Chapter 5: Chapter 5 Capacity Planning
Capacity Planning: 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?
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 Importance of Capacity Decisions
Various Capacities: Various Capacities Design capacity
Maximum obtainable output
Effective capacity, expected variations
Maximum capacity subject to planned and expected variations such as maintenance, coffee breaks, scheduling conflicts.
Actual output, unexpected variations and demand
Rate of output actually achieved--cannot exceed effective capacity. It is subject to random disruptions: machine break down, absenteeism, material shortages and most importantly the demand.
Efficiency and Utilization: Efficiency and Utilization This definition of efficiency is not used very much.
Utilization is more important.
Efficiency/Utilization Examplefor a Trucking Company: Design capacity = 50 trucks/day available
Effective capacity = 40 trucks/day, because 20% of truck capacity goes through planned maintenance
Actual output = 36 trucks/day, 3 trucks delayed at maintenance, 1 had a flat tire
Efficiency/Utilization Example for a Trucking Company
Determinants of Effective Capacity/Output: Determinants of Effective Capacity/Output Facilities, layout
Products or services, product mixes/setups
Processes, quality
Human considerations, motivation
Operations, scheduling and synchronization problems
Supply Chain factors, material shortages
External forces, regulations
Caution: While discussing these the book considers effective capacity almost synonymous to output.
Some Possible Growth/Decline Patterns: Some Possible Growth/Decline Patterns Figure 5-1
Developing Capacity Alternatives : Developing Capacity Alternatives Design flexibility into systems,
modular expansion
Take a “big picture” approach to capacity changes,
hotel rooms, car parks, restaurant seats
Differentiate new and mature products,
pay attention to the life cycle, demand variability vs. discontinuation
Prepare to deal with capacity “chunks”,
no machine comes in continuous capacities
Attempt to smooth out capacity requirements,
complementary products, subcontracting
Identify the optimal operating level,
facility size
Outsourcing: Make or Buy: Outsourcing: Make or Buy Outsourcing: Obtaining a good or service from an external provider
Decide on outsourcing by considering
Available capacity
Expertise
Quality considerations
The nature of demand: Stability
Cost
Risk: Loss of control over operations with outsourcing; loss of know-how. Loss of revenue.
Evaluating Alternatives: Facility Size: Evaluating Alternatives: Facility Size Production units have an optimal rate of output for minimal cost.
Evaluating Alternatives: Facility Size: Evaluating Alternatives: Facility Size Minimum cost & optimal operating rate are
functions of size of production unit.
Planning Service Capacity: Need to be near customers
Capacity and location are closely tied
Inability to store services
Capacity must me matched with timing of demand
Degree of volatility of demand
Peak demand periods Planning Service Capacity
Example: Calculating Processing Requirements: Example: Calculating Processing Requirements
Cost-Volume Relationships : Cost-Volume Relationships
Cost-Volume Relationships: Cost-Volume Relationships
Cost-Volume Relationships: Break-even analysis: Cost-Volume Relationships: Break-even analysis
Break-Even Problem with Multiple Fixed Costs: Break-Even Problem with Multiple Fixed Costs Quantity FC + VC = TC FC + VC = TC FC + VC = TC Fixed costs and variable costs.
Thick lines are fixed costs. 1 machine 2 machines 3 machines
Break-Even Problem with Step Fixed Costs: Break-Even Problem with Step Fixed Costs Break even points. TR No break
even points
in this range
Cost-Volume(Break-even) Analysis: Break-even quantity: Level of production that equates total costs to total revenues
Assumptions:
One product is involved
Everything produced can be sold
Variable cost per unit is the same with volume
Fixed costs do not change with volume
Revenue per unit constant with volume
Revenue per unit exceeds variable cost per unit Cost-Volume(Break-even) Analysis
Summary: Summary Capacity types
Efficiency, utilization
Break-even analysis
Decision Theory: Decision Theory Decision Theory represents a general approach to decision making which is suitable for a wide range of operations management decisions, including:
Decision Theory Elements: Decision Theory Elements A set of possible future conditions (call them scenarios) exists that will have a bearing on the results of the decision
Uncertain scenarios
A list of alternatives for the manager to choose from
A known payoff for each alternative under each possible future condition
Payoff TableInput or implied by the problem set up: Payoff Table Input or implied by the problem set up Alternatives Low Moderate High Small facility $10 $10 $10 Medium facility $7 $12 $12 Large facility $-4 $2 $16 Possible future demand Present value in $ millions.
This payoff table is given as an input.
Decision Making under Uncertainty: Decision Making under Uncertainty When maximizing an objective:
MaxiMin - Choose the alternative which has the maximum of minimum possible payoffs for each alternative. Conservative strategy because tries to make the best of the worst possible outcome (for each decision). Which facility?
MaxiMax - Choose the alternative with the largest possible payoff. Radical strategy. Which facility?
Average(Laplace) - Choose the alternative with the best average payoff of any of the alternatives. Which facility?
Decision Making under Uncertainty: Decision Making under Uncertainty When minimizing an objective: Say cost.
MiniMax - Choose the alternative which has the minimum of the maximum possible costs for each alternative. Conservative strategy.
MiniMin - Choose the alternative with the least possible cost. Radical strategy.
Average(Laplace) - Choose the alternative with the minimum average cost of any of the alternatives.
Average cost may not be a good indicator. Some alternatives may have more risk than others. In that case, it is ok to choose a slightly costly alternative with low risk.
Example: Hyatt at the Airport “some time ago”Construct the payoff matrix: Example: Hyatt at the Airport “some time ago” Construct the payoff matrix
Payoff Matrix for MaxiMax, MaxiMin: Payoff Matrix for MaxiMax, MaxiMin
Regret: What I have done against what I could have done. MiniMax Regret. : Regret: What I have done against what I could have done. MiniMax Regret.
Summary: Summary Capacity types
Efficiency, utilization
Break-even analysis
Decision Theory (decision making under uncertainty)