topic-6 long rang capacity planning. long range capacity planning capacity-is the productive...
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Topic-6Topic-6
Long Rang Capacity PlanningLong Rang Capacity Planning
Long range capacity Long range capacity planningplanning
Capacity-is the productive capability of a production facility
Capacity measurement: aggregate unit of output/input rate
* single item: output rate * many items: aggregate unit of output, or aggregate unit of input. In service: input rateWhy capacity planning- matching demand
fluctuation.
Why Matching Capacity- Why Matching Capacity- Matching Demand FluctuationMatching Demand Fluctuation
Output
Time
Capacity?
Demand
Measurement of CapacityMeasurement of Capacity• Output rate capacity: -- For a facility having a single product or a
few homogeneous products, the unit of measure is straightforward (barrels of beer per month)
-- For a facility having a diverse mix of products, an aggregate unit of capacity must be established using a common unit of output (sales dollars per week)
Measurement of Capacity (II)Measurement of Capacity (II)
• Input rate capacity: commonly used for service operations where output measures are particularly difficult.
--Hospital use available beds per month.--Airline use available seat miles per
month.--Movie theatres use available seats per
month.
Examples of Capacity Examples of Capacity MeasuresMeasuresMeasures of Capacity
Types of Organizations Inputs Outputs
Truck manufacturer Machine hours per shift Number of trucks per shift
Hospital Number of beds Number of patients treated per day
Airline Number of planes Seat-miles flow per week
Restaurant Number of seats Customers served per day
Restaurant Size of display area Sales dollars per year
Theater Number of seats Number of customers per week
Design Capacity vs. Maximum CapacityDesign Capacity vs. Maximum Capacity
• Design capacity (Q*): the amount of output at which the AUC (average unit cost) of a product facility is minimum.
• Practical maximum capacity : the maximum amount of output that a facility can produce (at a higher AUC)
• When Q>Q*,then AUC>AUC*• Q<Q*, also AUC>AUC*
AVCAVC
Q
(Output Quantity)Q* Qmax
Q* Qmax
AUC (Average Unit Cost)
Output Quantity
AUC
Variable Cost/ Unit
Fixed Cost/Unit
Q* - Design Capacity Qmax – Practical Maximum Capacity
Economies and Economies and Diseconomies of ScaleDiseconomies of Scale
Averageper Unit CostOf Output ($)
Economies of scale Dise
conom
ies o
f sca
le
Best Operating Level Annual Volume Units
Economies of ScaleEconomies of Scale• Best operating level —least average
unit cost• Economies of scale —average cost
per unit decrease as the volume increases toward the best operating level.
• Diseconomies of scale —average cost per unit increase as the volume increase beyond the best operating level
Economies of scaleEconomies of scale• Declining costs result from:--Fixed costs being spread over more
and more units.--Longer production runs result in a
smaller proportion of labor being allocated to setups.
--Proportionally less material scrap--……….and other economies.
Economies of scaleEconomies of scale• Diseconomies of scale: Increasing costs
result from increased congestion of workers and materials, which contribute to:
--increasing inefficiency --difficulty in scheduling --damaged goods --reduced morale --increased use of overtime --………and other diseconomies
Capacity EconomyCapacity Economy• Economy of scale: Refer to the cost
reduction resulting from the increase in production quantity.
“Economies of scale is so vague that it can be used to justify any number of decisions, which all too often turn out to be wrong.”
Capacity Economy (II)Capacity Economy (II)• Example:
Plant Des.cap. Act.Prod Proc. Tech AUC
A 100 100 X 10
B 100 60 X 12
C 200 200 X 5
D 200 200 Y 2
Capacity Economy (III)Capacity Economy (III)
• AUC(A)< AUC(B)—Volume Economy.
• AUC(C)< AUC(A)— Capacity Economy
• AUC(D)< AUC(C)—Technology Economy.
BA
C
D
AUC
Q
12
10
5
2
60 100 200
Increases in Incremental Increases in Incremental Facility CapacityFacility Capacity
Average per Unit Cost per Output ($)
Annual Volume (Units)
AB
C
SmallPlant Mid-Sized
PlantLarge Plant
Economies and Economies and Diseconomies of ScaleDiseconomies of Scale
250-250-unit unit shop shop 500-500-unit unit
shop shop
750-750-unit unit shop shop
Economies Economies of scale of scale
Diseconomies Diseconomies of scale of scale
Output rate (units per week)Output rate (units per week)
Av
era
ge
un
it c
os
t A
ve
rag
e u
nit
co
st
(do
llars
pe
r u
nit
)(d
olla
rs p
er
un
it)
Three Level Capacity PlanningThree Level Capacity Planning• 1.Long range capacity planning: T>1 year.• Decisions: planning for capacity that requires a
long time to acquire.• e.g. Plant/building/equipment/high cost facility • 2. Intermediate range capacity planning: T(6-18
months).• Decisions: planning for capacity requirement
(month or quarterly).• e.g. work force size/new tools/inventory/…..• 3. short range capacity planning: T (1-6moth).• Decisions: weekly (or daily) capacity planning.• e.g. overtime use/personnel transfer/alternative
routings/……
Ways of Changing Long Ways of Changing Long Range CapacityRange Capacity
• Expand Capacity– Subcontract with other companies to become suppliers
of the expanding firm’s components or entire products– Acquire other companies, facilities, or resources– Develop sites, buildings, buy equipment– Expand, update, or modify existing facilities– Reactivate facilities on standby status
• Reduce Capacity– Sell existing facilities, sell inventories, and layoff or
transfer employees– Mothball facilities and place on standby status, sell
inventories, and layoff of transfer employees– Develop and phase in new products as other products
decline
Capacity Planning ProcessCapacity Planning Process• 1. Determine capacity requirement: * long range demand forecasting.• 2. Generating alternative capacity plans: *when should new capacity be added?
(timing) * how much new capacity should be
added (sizing) *what kind capacity should be added?
(type)
The Timing of Capacity The Timing of Capacity IncrementsIncrements
Capacity
Demand
Capacity
Demand
Units
Time
Units
Time
Policy A: Capacity Leads Demand Policy B: Capacity lags Demand
The Sizing of Capacity The Sizing of Capacity IncrementsIncrements
Should the capacity be added more often in small increments (Option A) or in large increments less frequently (Option B)?
Capacity Increments
{
Units
Time
Demand
Capacity Increments
{Units
Time
Demand
Planned unused Planned unused capacity capacity
Capacity StrategiesCapacity Strategies
TimeTime
Ca
pac
ity
Ca
pac
ity
Forecast of Forecast of capacity required capacity required
Time between Time between increments increments
Capacity Capacity increment increment
((a) Expansionist strategya) Expansionist strategy
Capacity StrategiesCapacity Strategies
TimeTime
Ca
pac
ity
Ca
pac
ity
((b) Wait-and-see strategyb) Wait-and-see strategy
Forecast of Forecast of capacity required capacity required
Planned use of Planned use of short-term options short-term options
Time between Time between increments increments
Capacity Capacity increment increment
Capacity Planning Process (II)Capacity Planning Process (II)
• 3. Evaluating alternative capacity plans:
*Decision tree *Breakeven analysis4.Selecting best capacity plan under
given objectives5. Locating new capacity (facility
location).
Facility planningFacility planning• How much long range capacity is
need• When additional capacity is need• What the layout and characteristics
of facilities should be • The capital investment in land,
building, technology and machinery is enormous
Facility planningFacility planning• A firm must live with its facility
planning decisions for a long time and these decisions affect:
• Operating efficiency • Economy of scale • Ease of scheduling• Maintenance costs• ……………profitability
Facility planningFacility planning• Steps in the capacity planning process*estimate the capacity of the present
facilities.*forecast the long-range future capacity
needs.*identify and analyze sources of capacity to
meet these needs*Select from among the alternative sources
of capacity
Economies of scopeEconomies of scope• The ability to produce many product
models in one flexible facility more cheaply than in separate facilities
• Highly flexible and programmable automation allows quick, inexpensive products-to-product changes
• Economies are created by spreading the automation cost over many products
Evaluation of Capacity PlansEvaluation of Capacity Plans• Major method:1. Net present value analysis2. Breakeven analysis3. Decision tree model4. Computer simulation5. Queuing Models (Service Capacity
Plan)
Evaluation of Capacity Plans Evaluation of Capacity Plans (II)(II)
• Decision model: a simplified representation of a real world problem. There are many decision models developed in the literature for different problems.
• Three major elements of a decision model:
1. Objectives must be measurable2. Decision variables must be controllable3. Constraints and Assumptions.
Decision Tree Model Decision Tree Model • Decision tree model is primarily
developed for problem where:* a series of (multiple) decisions must
be made sequentially* all decisions are interrelated and
interdependent and * Outcomes associated with each
decision are uncertain
Decision Tree Model (II)Decision Tree Model (II)• Assumptions of decision tree model:1. Objective is a single measurement2. All possible outcomes associated with a
decision have a known probability.3. Best plan is represented by the optimal
expected value.
• Tree structure:* Decision point* Even point* Probability of outcome
Capacity DecisionsCapacity Decisions
Decision TreesDecision Trees
Low demand [0.40]Low demand [0.40]
Low demand [0.40]Low demand [0.40]
$70$70
$220$220
$40$40
$148$148
$109$109
$148$148
High demand [0.60]High demand [0.60]
High demand [0.60]High demand [0.60]
$135$135
Don’t expandDon’t expand
ExpandExpand$135$135
$90$90
11
22Small expansion
Small expansion
Large expansion
Large expansion
ExampleExample
Supplement: p. 6-20 - Problem #1
DevelopProduct Sell Idea
Sell Idea
3.0
1.8
2.5
2.1
2.8
2.2
2.6
2.3
EV = 2.5
||
||
1.5
(.5) Large Market
(.5) Marginal Mkt.
EV = 2.5
(.5) Large Market
(.5) Marginal Mkt.EV = 2.45
Company A
Company B
EV = 2.5
||
(.5) Large Market
(.5) Marginal Mkt.
EV = 2.4
(.5) Large Market
(.5) Marginal Mkt.EV = 2.3
Produce &Market
EV = 2.4
||
Lease for Royalty
Payoff($ millions)
SolutionsSolutions
• The company should lease the concept to company A. Notice, however, that other alternatives are very close in their payoffs.
• • b. If the company follows your
recommendation, what returns should the company expect to receive?
• • If the firm's estimates are correct, it will receive
either $2,800,000 or $2,200,000.
•
See Example on your See Example on your Supplementary Supplementary ––
p. 6-17 to 6-19.p. 6-17 to 6-19.
C
D
E
F
G
H
H,p= 0.7, $900 for 6 years
L,p= 0.3, $300 for 6 years
H,p= 0.7, $600 for 6 years
L,p= 0.3, $500 for 6 years
L,p= 0.8, $300 for 6 years
H,p= 0.2, $900 for 6 years
H,p= 0.2, $900 for 6 years
L,p= 0.8, $300 for 6 years
H,p= 0.2, $600 for 6 years
L,p= 0.8, $500 for 6 years
H,p= 0.7, $900 for 6 years
L,p= 0.3, $300 for 6 years
1
A
B
2
3
$520
$3,920
$4,260
$3,520
$3,120
Large plant,Investment = $4,000
Small plantInvestment= $3,400
H,p = 0.6
L,p = 0.4
H,p = 0.6
L,0 = $300
$4,320
Expand,Investment = $800
Do not expand
Expand, Investment = $800
Do not expand
$900
$300
$3,420
$2,520
$3,120
$4,320
$2,520
We evaluated the three from the right-hand side. Investment and income are given in thousands of dollars.
Event C: $900(6)(0.7) + $300 (6)(0.3)= $4,320Event D: $600(6)(0.7) + $500 (6)(0.3)= $3,420Event E: $900(6)(0.2) + $300 (6)(0.8)= $2,520Event F: $600(6)(0.2) + $500 (6)(0.8)= $3,120Event G: $900(6)(0.7) + $300 (6)(0.3)= $4,320Event H: $900(6)(0.2) + $300 (6)(0.8)= $2,520
Decision Point 2:Expand: Income= $4,320- $800 = $3,520Do not expand: Income=…………….....= $3,420
At this point the decision will be to expand the plant because the income for this alternative is larger. Event D will therefore be served.
Decision Point 3:Expand: Income= $42,520- $800 = $1,720Do not expand: Income=…………………= $3,120
At this point the decision will be “do not expand” because the income for this alternative is larger. Event E will therefore be served.
Decision Point 1:Expand: Income= $3,920- $3,400 = $520Do not expand: Income= $4,260- $4,00 = $260
At this point the decision will be to build a small plant. Event B therefore will be served.
Thus, XYZ should initially build a small plant. At the end of one year, if demand is high, the company should expand the plant. If demand is low, the company should not expand the plant. Expected income is $520,000.