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Strategic Capacity Planning Defined
Capacity: the ability to hold, receive, store, or produce. Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size. 3
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The Experience Curve Cost or price per unit
As plants produce more products, they gain experience in the best production methods and reduce their costs per unit. Cost or price per unit Total accumulated production of units 9
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Capacity Focus The concept of the focused factory holds that production facilities work best when they focus on a fairly limited set of production objectives. Plants Within Plants (PWP) (from Skinner) Extend focus concept to operating level 10
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Example of a Decision Tree Problem
A glass factory specializing in crystal is experiencing a substantial backlog, and the firm's management is considering three courses of action: A) Arrange for subcontracting, B) Construct new facilities. C) Do nothing (no change) The correct choice depends largely upon demand, which may be low, medium, or high. By consensus, management estimates the respective demand probabilities as .10, .50, and .40. 20
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Example of a Decision Tree Problem: The Payoff Table
The management also estimates the profits when choosing from the three alternatives (A, B, and C) under the differing probable levels of demand. These costs, in thousands of dollars are presented in the table below:
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Example of a Decision Tree Problem: Step 1
Example of a Decision Tree Problem: Step 1. We start by drawing the three decisions Subcontract Build New No Change 22
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Example of Decision Tree Problem: Step 2
Example of Decision Tree Problem: Step 2. Add our possible states of nature, probabilities, and payoffs Subcontract Build New No Change High demand (.4) Medium demand (.5) Low demand (.1) $90k $50k $10k $200k $25k -$120k $60k $40k $20k 23
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Example of Decision Tree Problem: Step 3
Example of Decision Tree Problem: Step 3. Determine the expected value of each decision High demand (.4) Medium demand (.5) Low demand (.1) Subcontract $90k $50k $10k EVA=.4(90)+.5(50)+.1(10)=$62k $62k 24
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Example of Decision Tree Problem: Step 4. Make decision
High demand (.4) Medium demand (.5) Low demand (.1) A B C $90k $50k $10k $200k $25k -$120k $60k $40k $20k $62k $80.5k $46k Alternative B generates the greatest expected profit, so our choice is B or to construct a new facility. 25
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Capacity Utilization & Service Quality
Best operating point is near 70% of capacity - balances efficiency and reserve From 70% to 100% of service capacity, what do you think happens to service quality? - customers are serviced, but service quality often declines 27
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Components of Demand Average demand for a period of time Trend
Seasonal element Cyclical elements Random variation Autocorrelation
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Delphi Method l. Choose the experts to participate. There should be a variety of knowledgeable people in different areas. 2. Through a questionnaire (or ), obtain forecasts (and any premises or qualifications for the forecasts) from all participants. 3. Summarize the results and redistribute them to the participants along with appropriate new questions. 4. Summarize again, refining forecasts and conditions, and again develop new questions. 5. Repeat Step 4 if necessary. Distribute the final results to all participants.
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Which Forecast Would You Prefer?
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Which Forecast Would You Prefer?
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In Class Example 3 Period Moving Average
July 110 August 115 September 105 October November 125 December January ( )/3 = 110 ( )/3 =110 ( )/3 = ( )/3 = 115
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In Class Example Exponential Smoothing, = .4 Ft = At-1 + (1- )Ft-1
July 110 August 115 September 105 October November 125 December January 110 .4(110) + (1-.4)110 = 110 .4(115) + (1-.4)110 = 112 .4(105) + (1-.4)112 = 109.2 .4(110) + (1-.4)109.2 = .4(125) + (1-.4) = .4(110) + (1-.4) =
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In Class 2 a = .4 At Ft Forecast Error RSFE Absolute Deviation MAD TS July 110 110.0 August 115 September 105 112.0 October 109.2 November 125 109.5 December 115.7 January 113.4
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a = .4 At Ft Forecast Error July 110 110.0 August 115 = 5.0 September 105 112.0 105 – 112 = -7.0 October 109.2 = 0.8 November 125 109.5 125 – = 15.5 December 115.7 = -5.7 January 113.4
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a = .4 At Ft Forecast Error RSFE July 110 110.0 August 115 5.0 September 105 112.0 -7.0 5 – 7 = -2.0 October 109.2 0.8 -2+.8 = -1.2 November 125 109.5 15.5 = 14.3 December 115.7 -5.7 14.3 – 5.7 = 8.6 January 113.4
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a = .4 At Ft Forecast Error RSFE Absolute Deviation July 110 110.0 August 115 5.0 September 105 112.0 -7.0 -2.0 7.0 October 109.2 0.8 -1.2 November 125 109.5 15.5 14.3 December 115.7 -5.7 8.6 5.7 January 113.4
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a = .4 At Ft Forecast Error RSFE Absolute Deviation MAD July 110 110.0 August 115 5.0 5/1 = 5.0 September 105 112.0 -7.0 -2.0 7.0 (5+ 7)/2 = 6.0 October 109.2 0.8 -1.2 (5+7+.8)/3 = 4.3 November 125 109.5 15.5 14.3 ( )/4 = 7.1 December 115.7 -5.7 8.6 5.7 ( )/5 = 6.8 January 113.4
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a = .4 At Ft Forecast Error RSFE Absolute Deviation MAD TS July 110 110.0 August 115 5.0 5/5 = 1.00 September 105 112.0 -7.0 -2.0 7.0 6.0 -2/6 = -0.33 October 109.2 0.8 -1.2 4.3 -1.2/4.3 = -0.28 November 125 109.5 15.5 14.3 7.1 14.3/7.1 = 2.02 December 115.7 -5.7 8.6 5.7 6.8 8.6/6.8 = 1.26 January 113.4
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Strategic Capacity Planning
Process Planning Long- range Strategic Capacity Planning Forecasting and Demand Mgmt. Sales and Operations (Aggregate) Planning Intermediate- range Sales Plan Aggregate Operations Plan Manufacturing Services Master Production Scheduling Material Requirements Planning Weekly Workforce & Customer Scheduling Order Scheduling Short- range Daily Workforce & Customer Scheduling 4 4
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Aggregate Planning Goal: Specify the optimal combination of
production rate (units completed per unit of time) workforce level (number of workers) inventory on hand (inventory carried from previous period) Product group or broad category - family (Aggregation) Intermediate-range planning period: 6-18 months 6 6
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Key Strategies for Meeting Demand
Chase - Match production to customer order rate by hiring and laying off employees Level - Stable workforce with constant output, inventory and backlogs absorb fluctuations in demand Some combination of the two - Stable workforce, variable hours - vary output through overtime or flexible schedules 10 10
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