Introduction to Operations Management
Ch. 5. Strategic Capacity Planning for Ch. 5. Strategic Capacity Planning for Products and ServicesProducts and Services
Hansoo Kim ( 金翰秀 )Dept. of Management Information Systems,
YUST
What you should have done!
Read Chapter 17 again and Chapter 5, 5s
HW#2 Play with MS-Project®
Important things in Ch.17 What is Project? What is Project Management? Project Planning, Scheduling, and Controlling Matrix Organization, WBS (Work-Breakdown-Structure) Network Diagram
AON, AOA Gantt Chart PERT/CPM
Finding Critical Path Forward Calculation/Backward Calculation
Project Management Problem Is the project on schedule, ahead of schedule, or behind schedule? Is the project over or under cost budget? Are there enough resources available to finish the project on time?
If the project must be finished in less than the scheduled amount of time, what is the way to accomplish this at least cost?
Crashing
OM Overview
Class Overview(Ch. 0)
Project Management
(Ch. 17)
Strategic Capacity Planning(Ch. 5, 5S)
Operations, Productivity, and Strategy
(Ch. 1, 2)
Mgmt of Quality/Six Sigma Quality
(Ch. 9, 10)
Supply Chain Management
(Ch 11)
Location Planning and Analysis
(Ch. 8)
Demand MgmtForecasting
(Ch 3)
Inventory Management
(Ch. 12)
Aggregated Planning
(Ch. 13)
Queueing/ Simulation
(Ch. 18)
MRP & ERP (Ch 14)
JIT & Lean Mfg System
(Ch. 15)
Term Project
Process Selection/
Facility Layout; LP(Ch. 6, 6S)X X X
To be OM Expert !!!
UnderstandingProblem
DevelopingProper Model
Finding SolutionTechnique
Communicable with other OM People
Domain Expert(Studying general
Problems and Working Experience)
Operations Research(경영과학)
Mathematical Programming, and Computational
Methodology
Existing Models:LP Model,
Queueing Model, Simulation Model,PERT/CPM Model
Develop New Models
OM EXPERT!!
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
Terms ( 용어 )영어 중국어 영어 중국어Bottleneck operation 瓶颈作业 Expected monetary
value(EMV)criterion预期币值标准
Break-even point 盈亏平衡点 Expected value of perfect information(EVPI)
完全信息预期价值
Capacity 运营能力 Laplace
Capacity cushion 运营能力缓冲 Maximax
Cash flow 现金流 Maximin
Diseconomies of scale 规模不经济 Minimax regret
Economies of scale 规模经济 Payoff table 结算表Outsource 外包 Regret (opportunity
loss)
Present value 现值 Risk 风险Bounded rationality 有限理性 Sensitivity analysis 灵敏度分析Certainty Suboptimization 局部最优化Decision tree 决策图标 Uncertainty
Capacity Planning Capacity is the upper limit or ceiling on the
load that an operating unit can handle. Capacity also includes
Equipment ( 설비 ) Space ( 공간 ) Employee skills ( 작업능력 )
The basic questions in capacity handling are: What kind of capacity is needed? ( 어떤 종류 ) How much is needed? ( 얼마나 ) When is it needed? ( 언제 )
Importance of Capacity Decisions
1. Impacts ability to meet future demands
2. Affects operating costs3. Major determinant of initial costs4. Involves long-term commitment5. Affects competitiveness6. Affects ease of management7. Globalization adds complexity8. Impacts long range planning
Capacity Design capacity
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.
Efficiency( 효율 ) and Utilization(가동률 )
Actual outputEfficiency =
Effective capacity
Actual outputUtilization =
Design capacity
Both measures expressed as percentages
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
Example 1
Determinants of Effective Capacity Facilities
Design Location Layout Environment
Product/service Design Product or service mix
Process Quantity capabilities Quality capabilities
Human factors Job content Job design Training and experience Motivation Compensation Learning rates Absenteeism and labor
turnover
Policy Operational
Scheduling Materials management Quality assurance Maintenance policies Equipment breakdowns
Supply chain External factors
Product standards Safety regulations Unions Pollution control
standards
Key Decisions of Capacity Planning
1.Amount of capacity needed• Capacity cushion = (100% - Utilization)
2.Timing of changes3.Need to maintain balance4.Extent of flexibility of facilities
Capacity cushion – extra demand intended to offset uncertainty
Steps for Capacity Planning
1.Estimate future capacity requirements2.Evaluate existing capacity3.Identify alternatives4.Conduct financial analysis5.Assess key qualitative issues6.Select one alternative7.Implement alternative chosen8.Monitor results
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
Figure5-1 Common demand patterns
Calculating Processing Requirements
P r o d u c tA n n u a l
D e m a n d
S t a n d a r dp r o c e s s i n g t i m e
p e r u n i t ( h r . )P r o c e s s i n g t i m e
n e e d e d ( h r . )
# 1
# 2
# 3
4 0 0
3 0 0
7 0 0
5 . 0
8 . 0
2 . 0
2 , 0 0 0
2 , 4 0 0
1 , 4 0 0 5 , 8 0 0
P r o d u c tA n n u a l
D e m a n d
S t a n d a r dp r o c e s s i n g t i m e
p e r u n i t ( h r . )P r o c e s s i n g t i m e
n e e d e d ( h r . )
# 1
# 2
# 3
4 0 0
3 0 0
7 0 0
5 . 0
8 . 0
2 . 0
2 , 0 0 0
2 , 4 0 0
1 , 4 0 0 5 , 8 0 0
If annual capacity is 2000 hours/machine, then we need three machines to handle the required volume: 5,800 (hours)/2,000 (hours/mc) = 2.90 machines
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( 휘발성 ) of demand
Peak demand periods
Planning ServiceService Capacity
In-House or Outsourcing*
1. Available capacity2. Expertise3. Quality considerations4. Nature of demand5. Cost6. Risk
Outsource: obtain a good or service from an external provider
Make or Buy?Make or Buy?
Developing Capacity Alternatives
1.Design flexibility into systems2.Take stage of life cycle into account
3.Take a “big picture” approach to capacity changes (not to be sub-optimal)
4.Prepare to deal with capacity “chunks”
5.Attempt to smooth out capacity requirements
6.Identify the optimal operating level
Bottleneck Operation
Figure 5.2
Bottleneck operation: An operationin a sequence of operations whosecapacity is lower than that of theother operations
Operation 120/hr.
Operation 210/hr.
Operation 315/hr.
10/hr.
BottleneckMaximum output ratelimited by bottleneck
sub optimization
Economies of Scale
Economies 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
Economies of ScaleMinimum cost & optimal operating rate are
functions of size of production unit.
Figure 5.5
Evaluating Alternatives
Cost-volume analysis Break-even point
Financial analysis Cash flow Present value
Decision theory Waiting-line analysis
Cost-Volume Relationships
FC = Fixed costVC = Total variable costv = Variable cost per unitTC = Total costTR = Total revenueR = Revenue per unitQ = Quantity or volume of outputQBEP = Break-even quantityP = Profit
TC=FC+VCVC=Q*v
Break-Even Analysis
Example 3 Adding a new line of pies, which will require leasing
new equipment for a monthly payment of $6,000. Variable costs would be $2.00 per pie, and pies would retail for $7.00 each.
1. How many pies must be sold in order to break even?2. What would the profit (loss) be if 1,000 pies are made and
sold in a month?3. How many pies must be sold to realize a profit of $4,000?4. If 2,000 can be sold, and a profit target is $5,000, what
price should be charged per pie?SOLUTION
Break-Even Problem with Step Fixed Costs
EXAMPLE 4
Decision Theory
Ch. 5S
Decision Theory represents a general approach to decision making which is suitable for a wide range of operations management decisions, including:
Product andservice design
Product andservice design
Equipment selection
Location planning
Capacityplanning
Decision TheoryDecision Theory
Decision Process
1. Identify the problem2. Specify objectives and criteria for a solution3. Develop suitable alternatives4. Analyze and compare alternatives5. Select the best alternative6. Implement the solution7. Monitor to see that the desired result is
achieved
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
Decision EnvironmentsDecision Environments
1. Profit per unit is $5. You have an order for 200 units. How much profit will you make? (This is an example of certainty since unit profits and total demand are known.)
2. Profit is $5 per unit. Based on previous experience, there is a 50 percent chance of an order for 100 units and a 50 percent chance of an order for 200 units. What is expected profit? (This is an example of risk since demand outcomes are probabilistic.)
3. Profit is $5 per unit. The probabilities of potential demands are unknown. (This is an example of uncertainty.)
Decision Making under Certainty
Solution:Choose the alternative with the highest payoffIf demand is low, take “small facility” alternativeIf demand is moderate, take “Medium facility” alternativeIf demand is high, take “Large facility” alternative
Payoff tablePayoff table
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
Decision Making under Uncertainty
Decision Making under Uncertainty
(a)Maximin
(b) Maximax
(c) Laplace For the Laplace criterion, first find the row totals, and
then divide each of those amounts by the number of states of nature (three in this case).
(d) Minimax Regret (Opportunity Losses)
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 payoffWhen demand
probabilities are distributed as followslow = .30, moderate = .50, and high = .20.
Decision Tree
Decision tree: a Schematic representation of the available alternatives and their possible consequences.
Example A manager must decide on the size of a video arcade to
construct. The manager has narrowed the choices to two: large or small. Information has been collected on payoffs, and a decision tree has been constructed. Analyze the decision tree and determine which initial alternative (build small or build large) should be chosen in order to maximize expected monetary value.
Expected Value of Perfect Information (EVPI)
Expected value of perfect information: the difference between the expected payoff under certainty and the expected payoff under risk
Expected value ofperfect information
Expected payoffunder certainty
Expected payoffunder risk= -
In the previous example,
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
Example 5s-8
Summary
Capacity Planning Decision Theory
HW#
Review all Solved Problems on Ch. 5, 5s Do not need to hand-in
To be OM Expert !!!
UnderstandingProblem
DevelopingProper Model
Finding SolutionTechnique
Communicable with other OM People
Domain Expert(Studying general
Problems and Working Experience)
Operations Research(경영과학)
Mathematical Programming, and Computational
Methodology
Existing Models:LP Model,
Queueing Model, Simulation Model,PERT/CPM Model
Develop New Models
OM EXPERT!!Capacity Planning& Decision Theory