MD 021 - Management and Operations Capacity Planning and Decision Theory Measures of capacity Bottlenecks Capacity strategies A systematic

atic approach to capacity decisions Make or Buy Pro lem Decision Making !nder !ncertainty and "isk# Decision $rees

Capacity Planning

Capacity is the ma%imum rate of output for a facility& Capacity planning considers 'uestions such as(

)hould *e ha+e one large facility or se+eral small ones, )hould *e e%pand capacity efore the demand is there or *ait until demand is more certain,

Measuring Capacity Measurement $ype Output measure for product focus -nput measure for process focus

!tili.ation / 0fficiency /

Actual Output Design Capacity Actual Output Effective Capacity

0ffecti+e Capacity / Design Capacity 1ma%imum output rate2 3 Allo*ances 1e&g& personal time# maintenance# and scrap2

)i.ing Capacity Cushion

Cushion( the amount of the reser+ed capacity that a firm maintains to handle sudden increase in demand or temporary losses of production capacity Capacity cushion /1 - !tili.ation

Pressures for Large Cushion !ne+en demand !ncertain demand Changing product mi% Capacity comes in large increments !ncertain supply Pressure for Small Cushion Capital costs

Links with Other Areas Other Choice 7aster deli+ery times )maller yield losses 9igher capital intensity 8ess *orker fle%i ility 8o*er in+entories More sta le schedules Cushion 8arger )maller )maller 8arger 8arger )maller

A Systematic Approach to Capacity Decisions

1& 2& 4& 5&

0stimate capacity re'uirements -dentify gaps De+elop alternati+es 0+aluate the alternati+es

Estimate Capacity e!uirements

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1& One type of product

=um ers of machines re'uired / Processing hours re'uired for year<s demand hours a+aila le from one machine per year# after the desired cushion deducted

M =

Dp N 11 C 2

*here D / num er of units 1customers2 forecast per year p / processing time 1in hours per unit or customer2 = / total num er of hours per year during *hich the process operates C / desired capacity cushion rate 1>2

2& More than one type of product( n types of products

=um ers of machines re'uired / Processing and setup hours re'uired for year<s demand# sumed o+er all products hours a+aila le from one machine per year# after the desired cushion deducted

M =

B Dp + 1 D A Q 2 s @ product1 + B Dp + 1 D A Q 2 s @ product 2 + &&& + B Dp + 1 D A Q 2 s @ product n N 11 C 2

C / num er of units in each lot s / setup time 1in hours2 per lot =ote( Al*ays round up the fractional part for the num er of machines re'uired&

Capacity Planning Pro"lem Eou ha+e een asked to put together a capacity plan for a critical ottleneck operation at the )urefoot )andal Company& Eour capacity measure is num er of machines& $hree products 1menFs *omenFs# and kidFs sandals2 are manufactured& $he time standards 1processing and setup2# lot si.es# and demand forecasts are gi+en in the follo*ing ta le& $he firm operates t*o ?-hour shifts# 6 days per *eek# 60 *eeks per year& 0%perience sho*s that a capacity cushion of 6 percent is sufficient&
$ime )tandards Product MenFs sandals GomenFs sandals HidFs sandals Processing )etup 8ot )i.e 1hrApair2 1hrAlot2 1pairsAlot2 0&06 0&6 250 0&10 2&2 1?0 0&02 4&? 4:0 Demand 7orecast 1pairsAyr2 ?0#000 :0#000 120#000

a& 9o* many machines are needed at the ottleneck, & -f the operation currently has t*o machines# *hat is the capacity gap, c& -f the operation can not uy any more machines# *hich products can e made, d& -f the operation currently has fi+e machines# *hat is the utili.ation,

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Capacity Planning Pro"lem Solution $otal time a+aila le per machine per year( 12 shiftsAday21? hoursAshift216 daysA*eek2160 *eeksAyear2 / 5000 hoursAmachineAyear Gith a 6> capacity cushion# the hoursAmachineAyear that are a+aila le are( 500011-0&062 / 4?00 hoursAmachineAyear $otal time to produce the yearly demand of each product( 1$his is e'ual to the processing time plus the setup time&2 MenFs /10&0621?0#0002I1?0#000A250210&62/ 51:; hrs GomenFs /10&1021:0#0002I1:0#000A1?0212&22/ :;44 hrs HidFs /10&0221120#0002I1120#000A4:0214&?2/ 4::; hrs $otal time for all products /51:;I:;44I4::;/ 156:; hrs a& Machines needed / 115#6:;A4?002 / 4&?4 / 5 machines & Capacity gap is 5 - 2 / 2 machines c& Gith t*o machines# *e ha+e 14?002122 / ;:00 hours of machine capacity& Ge can make all of the *omenFs sandals 1:;44 hours2 and some of the menFs sandals# for e%ample& d& Gith fi+e machines# 162150002 / 20#000 machine-hoursAyr are a+aila le& $he total num er of machine-hoursAyr needed for production are 15#6:;& !tili.ation / 115#6:;A20#00021100>2 / ;4>& $hus# the capacity cushion is 1100> - ;4>2 / 2;>&

Jertical -ntegration Pro lem( Make or Buy

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9ahn Manufacturing has een purchasing a key component of one of its products from a local supplier& $he current purchase price is K1#600 per unit& 0fforts to standardi.e parts ha+e succeeded to the point that this same component can no* e used in fi+e different products& Annual component usage should increase from 160 to ;60 units& Management *onders *hether it is time to make the component in-house# rather than to continue uying it from the supplier& 7i%ed costs *ould increase y a out K50#000 per year for the ne* e'uipment and tooling needed& $he cost of ra* materials and +aria le o+erhead *ould e a out K1#100 per unit# and la or costs *ould go up y another K400 per unit produced& a& )hould 9ahn make rather than uy,

& Ghat is the reak-e+en 'uantity,

c& Ghat other considerations might e important,

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Decision Making #nder #ncertainty Decision ules Ma%imin( Choose the alternati+e that is the L est of the *orst&M Ma%ima%( Choose the alternati+e that is the L est of the est&M 8aplace( Choose the alternati+e *ith the est *eighted payoff& Minima% regret( Choose the alternati+e *ith the est L*orst regretM 1i&e&# opportunity losses2&

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Decision Making #nder #ncertainty Profits 0+ent 1 18o* demand2 0+ent 2 19igh demand2 Alternati+e 1 1)mall facility2 K400 K200 Alternati+e 2 18arge facility2 Decision rules( Ma%imin( Ma%ima%( 8aplace( Minima% regret( K60 K500

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Decision Making #nder isk Profits 0+ent 1 18o* demand2 0+ent 2 19igh demand2 Pro a ility / 0&4 Pro a ility / 0&; Alternati+e 1 1)mall facility2 Alternati+e 2 18arge facility2 !se the e%pected +alue decision rule( K400 K60 K200 K500

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