6-capacity planning afia
DESCRIPTION
industrial organizationTRANSCRIPT
S7 - 1© 2014 Pearson Education, Inc.
Capacity and Constraint
Management
PowerPoint presentation to accompany Heizer and Render Operations Management, Eleventh EditionPrinciples of Operations Management, Ninth Edition
PowerPoint slides by Jeff Heyl
7
© 2014 Pearson Education, Inc.
SU
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Outline
► Capacity► Bottleneck Analysis and the Theory
of Constraints► Break-Even Analysis► Reducing Risk with Incremental
Changes
S7 - 3© 2014 Pearson Education, Inc.
Outline - Continued
► Applying Expected Monetary Value (EMV) to Capacity Decisions
S7 - 4© 2014 Pearson Education, Inc.
Learning Objectives
When you complete this supplement you should be able to :
1. Define capacity
2. Determine design capacity, effective capacity, and utilization
3. Perform bottleneck analysis
4. Compute break-even
S7 - 5© 2014 Pearson Education, Inc.
Learning Objectives
When you complete this supplement you should be able to :
5. Determine the expected monetary value of a capacity decision
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Capacity► The throughput, or the number of units
a facility can hold, receive, store, or produce in a period of time
► Determines fixed costs
► Determines if demand will be satisfied
► Three time horizons
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Planning Over a Time HorizonFigure S7.1
Modify capacity Use capacity
Intermediate-range planning (aggregate planning)
Subcontract Add personnelAdd equipment Build or use inventory Add shifts
Short-range planning (scheduling)
Schedule jobsSchedule personnel Allocate machinery*
Long-range planning
Add facilitiesAdd long lead time equipment *
* Difficult to adjust capacity as limited options exist
Options for Adjusting CapacityTime Horizon
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Design and Effective Capacity
► Design capacity (Nominal Capacity) is the maximum theoretical output of a system
► Normally expressed as a rate
► Effective capacity(Available/Normal Capacity) is the capacity a firm expects to achieve given current operating constraints
► Often lower than design capacity
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To measure capacity If the input is:
Motor, Crank, Body, Tyres and Corona
The Output : Car
It is easier to deal with a car
If the input is Flour
The output is: Cake, Bread, Batee and Biscuits
It is easier to deal with units in: Flour
If we have many units in and many units out it is easier then to deal with machining hours
Reid & Sanders, Operations Management© Wiley 2002
Page 10
Measuring Capacity
Type of BusinessInput Measures of
CapacityOutput Measures
of Capacity
Car manufacturer Labor hours Cars per shift
Hospital Available beds Patients per month
Pizza parlor Labor hours Pizzas per day
Retail storeFloor space in square feet
Revenue per foot
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Utilization and Efficiency
Utilization is the percent of design capacity actually achieved
Efficiency is the percent of effective capacity actually achieved
Utilization = Actual output/Design(Nominal/Theoretical) capacity
Efficiency = Actual output/Effective(Available) capacity
2-12 Competitiveness, Strategy, and Productivity
EFFECTIVENESSIt is the degree of accomplishment of the objectives that is: How well a set of result is accomplished?
How well are the resources utilized? Effectiveness is obtaining the desired results. It may reflect output
quantities, perceived quality or both. Effectiveness can also be defined as doing the right things.
EFFICIENCYThis occurs when a certain output is obtained with a minimum of inputs. The desired output can be
increased by minimizing the down times as much as possible (down times are coffee breaks, machine
failures, waiting time, etc). But as we decrease down times the frequency of occurrence of defective
products will increase due to fatigue. The production system might efficiently produce defective
(ineffective) products. Efficiency can be defined as doing things right. Operational efficiency refers to a ratio of outputs to inputs (like land, capital, labor, etc.)
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Bakery Example
Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3shifts, 8 hour/shift
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls
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Bakery Example
Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3shifts, 8 hour/shift
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls
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Bakery Example
Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3shifts, 8 hour/shift
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls
Utilization = 148,000/201,600 = 73.4%
S7 - 16© 2014 Pearson Education, Inc.
Bakery Example
Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3shifts, 8 hour/shift
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls
Utilization = 148,000/201,600 = 73.4%
Efficiency = 148,000/175,000 = 84.6%
S7 - 17© 2014 Pearson Education, Inc.
Bakery Example
Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3shifts, 8 hour/shift
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls
Utilization = 148,000/201,600 = 73.4%
Efficiency = 148,000/175,000 = 84.6%
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Bakery Example
Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3shifts, 8 hour/shiftEfficiency = 84.6%Efficiency of new line = 75%
Expected Output = (Effective Capacity)(Efficiency)
= (175,000)(.75) = 131,250 rolls
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Bakery Example
Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shiftsEfficiency = 84.6%Efficiency of new line = 75%
Expected Output = (Effective Capacity)(Efficiency)
= (175,000)(.75) = 131,250 rolls
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Capacity and Strategy
► Capacity decisions impact all 10 decisions of operations management as well as other functional areas of the organization
► Capacity decisions must be integrated into the organization’s mission and strategy
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Capacity Considerations
1. Forecast demand accurately
2. Match technology increments and sales volume
3. Find the optimum operating size(volume)
4. Build for change
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Economies and Diseconomies of Scale
Economies of scale
Diseconomies of scale
1,300 sq ft store 2,600 sq ft
store
8,000 sq ft store
Number of square feet in store1,300 2,600 8,000
Ave
rage
uni
t co
st(s
ales
per
squ
are
foot
)
Figure S7.2
© 2014 Pearson Education, Inc.
Reid & Sanders, Operations Management© Wiley 2002
Page 23
Best Operating Level
Reid & Sanders, Operations Management© Wiley 2002
Page 24
How Much Capacity?
• Economies of Scale:– Where the cost per unit of output drops as volume
of output increases– Spread the fixed costs of buildings & equipment
over multiple units, allow bulk purchasing & handling of material
• Diseconomies of Scale:– Where the cost per unit rises as volume increases– Often caused by congestion (overwhelming the
process with too much work-in-process)
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Managing Demand► Demand exceeds capacity
► Curtail demand by raising prices, scheduling longer lead time
► Long term solution is to increase capacity
► Capacity exceeds demand► Stimulate market► Product changes
► Adjusting to seasonal demands► Produce products with complementary
demand patterns
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Complementary Demand Patterns
4,000 –
3,000 –
2,000 –
1,000 –
J F M A M J J A S O N D J F M A M J J A S O N D J
Sal
es in
uni
ts
Time (months)
Combining the two demand patterns reduces the variation
Snowmobile motor sales
Jet ski engine sales
Figure S7.3
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Tactics for Matching Capacity to Demand
1. Making staffing changes
2. Adjusting equipment► Purchasing additional machinery► Selling or leasing out existing equipment
3. Improving processes to increase throughput
4. Redesigning products to facilitate more throughput
5. Adding process flexibility to meet changing product preferences
6. Closing facilities
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Service-Sector Demand and Capacity Management
► Demand management► Appointment, reservations, FCFS rule
► Capacity management
► Full time, temporary, part-time staff
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Bottleneck Analysis and the Theory of Constraints
► Each work area can have its own unique capacity
► Capacity analysis determines the throughput capacity of workstations in a system
► A bottleneck is a limiting factor or constraint► A bottleneck has the lowest effective capacity
in a system
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Bottleneck Analysis and the Theory of Constraints
► The bottleneck time is the time of the slowest workstation (the one that takes the longest) in a production system
► The throughput time is the time it takes a unit to go through production from start to end
2 min/unit 4 min/unit 3 min/unit
A B C
Figure S7.4
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Capacity Analysis► Two identical sandwich lines► Lines have two workers and three operations ► All completed sandwiches are wrapped
Wrap/Deliver
37.5 sec/sandwich
Order
30 sec/sandwich
Bread Fill
15 sec/sandwich 20 sec/sandwich
20 sec/sandwichBread Fill
Toaster15 sec/sandwich 20 sec/sandwich
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Capacity Analysis
Wrap/Deliver
37.5 sec
Order
30 sec
Bread Fill
15 sec 20 sec
20 secBread Fill
Toaster15 sec 20 sec
► The two lines each deliver a sandwich every 20 seconds
► At 37.5 seconds, wrapping and delivery has the longest processing time and is the bottleneck
► Capacity per hour is 3,600 seconds/37.5 seconds/sandwich = 96 sandwiches per hour
► Throughput time is 30 + 15 + 20 + 20 + 37.5 = 122.5 seconds
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Capacity Analysis► Standard process for cleaning teeth► Cleaning and examining X-rays can happen
simultaneously
Checkout
6 min/unit
Check in
2 min/unit
DevelopsX-ray
4 min/unit 8 min/unit
DentistTakesX-ray
2 min/unit
5 min/unit
X-rayexam
Cleaning
24 min/unit
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Capacity Analysis
► All possible paths must be compared► Bottleneck is the hygienist at 24 minutes► Hourly capacity is 60/24 = 2.5 patients► X-ray exam path is 2 + 2 + 4 + 5 + 8 + 6 = 27
minutes► Cleaning path is 2 + 2 + 4 + 24 + 8 + 6 = 46
minutes► Longest path involves the hygienist cleaning
the teeth, patient should complete in 46 minutes
Checkout
6 min/unit
Check in
2 min/unit
DevelopsX-ray
4 min/unit 8 min/unit
DentistTakesX-ray
2 min/unit
5 min/unit
X-rayexam
Cleaning
24 min/unit
S7 - 35© 2014 Pearson Education, Inc.
Theory of Constraints► Five-step process for recognizing and
managing limitations
Step 1: Identify the constraints
Step 2: Develop a plan for overcoming the constraints
Step 3: Focus resources on accomplishing Step 2
Step 4: Reduce the effects of constraints by offloading work or expanding capability
Step 5: Once overcome, go back to Step 1 and find new constraints
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Bottleneck Management
1. Release work orders to the system at the pace of set by the bottleneck
► Drum, Buffer, Rope
2. Lost time at the bottleneck represents lost time for the whole system
3. Increasing the capacity of a non-bottleneck station is a mirage
4. Increasing the capacity of a bottleneck increases the capacity of the whole system
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Break-Even Analysis
► Technique for evaluating process and equipment alternatives
► Objective is to find the point in dollars and units at which cost equals revenue
► Requires estimation of fixed costs, variable costs, and revenue
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Break-Even Analysis► Fixed costs are costs that continue even
if no units are produced► Depreciation, taxes, debt, mortgage
payments
► Variable costs are costs that vary with the volume of units produced
► Labor, materials, portion of utilities► Contribution is the difference between
selling price and variable cost
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Break-Even Analysis
► Revenue function begins at the origin and proceeds upward to the right, increasing by the selling price of each unit
► Where the revenue function crosses the total cost line is the break-even point
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Profit corrid
or
Loss
corrid
or
Break-Even AnalysisTotal revenue line
Total cost line
Variable cost
Fixed cost
Break-even pointTotal cost = Total revenue
–
900 –
800 –
700 –
600 –
500 –
400 –
300 –
200 –
100 –
–| | | | | | | | | | | |
0 100 200 300 400 500 600 700 800 900 10001100
Cos
t in
dolla
rs
Volume (units per period)Figure S7.5
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Break-Even Analysis
► Costs and revenue are linear functions
► Generally not the case in the real world
► We actually know these costs► Very difficult to verify
► Time value of money is often ignored
Assumptions
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Break-Even AnalysisBEPx =break-even point in units
BEP$ =break-even point in dollarsP =price per unit (after all discounts)
x = number of units producedTR = total revenue = PxF = fixed costsV = variable cost per unitTC = total costs = F + VxTR = TC
orPx = F + Vx
Break-even point occurs when
BEPx =F
P – V
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Break-Even AnalysisBEPx =break-even point in units
BEP$ =break-even point in dollarsP =price per unit (after all discounts)
x = number of units producedTR = total revenue = PxF = fixed costsV = variable cost per unitTC = total costs = F + Vx
BEP$ = BEPx P = P
=
=
F(P – V)/P
FP – V
F1 – V/P
Profit = TR - TC= Px – (F + Vx)= Px – F – Vx= (P - V)x – F
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Break-Even Example
Fixed costs = $10,000 Material = $.75/unitDirect labor = $1.50/unit Selling price = $4.00 per unit
BEP$ = =F
1 – (V/P)
$10,000
1 – [(1.50 + .75)/(4.00)]
= = $22,857.14$10,000
.4375
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Break-Even Example
Fixed costs = $10,000 Material = $.75/unitDirect labor = $1.50/unit Selling price = $4.00 per unit
BEP$ = =F
1 – (V/P)
$10,000
1 – [(1.50 + .75)/(4.00)]
= = $22,857.14$10,000
.4375
BEPx = = = 5,714F
P – V
$10,000
4.00 – (1.50 + .75)
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Break-Even Example
50,000 –
40,000 –
30,000 –
20,000 –
10,000 –
–| | | | | |
0 2,000 4,000 6,000 8,000 10,000
Dol
lars
Units
Fixed costs
Total costs
Revenue
Break-even point
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Break-Even Example
Multiproduct Case
where V = variable cost per unitP = price per unitF = fixed costs
W = percent each product is of total dollar sales expressed as a decimal
i = each product
ii
i WPV
F
1
Break-even point in dollars (BEP$)
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Multiproduct ExampleFixed costs = $3,000 per month
ITEM PRICE COST ANNUAL FORECASTED SALES UNITS
Sandwich $5.00 $3.00 9,000
Drink 1.50 .50 9,000
Baked potato 2.00 1.00 7,000
1 2 3 4 5 6 7 8
ITEM (i)SELLING PRICE (P)
VARIABLE COST (V) (V/P) 1 - (V/P)
ANNUAL FORECASTED
SALES $% OF
SALES
WEIGHTED CONTRIBUTION (COL 5 X COL 7)
Sandwich $5.00 $3.00 .60 .40 $45,000 .621 .248
Drinks 1.50 0.50 .33 .67 13,500 .186 .125
Baked potato 2.00 1.00 .50 .50 14,000 .193 .097
$72,500 1.000 .470
S7 - 49© 2014 Pearson Education, Inc.
Multiproduct ExampleFixed costs = $3,000 per month
ITEM PRICE COST ANNUAL FORECASTED SALES UNITS
Sandwich $5.00 $3.00 9,000
Drink 1.50 .50 9,000
Baked potato 2.00 1.00 7,000
1 2 3 4 5 6 7 8
ITEM (i)SELLING PRICE (P)
VARIABLE COST (V) (V/P) 1 - (V/P)
ANNUAL FORECASTED
SALES $% OF
SALES
WEIGHTED CONTRIBUTION (COL 5 X COL 7)
Sandwich $5.00 $3.00 .60 .40 $45,000 .621 .248
Drinks 1.50 0.50 .33 .67 13,500 .186 .125
Baked potato 2.00 1.00 .50 .50 14,000 .193 .097
$72,500 1.000 .470
= = $76,596$3,000 x 12
.47
Daily sales = = $245.50
$76,596
312 days
.621 x $245.50
$5.00= 30.5 31Sandwiches
each day
ii
i WP
V
FBEP
1$
S7 - 50© 2014 Pearson Education, Inc.
Reducing Risk with Incremental Changes
(a) Leading demand with incremental expansion
Dem
and Expected
demand
New capacity
(d) Attempts to have an average capacity with incremental expansion
Dem
and
New capacity Expected
demand
(c) Lagging demand with incremental expansion
Dem
and
New capacity
Expected demand
Figure S7.6
(b) Leading demand with a one-step expansion
Dem
and Expected
demand
New capacity
S7 - 51© 2014 Pearson Education, Inc.
Reducing Risk with Incremental Changes
(a) Leading demand with incremental expansion
Expected demand
Figure S7.6
New capacity
Dem
and
Time (years)1 2 3
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Reducing Risk with Incremental Changes
(b) Leading demand with a one-step expansion
Expected demand
Figure S7.6
New capacity
Dem
and
Time (years)1 2 3
S7 - 53© 2014 Pearson Education, Inc.
Reducing Risk with Incremental Changes
(c) Lagging demand with incremental expansion
Expected demand
Dem
and
Time (years)1 2 3
New capacity
Figure S7.6
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Reducing Risk with Incremental Changes(d) Attempts to have an average capacity with
incremental expansion
Expected demand
New capacity
Dem
and
Time (years)1 2 3
Figure S7.6
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Applying Expected Monetary Value (EMV) and Capacity
Decisions► Determine states of nature
► Future demand► Market favorability
► Assign probability values to states of nature to determine expected value
Reid & Sanders, Operations Management© Wiley 2002
Page 56
Other Issues
• Focused factories:– Small, specialized facilities with limited objectives
• Plant within a plant (PWP):– Segmenting larger operations into smaller
operating units with focused objectives• Subcontractor networks:
– Outsource non-core items to free up capacity for what you do well
• Capacity cushions:– Plan to underutilize capacity to provide flexibility
Reid & Sanders, Operations Management© Wiley 2002
Page 57
Evaluating Alternatives
• Decision trees:– A modeling tool for evaluating sequential
decisions– Identify the alternatives at each point in
time (decision points), estimate probable consequences of each decision (chance events) & the ultimate outcomes (e.g.: profit or loss)
Reid & Sanders, Operations Management© Wiley 2002
Page 58
Decision Trees
• Build from the present to the future:– Distinguish between decisions (under your
control) & chance events (out of your control, but can be estimated to a given probability)
• Solve from the future to the present:– Generate an expected value for each
decision point based on probable outcomes of subsequent events
Reid & Sanders, Operations Management© Wiley 2002
Decision Trees
Southern’s major alternatives are to do nothing, build a small plant, build a medium plant. The new facility would produce a new type of gown, and currently the potential or marketability for this product is unknown.
If a large plant is built and a favorable market exists, a profit of $100,000 could be realized. An unfavorable market would yield a $90,000 loss.
However, a medium plant would earn a $60,000 profit with a favorable market. A $10,000 loss would result from an unfavorable market.
A small plant, on the other hand, would return $40,000 with favorable market conditions and lose only $5000 in an unfavorable market.
Of course, there is always the option of doing nothing.
Recent market research indicates that there is a 0.4 probability of a favorable market, which means that there is also a 0.6 probability of an unfavorable market.
With this information, the alternative that will result in the highest expected monetary value EMV can be selected.
Page 59
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EMV Applied to Capacity Decision
▶Southern Hospital Supplies capacity expansion
EMV (large plant) = (.4)($100,000) + (.6)(–$90,000)= –$14,000
EMV (medium plant) = (.4)($60,000) + (.6)(–$10,000)= +$18,000
EMV (small plant) = (.4)($40,000) + (.6)(–$5,000)= +$13,000
EMV (do nothing) = $0
Reid & Sanders, Operations Management© Wiley 2002
Page 61
Example
Reid & Sanders, Operations Management© Wiley 2002
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Interpretation
• At decision point 2, choose to expand to maximize profits ($200,000 > $150,000)
• Calculate expected value of small expansion:– EVsmall = 0.30($80,000) + 0.70($200,000) = $164,000
• Calculate expected value of large expansion:– EVlarge = 0.30($50,000) + 0.70($300,000) = $225,000
• At decision point 1, compare alternatives & choose the large expansion to maximize the expected profit:– $225,000 > $164,000
• Choose large expansion despite the fact that there is a 30% chance it’s the worst decision:– Take the calculated risk!