1. Capacity Planning For Products and Services

2. Learning Objectives Explain the importance of capacity planning.
Discuss ways of defining and measuring capacity.
Describe the determinants of effective capacity.
Discuss the major considerations related to developing capacity alternatives.
Briefly describe approaches that are useful for evaluating capacity alternatives

3. Capacity Planning
Capacity is the upper limit or ceiling on the load that an operating unit can handle.
Capacity also includes
Equipment
Space
Employee skills
The basic questions in capacity handling are:
What kind of capacity is needed?
How much is needed?
When is it needed?

4. Importance of Capacity Decisions
Impacts ability to meet future demands
Affects operating costs
Major determinant of initial costs
Involves long-term commitment
Affects competitiveness
Affects ease of management
Globalization adds complexity
Impacts long range planning

5. 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.

6. Efficiency and Utilization
Actual output
Efficiency =
Effective capacity
Utilization =
Design capacity
Both measures expressed as percentages (%)

7. Efficiency/Utilization Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
Actual output = units/day
Efficiency = = 90%
Effective capacity units/ day
Utilization = Actual output = units/day
= 72% Design capacity units/day

8. Determinants of Effective Capacity
Facilities (design, location, layout, environment)
Product and service factors (design, product mix)
Process factors (quantity capacity, quality capacity)
Human factors (job content, job design, training & experience, motivation, compensation, learning rate, absenteeism and turnover)
Policy factors
Operational factors (scheduling, materials management, QA, maintenance, breakdown)
Supply chain factors
External factors (standard, safety regulation, unions, pollution control standard)

9. Strategy Formulation
Capacity strategy for long-term demand patterns involve;
Growth rate and variability of demand
Cost of building and operating facilities of various size
Rate and direction of technology changes
Behavior of competitors
Availability of capital and other inputs

10. Key Decisions of Capacity Planning
Amount of capacity needed
Capacity cushion (100% - Utilization)
Timing of changes
Need to maintain balance of the system
Extent of flexibility of facilities and workforce
Capacity cushion – extra demand intended to offset uncertainty

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

12. Forecasting Capacity Requirements
Long-term vs. short-term capacity needs
Long-term relates to overall level of capacity such as facility size, trends, and cycles
Short-term relates to variations from seasonal, random, and irregular fluctuations in demand

13. Calculating Processing Requirements
Working 8-hour shift, 250 day/year
Annual capacity = 2000 hours
Machine required to handle these job = 5,800 /2,000 = 2.90
Machine required to handle these job = 3 machines

14. 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

15. In-House or Outsourcing (Make or Buy)
Available capacity
Expertise
Quality considerations
Nature of demand
Cost
Risk

16. Developing Capacity Alternatives
Design flexibility into systems
Take stage of life cycle into account
Take a “big picture” approach to capacity changes (to focus bottleneck)
Prepare to deal with capacity “chunks”
Attempt to smooth out capacity requirements
Identify the optimal operating level (economy of scale)

17. Company Strategy/Issues Drive-through restaurants
Product Life Cycle
Introduction Growth Maturity Decline
Company Strategy/Issues
Best period to increase market share
R&D engineering is critical
Practical to change price or quality image
Strengthen niche
Poor time to change image, price, or quality
Competitive costs become critical
Defend market position
Cost control critical
Internet
Flat-screen monitors
Sales
DVD
CD-ROM
Drive-through restaurants
Fax machines
3 1/2” Floppy disks
Color printers

18. Product Life Cycle Introduction Growth Maturity Decline
OM Strategy/Issues
Product design and development critical
Frequent product and process design changes
Short production runs
High production costs
Limited models
Attention to quality
Forecasting critical
Product and process reliability
Competitive product improvements and options
Increase capacity
Shift toward product focus
Enhance distribution
Standardization
Less rapid product changes – more minor changes
Optimum capacity
Increasing stability of process
Long production runs
Product improvement and cost cutting
Little product differentiation
Cost minimization
Overcapacity in the industry
Prune line to eliminate items not returning good margin
Reduce capacity

19. Bottleneck Operation Machine #1 Machine #2 Bottleneck Operation
Bottleneck operation: An operation in a sequence of operations whose capacity is lower than that of the other operations
Bottleneck
Operation
Machine #1
Machine #3
Machine #4
10/hr
30/hr
30/hr
Machine #2

20. Bottleneck Operation Bottleneck Operation 1 20/hr. Operation 2 10/hr.
Maximum output rate limited by bottleneck

21. Production units have an optimal rate of output for minimal cost.
Minimum
cost
Average cost per unit
Rate of output
Minimum average cost per unit

22. 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

23. Economies of Scale Small Medium plant Large plant Output rate
Minimum cost & optimal operating rate are
functions of size of production unit.
Small
plant
Average cost per unit
Medium
plant
Large
plant
Output rate

24. Evaluating Alternatives
Cost-volume analysis
Break-even point
Financial analysis
Cash flow
Present value
Decision theory
Waiting-line analysis

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

26. Cost-Volume Relationships
Total revenue
Amount ($)
Q (volume in units)

27. Cost-Volume Relationships
Profit
Total revenue
Amount ($)
Total cost
BEP units
Q (volume in units)
BEP = Break Even Point

28. Break-Even Problem with Step Fixed Costs
Quantity
FC + VC = TC
Step fixed costs and variable costs.
1 machine
2 machines
3 machines

29. Break-Even Problem with Step Fixed Costs$
BEP 3
BEP 2 TC TC 3 TC 2 TR 1
Quantity
Multiple break-even points

30. 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

31. 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.

32. Decision Theory
Helpful tool for financial comparison of alternatives under conditions of risk or uncertainty
Suited to capacity decisions

33. 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

34. Product and service design
Decision Theory
Decision Theory represents a general approach to decision making which is suitable for a wide range of operations management decisions, including:
Capacity
planning
Product and service design
Location
planning
Equipment
selection

35. Decision Theory Elements
A set of possible future conditions exists that will have a bearing on the results of the decision
A list of alternatives for the manager to choose from
A known payoff for each alternative under each possible future condition

36. Decision Theory Process
Identify possible future conditions called states of nature
Develop a list of possible alternatives, one of which may be to do nothing
Determine the payoff associated with each alternative for every future condition
If possible, determine the likelihood of each possible future condition
Evaluate alternatives according to some decision criterion and select the best alternative

37. Causes of Poor Decisions
Bounded Rationality
The limitations on decision making caused by costs, human abilities, time, technology, and availability of information

38. Causes of Poor Decisions (Cont’d)
Suboptimization
The result of different departments each attempting to reach a solution that is optimum for that department

39. Decision Process Identify the problem
Specify objectives and criteria for a solution
Develop suitable alternatives
Analyze and compare alternatives
Select the best alternative
Implement the solution
Monitor to see that the desired result is achieved

40. Decision Environments
Certainty - Environment in which relevant parameters have known values
Risk - Environment in which certain future events have probable outcomes
Uncertainty - Environment in which it is impossible to assess the likelihood of various future events

41. Decision Making under Uncertainty
Maximin - Choose the alternative with the best of the worst possible payoffs
Maximax - Choose the alternative with the best possible payoff
Laplace - Choose the alternative with the best average payoff of any of the alternatives
Minimax Regret - Choose the alternative that has the least of the worst regrets

42. Decision Making Under Risk
Risk: The probability of occurrence for each state of nature is known
Risk lies between the extremes of uncertainty and certainty
Expected monetary value (EMV) criterion:
The best expected value among alternatives
Determine the expected payoff of each alternative, and choose the alternative with the best expected payoff

43. Decision Trees
Decision tree: a Schematic representation of the available alternatives and their possible consequences.
Useful for analyzing situations that involve sequential decisions

44. Format of a Decision Tree
State of nature 1 B
Payoff 1
State of nature 2
Payoff 2
Payoff 3 2
Choose A’1
Choose A’2
Payoff 6
Payoff 4
Payoff 5
Choose A’3
Choose A’4
Choose A’ 1
Decision Point
Chance Event

45. Example of a Decision Tree
Low demand (0.4) B
40M
High demand (0.6)
55M 2
Do nothing
Expand
70M
10M
50M
Reduce price
Build small
Build large 1
Decision Point
Chance Event
Overtime
50M

46. Expected Value of Perfect Information
Expected value of perfect information: the difference between the expected payoff under certainty and the expected payoff under risk
Expected value of perfect information
Expected payoff under certainty
Expected payoff under risk - =

47. Sensitivity Analysis
Sensitivity Analysis: Determining the range of probability for which an alternative has the best expected payoff
Useful for decision makers to have some indication of how sensitive the choice of an alternative is to changes in one or more of these values

48. Example ตารางแสดง Payoff ของแต่ละทางเลือก State of nature #1 #2
#1 #2
Alternative A B C
จงเขียนภาพแสดง Sensitivity

49. Sensitivity Analysis A B C
A best
C best
B best
#1 Payoff
#2 Payoff 16 14 12 10 8 6 4 2 16 14 12 10 8 6 4 2
Sensitivity analysis: determine the range of probability for which an alternative has the best expected payoff