1. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Process Capacity Chapter 6

2. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Implement changes 6 Redesign Process (Capacity change) 5 Redesigning a Process Through Capacity Change Document process 3 Define scope 2 Evaluate performance 4 Figure 6.1 Identify opportunity 1

3. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Utilization Utilization = x 100% Average output rate Maximum capacity

4. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Bottlenecks (a) Operation 2 a bottleneck Inputs To customers 50/hr 123 200/hr200/hr Figure 6.2

5. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. (b) All operations bottlenecks 231 Inputs To customers 200/hr Capacity Bottlenecks Figure 6.2

6. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 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

7. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Economies and Diseconomies of Scale Figure 6.3 250-bed hospital 500-bed hospital 750-bed hospital Economies of scale Diseconomies of scale Output rate (patients per week) Average unit cost (dollars per patient)

8. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Cushions Capacity Cushion = 100% - Utilization Rate (%)

9. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Planned unused capacity Capacity Strategies Time Capacity Figure 6.4 Forecast of capacity required Time between increments Capacity increment (a) Expansionist strategy

10. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Strategies Time Capacity (b) Wait-and-see strategy Forecast of capacity required Planned use of short-term options Figure 6.4 Time between increments Capacity increment

11. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Linking Process Capacity and Other Decisions Competitive PrioritiesCompetitive Priorities QualityQuality Process DesignProcess Design Aggregate PlanningAggregate Planning

12. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Estimating Capacity Requirements M = = 62.5 customers per day 50 50[1.0 –.20)] A process serves 50 customers per day, utilization is about 90%, and demand is expected to double in five years. Management wants to increase the capacity cushion to 20%. In 5 years if demand doubles, M = 2 x 62.5 or 125 customers per day Example 6.1

13. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Estimating Capacity Requirements Capacity requirement = Processing hours required for years demand Hours available from a single capacity unit per year, after deducting desired cushion M =M =M =M =Dp N[1 – (C/100)] D=demand forecast for the year p=processing time N=total number of hours per year during which the process operates C=desired capacity cushion

14. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions

15. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Estimate Capacity Requirements ItemClient XClient Y Annual demand forecast (copies)2000.006000.00 Standard processing time (hour/copy) 0.50 0.70 Average lot size (copies per report) 20.00 30.00 Standard setup time (hours) 0.25 0.40 Example 6.2

16. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Estimate Capacity Requirements ItemClient XClient Y Annual demand forecast (copies)2000.006000.00 Standard processing time (hour/copy) 0.50 0.70 Average lot size (copies per report) 20.00 30.00 Standard setup time (hours) 0.25 0.40 [Dp + (D/Q)s] product 1 +... + [Dp + (D/Q)s] product n N[1 – (C/100)] M =M =M =M = Example 6.2

17. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Estimate Capacity Requirements ItemClient XClient Y Annual demand forecast (copies)2000.006000.00 Standard processing time (hour/copy) 0.50 0.70 Average lot size (copies per report) 20.00 30.00 Standard setup time (hours) 0.25 0.40 [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 =M =M =M = Example 6.2

18. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Estimate Capacity Requirements ItemClient XClient Y Annual demand forecast (copies)2000.006000.00 Standard processing time (hour/copy) 0.50 0.70 Average lot size (copies per report) 20.00 30.00 Standard setup time (hours) 0.25 0.40 M =M =M =M = [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) Example 6.2

19. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Estimate Capacity Requirements ItemClient XClient Y Annual demand forecast (copies)2000.006000.00 Standard processing time (hour/copy) 0.50 0.70 Average lot size (copies per report) 20.00 30.00 Standard setup time (hours) 0.25 0.40 M = = 3.12 4 machines 53051700 Example 6.2

20. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Evaluate Alternatives Expand capacity to meet expected demand through Year 5 YearDemandCash Flow Example 6.3

21. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 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 Example 6.3

22. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 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 2100,000(100,000 – 80,000)2 = $40,000 3110,000(110,000 – 80,000)2 = $60,000 4120,000(120,000 – 80,000)2 = $80,000 5130,000(130,000 – 80,000)2 = $100,000 Example 6.3

23. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Simulation Figure 6.5

24. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Simulation Figure 6.6(a)

25. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Simulation Figure 6.6(b)

26. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Dont expand Expand 2 Low demand High demand 1 Small expansion Large expansion Figure 6.7

27. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Dont expand Expand 1 2 Low demand [0.40] High demand [0.60] Small expansion Large expansion Figure 6.7 $70$220 $40 $135 $90

28. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] Dont expand Expand $135 $90 1 2 Small expansion Large expansion Figure 6.7

29. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Dont expand Expand $135 $90 1 2 Small expansion Large expansion Figure 6.7

30. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Dont expand Expand $135 $90 1 2 Small expansion Large expansion Figure 6.7

31. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Dont expand Expand $135 $90 1 2 Small expansion Large expansion Expected Payoff = Event * Event Probability Figure 6.7

32. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Dont expand Expand $135 $90 1 2 Small expansion Large expansion Expected Payoff = Event * Event Probability Small/Low = $70 (0.40) Figure 6.7

33. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Dont expand Expand $135 $90 1 2 Small expansion Large expansion Expected Payoff = Event * Event Probability Small/Low = $70 (0.40) = $28 Figure 6.7

34. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Dont expand Expand $135 $90 1 2 Small expansion Large expansion Expected Payoff = Event * Event Probability Small/Low = $70 (0.40) = $28 Small/High = $135 (0.60) Figure 6.7

35. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Dont expand Expand $135 $90 1 2 Small expansion Large expansion Expected Payoff = Event * Event Probability Small/Low = $70 (0.40) = $28 Small/High = $135 (0.60) = $81 Figure 6.7

36. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Dont expand Expand $135 $90 1 2 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 Figure 6.7

37. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Dont expand Expand $135 $90 1 2 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 Figure 6.7

38. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Dont expand Expand $135 $90 1 2 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 Figure 6.7

39. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Dont expand Expand $135 $90 1 2 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 Figure 6.7

40. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 High demand [0.60] $135 Dont expand Expand $135 $90 1 2 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 Figure 6.7

41. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 $148 $109 High demand [0.60] $135 Dont expand Expand $135 $90 1 2 Small expansion Large expansion Figure 6.7

42. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Decision Trees Low demand [0.40] $70 $220 $40 $148 $109 High demand [0.60] $135 Dont expand Expand $135 $90 1 2 Small expansion Large expansion Figure 6.7

43. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 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 Dont expand Expand $135 $90 1 2 Small expansion Large expansion Figure 6.7

44. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 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 Dont expand Expand $135 $90 1 2 Small expansion Large expansion Figure 6.7

45. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Solved Problem 1 Figure 6.8(a)

46. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Solved Problem 1 Figure 6.8(b)

47. To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Capacity Decisions Solved Problem 2 TABLE 6.1 CASH FLOWS FOR TWO-STAGE EXPANSION OF GRANDMOTHERS CHICKEN RESTAURANT ProjectedProjectedCalculation of Incremental Cash DemandCapacityFlow Compared to Base CaseCash Inflow Year(meals/yr)(meals/yr)(80,000 meals/yr)(outflow) 080,00080,000Increase kitchen capacity to 105,000 meals =($80,000) 190,000105,00090,000 – 80,000 = (10,000 meals)($2/meal) =$20,000 2100,000105,000100,000 – 80,000 = (20,000 meals)($2/meal) =$40,000 3110,000105,000105,000 – 80,000 = (25,000 meals)($2/meal) =$50,000 Increase total capacity to 130,000 =($170,000) ($120,000) 4120,000130,000120,000 – 80,000 = (40,000 meals)($2/meal) =$80,000 5130,000130,000130,000 – 80,000 = (50,000 meals)($2/meal) =$100,000