Management, Eighth Edition, by William J. Stevenson
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

21. Capacity Requirements Planning
Capacity Requirements Planning is a computerized technique for projecting resource requirements for critical work stations.
Inputs:
Planned order releases
Routing file
Open orders file
Outputs:
Load Profile for each work center

22. Definitions
Planned Order Releases: Information from the Material Requirements Planning which tells when you should start the order so it can be completed on time.
Routing Files: Information that details the requirements of equipment and labor to complete the order as needed in the required time frame.
Open Orders Files: Information regarding the orders that are currently started and need to be completed.
To fully understand the definition of the information that goes into the capacity requirement planning, it is important to understand the terms used.
The planned order releases is from the material requirements planning which translates a master schedule for end items into time-phased requirements for subassemblies, components and raw materials. It is used to be certain materials are available when needed. (Russell and Taylor)
Routing files has a triple component – it determines which workers and/or machines are needed for an order, which operations should be completed first, and the length of time each operation will take.
Open order files contain the data on the jobs currently being worked on but are not yet completed.

23. Capacity Requirements Planning
A tool for:
determining capacity that is available and required.
Alleviating bottleneck work centers.
Helping planners make the right decisions on scheduling before problems develop.
Verifies that you have sufficient capacity available to meet the capacity requirements from MRP plans.
Capacity requirements planning is a computerized tool that is used to determine the available and required capacity to help alleviate bottlenecks and to help identify potential problems before they occur.
It is a tool that measures capacity to determine you have sufficient capacity to meet the requirements for the Material Requirements Planning. MRP is the computerized inventory system used for generating purchase orders and work orders of materials, components and assemblies. (Russell & Taylor)

24. What is Capacity? plant department work center
The work that the system is capable of doing in a period of time.
It must be determined at different levels:
plant
department
work center
It is normally stated in standard hours of work.
Capacity is the maximum output or volume a system can produce, the maximum work that a system is capable of doing in a given period of time. This information is needed to determine projects companies can commit themselves to, bid on or accept. By calculating the capacity, the company can determine if they are capable of completing the project within the timeframe required.

25. 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?

26. Capacity Design capacity Effective capacity Actual output
maximum output rate or service capacity an operation, process, or facility is designed for
Effective capacity
Design capacity minus allowances such as personal time, maintenance, and scrap
Actual output
rate of output actually achieved--cannot exceed effective capacity.

27. Efficiency and Utilization
Actual output
Efficiency =
Effective capacity
Utilisation =
Design capacity
Both measures expressed as percentages

28. Example 1: Efficiency/Utilization
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 trucks/day
Actual output = trucks/day
Efficiency = = 90%
Effective capacity trucks/ day
Utilisation = Actual output = trucks/day
= 72% Design capacity trucks/day

29. Capacity Requirement
In production planning, capacity requirement often refers to the utilisation of machine and labour that are required to complete a particular job; normally represented as the number of hours.
Utilisation capacity must be computed against available capacity to determine the percentage of utilisation.
Identifies under-loads and over-loads

30. Example 2
100 product A are required. Each A requires 2 hours of labour and 1.5 hours of machine time.
Capacity requirements:
Labour: 100 units x 2 hr/unit = 200 labour hrs
M/C: units x 1.5 hr/unit = 150 M/C hrs

31. Example 2 (cont’d) If available capacity: Labour: 200 hours
M/C: 200 hours
Then, capacity utilisation:
Labour: Required x 100 = 200 hrs x 100 = 100%
Available hrs
M/C : 150 hrs x 100 = 75%
200 hrs
Therefore, M/C capacity will be underutilised.

32. Utilisation
Underutilisation may mean that unused capacity can be used for other jobs.
Overutilisation indicates that available capacity is insufficient to handle requirements.
To compensate, production may have to be rescheduled or overtime may be needed.

33. Example 3
Week 1 2 3 4
Quantity
200
300
100
150
Standard times: Labour 0.5 hr/unit
M/C 1.0 hr/unit
Available capacity: Labour 200 hrs/week
M/C 250 hrs/week
Determine labour and M/C capacity requirements for each week and then compute labour and M/C utilisation percentage.

34. Example 3 Cont’d Week 1 2 3 4 Quantity 200 300 100 150
Capacity requirements
Labour 50 75
M/C
Capacity utilisation
50%
75%
25%
37.5%
80%
120%
40%
60%
Note that M/C capacity in week 2 is overutilised (i.e. capacity is insufficient) because the utilisation exceeds 100 percent. To compensate, some production could be shifted to weeks 1 and/or 3 where labour and M/C time are available.

35. Product Z resource profile
Example 4
Determine the capacity requirements in all work centers at
Erben Fabricators using the MPS, resource profile, product
structure, and lead time information given below for product Z
and all of its components. (Assume all usages are one and
that a new setup must be made in each period at each work
center.)
Period
Product Z MPS
Product Z resource profile
Part Work center Setup hours Run hours/unit Planned Lead time
Z periods
M period
N period
O periods
P periods

36. Example 4 Cont’d Resource Profile Solution
Requires: MPS, setup and run time information from the product routing file, and lead time information.

37. What is CRP Used For?
To determine the capability of a system or resource to produce a quantity of output in a particular time period. For example:
Should the hospital hire more registered nurses to care for the projected patient load?
Should the hospital build more rooms for patients?
What is the expected finish time for the current projects?
It is important to understand what CRP is; however you also need to understand what it would be used for. A company would use CRP to determine the quantity of output to do strategic planning for a company. The hospital that was considering the registered nurses, might use CRP to determine if they need to hire them to care for the projected patient load. The hospital might also use CRP to determine is the need is large enough to build more rooms for the expected patients.

38. CRP Produces Load Profile
CRP uses the information to produce a load profile for each machine or work center. A load profile:
Compares released orders and planned orders with the capacity of the work center.
Identifies underloads and overloads.
A CRP system inputs the data to produce a load profile. The hospital would input the current and projected data in the system to identify the registered nurse need.

39. Adjustments to Capacity or Load
Increasing Capacity
Add extra shifts
Schedule overtime or weekends
Add equipment and/or personnel
Reducing Load
Subcontract work to outside suppliers
Reduce lot sizes
Hold work in production control
Reduce the MPS
Reducing Capacity
Eliminate shifts or reduce length of shifts worked
Reassign personnel temporarily

40. Continued Increasing Load
Make items normally purchased or subcontracted
Release orders early
Increase lot sizes
Increase the MPS
Redistributing the Load
Use alternate work centers
Use alternate routings
Adjust operation start dates forward or backward in time
Revise the MPS

41. Initial Load Profile Hours of capacity Normal capacity Time (weeks)
Time (weeks)
Normal
capacity
120 –
110 –
100 –
90 –
80 –
70 –
60 –
50 –
40 –
30 –
20 –
10 –
0 –

42. Adjusted Load Profile Hours of capacity Normal capacity Time (weeks)
Time (weeks)
Normal
capacity
120 –
110 –
100 –
90 –
80 –
70 –
60 –
50 –
40 –
30 –
20 –
10 –
0 –
Pull ahead
Push back
Overtime
Work an extra shift

43. Capacity Planning
Best operation is seldom at 100% and varies with industry.
In industries where demand is highly variable, large capacity cushions are common.
Companies with less flexibility and higher costs maintain small cushions – under 10%.
Overbooking is common with some industries such as airlines.
The best operating rate is seldom 100% however it does vary with industries. In companies where the demand is highly variable, the company may choose to have large cushions. By doing so, they will be able to fulfill the demand for the customer and keep the customer satisfied so they are not tempted to turn to a competitor to obtain the product.
Companies with less flexibility and higher costs would probably choose to maintain a smaller cushion to maintain a higher profit margin. If the product has a very short life or would become outdated very quickly, the company would choose to have a small cushion.
Hotels and airlines often will overbook. They take into consideration that a certain percent of their customers are not going to show up and therefore to maximum their profit they choose to overbook.

44. Sizing Capacity Cushion
Cushion: the amount of the reserved capacity that a firm maintains to handle sudden increase in demand or temporary losses of production capacity.
Capacity cushion = 1 - utilisation

45. Sizing Capacity Cushion
Pressures for Large Cushion
Uneven demand
Uncertain demand
Changing product mix
Capacity comes in large increments
Uncertain supply
Pressure for Small Cushion
Capital costs

46. Estimate Capacity Requirements (with cushion)
One type of product:
Number of M/C required =
processing hours required for year’s demand
hours available from one M/C per year, after the desired cushion deducted
where D = number of units (customers) forecast per year
p = processing time (in hours per unit or customer)
N = total number of hours per year during which the process operates
C = desired capacity cushion rate (%)

47. Estimate Capacity Requirements (with cushion)
More than one type of product: n types of products
Number of M/C required =
processing and setup hours required for year’s demand, summed over all products
hours available from one M/C per year, after the desired cushion deducted
Q = number of units in each lot
s = setup time (in hours) per lot
Note: Always round up the fractional part for the number of machines required.

48. Example 5: Capacity Planning Problem
You have been asked to put together a capacity plan for a critical bottleneck operation at the Bigfoot Sandal Company. Your capacity measure is number of machines. Three products (men’s, women’s, and kid’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.

49. Example 5 Cont’d Time Standards Product Processing (hr/pair) Setup
(hr/lot)
Lot Size
(pairs/lot)
Demand Forecast
(pairs/yr)
Men’s sandals
0.05
0.5
240
80,000
Women’s sandals
0.10
2.2
180
60,000
Kid’s sandals
0.02
3.8
360
120,000

50. Example 5 Cont’d How many machines are needed at the bottleneck?
If the operation currently has two machines, what is the capacity gap?
If the operation can not buy any more machines, which products can be made?
If the operation currently has five machines, what is the utilization?

51. Example 5 Cont’d Total time available per machine per year:
(2 shifts/day)(8 hours/shift)(5 days/week)(50 weeks/year)
= 4000 hours/machine/year
With a 5% capacity cushion, the hours/machine/year that are available:
4000(1-0.05) = 3800 hours/machine/year
Total time to produce the yearly demand of each product:
(This is equal to the processing time plus the setup time.)
Men’s =(0.05)(80,000)+(80,000/240)(0.5)= 4167 hrs
Women’s =(0.10)(60,000)+(60,000/180)(2.2)= 6733 hrs
Kid’s =(0.02)(120,000)+(120,000/360)(3.8)= 3667 hrs
Total time for all products = = hrs

52. Example 5 Cont’d Machines needed = (14,567/3800) = 3.83 = 4 machines
Capacity gap is = 2 machines
With two machines, we have (3800)(2) = 7600 hours of machine capacity. We can make all of the women’s sandals (6733 hours) and some of the men’s sandals, for example.
With five machines, (5)(4000) = 20,000 machine-hours/yr are available. The total number of machine-hours/yr needed for production are 14,567.
Utilization = (14,567/20,000)(100%) = 73%. Thus, the capacity cushion is (100% - 73%) = 27%.

53. Steps for Capacity Planning
Estimate future capacity requirements
Evaluate existing capacity
Identify alternatives
Conduct financial analysis
Assess key qualitative issues
Select one alternative
Implement alternative chosen
Monitor results

54. Make or Buy Available capacity Expertise Quality considerations
Nature of demand
Cost
Risk

55. Economies of Scale Economies of scale Diseconomies of scale
If the output rate is less than the optimal level, increasing output rate results in decreasing average unit costs
Diseconomies of scale
If the output rate is more than the optimal level, increasing the output rate results in increasing average unit costs

56. Cost-Volume Relationships
Figure 5.5a
Amount ($)
Q (volume in units)
Total cost = VC + FC
Total variable cost (VC)
Fixed cost (FC)

57. Cost-Volume Relationships
Figure 5.5b
Amount ($)
Q (volume in units)
Total revenue

58. Cost-Volume Relationships
Figure 5.5c
Amount ($)
Q (volume in units)
BEP units
Profit
Total revenue
Total cost

59. Assumptions of Cost-Volume Analysis
One product is involved
Everything produced can be sold
Variable cost per unit is the same regardless of volume
Fixed costs do not change with volume
Revenue per unit constant with volume
Revenue per unit exceeds variable cost per unit

60. Example 6: Make or Buy
Hi-Speed Manufacturing has been purchasing a key component of one of its products from a local supplier. The current purchase price is $1,500 per unit. Efforts to standardize parts have succeeded to the point that this same component can now be used in five different products. Annual component usage should increase from 150 to 750 units. Management wonders whether it is time to make the component in-house, rather than to continue buying it from the supplier. Fixed costs would increase by about $40,000 per year for the new equipment and tooling needed. The cost of raw materials and variable overhead would be about $1,100 per unit, and labor costs would go up by another $300 per unit produced.
Should Hi-Speed make rather than buy?
What is the break-even quantity?
What other considerations might be important?

61. Example 6: Make or Buy Figure 5.5c Amount ($) TC (buy) TC (make)
Q (volume in units)
BEP units
TC (buy)
TC (make)
FC (make)

62. Example 6: Make or Buy Let Q = quantity TC (buy) = TC (make)
Q = 400 units.

63. 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.

64. Capacity Strategies Resource To Increase Capacity To Decrease Capacity
All
Subcontract excess load
Buy rather than make
Retrieve subcon work
Make rather than buy
Material
Reduce material content
Use available material
Rearrange priorities
Revise delivery schedules
Machines
Revise work schedules (long runs/big batches)
Revise maintenance schedules (defer, weekends, etc)
Revise work schedules (short runs/small batches)
Revise maintenance schedules (advance, dayshift working, etc)
Manpower
Increase overtime
Hire
Decrease overtime
Lay off

65. Enterprise Resource Planning (ERP)
Software that organizes and manages a company’s business processes by
sharing information across functional areas
integrating business processes
facilitating customer interaction
providing benefit to global companies

66. ERP Modules

67. Organizational Data Flows
Source: Adapted from Joseph Brady, Ellen Monk, and Bret Wagner, Concepts in Enterprise Resource Planning (Boston: Course Technology, 2001), pp. 7–12

68. Enterprise Software Vendors

69. ERP Implementation Analyze business processes
Choose modules to implement
Which processes have the biggest impact on customer relations?
Which process would benefit the most from integration?
Which processes should be standardized?
Align level of sophistication
Finalize delivery and access
Link with external partners

70. Customer Relationship Management (CRM)
Software that
Plans and executes business processes
Involves customer interaction
Changes focus from managing products to managing customers
Analyzes point-of-sale data for patterns used to predict future behavior

71. Supply Chain Management
Software that plans and executes business processes related to supply chains
Includes
Supply chain planning
Supply chain execution
Supplier relationships
Distinctions between ERP and SCM are becoming increasingly blurred

72. Collaborative Product Commerce (CPC)
Software that
Incorporates new product design and development and product life cycle management
Integrates customers and suppliers in the design process though the entire product life cycle

73. ERP and Software Systems
Customer Relationship Management (CRM)
Enterprise Resource Planning (ERP)
Collaborative Product Commerce (CPC)
Supply Chain Management (SCM)
Time to Market
Time to Customer
Customers
Product Design
Suppliers
Collaborative Design
Manufacture &
Delivery
Collaborative Manufacture
DFMA
Source: Adapted from George Shaw, “Building the Lean Enterprise: Reducing Time to Market.” Industry Week (Webcast, June 14, 2001), pent0614.html