Operations Management (MD021)

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Operations Management(MD021)

• Capacity Management

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Agenda

• A Simple Example
• Basic Definitions
• Planning Capacity
• Evaluating Alternative Capacity Scenarios

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In the real world, we need to manage this
capacity
but this is too complex to start out with
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Funnels and Sand
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Grasshopper, you will learn capacity management
by meditating about
Funnel
Sand
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The Metaphor
RAW MATERIALS
FACTORY CAPACITY
CAPACITY 200 grains of sand/minute
FACTORY OUTPUT
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What are the problems with these two production
systems?
DEMAND 200 grains/minute
DEMAND 100 grains/minute
200 grains/minute
100 grains/minute
100 grains/minute
200 grains/minute
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Creating a balanced production system can be
fairly easy in simple systems
200 grains/minute
each 100 grains/minute
200 grains/minute
200 grains/minute
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Bottleneck processing stage is defined by
200
100
400
100 grains/minute
200
100
200 grains/minute
200
400
400
400 grains/minute
100
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Easy to identify the bottleneck stage(s) by
observing where inventory builds up
200
400
100
200
100
200
400
400
100
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This becomes important in real systems
Here, you dont know individual capacities
which processing stage doesnt have sufficient
capacity?
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PROBLEM For a fixed set of resources, what
happens as we increase the jobs in the system?
Response Time Time in System
Jobs In System
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Basic funnel management questions of interest?

• How much sand should we allow into the system of
  funnels?
• Should we limit the amount of sand that we put
  in?
• How many funnels should we have?
• How big should our funnels be?
• What kind of funnels should they be?
• When should we add funnels?

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There are several ways to increase capacity
100 grains/minute
scale up
modify your funnel or get a bigger funnel 400
grains/minute
scale out
get more funnels
change technology to big-mouth funnel 400
grains/minute
4 funnels X 100 grains/minute 400 grains/minute
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When can we add capacity?

• Before demand is observed demand leading
• After demand is observed demand trailing
• When demand is observed demand matching
• Add at regular time intervals steady
  expansion
• The above are the basic capacity expansion
  strategies

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Basic Definitions
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Capacity

• Capacity is the upper limit or ceiling on the
  load that an operating unit can handle
• an upper limit on the rate of output
• The basic questions in capacity planning are
• What kind of capacity is needed?
• How much is needed?
• When is it needed?

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Several definitions of capacity none is
universally applicable

• 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.

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Efficiency and Utilization
Both measures are expressed as percentages
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Capacity cushion

• Capacity Cushion
• The amount of reserved capacity that a firm
  maintains to handle sudden increases in demand or
  temporary losses of production capacity.
• Capacity Cushion 1 - Utilization

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Common Capacity Utilization

• High Volume Manufacturing (Automated Flow Shop,
  Continuous Flow) level demand, perfect
  technology, perfect quality, no machine
  breakdowns, no worker breaks, no inventory
  shortages
• Utilization in an ideal world close to 100, but
  often far less (85)
• Job Shop, Batch Manufacturing variable demand,
  complex products, machine breakdowns, worker
  breaks, quality issues
• Nationwide, average utilization about 70-85
• Service high demand variability
  daily/weekly/lunch hour variation, interface with
  customers
• Ranges from very low (20) to average (70-80)
• E-Service/Websites huge demand spikes high
  demand can be 20X average demand
• Many computer-based processes have utilization
  around 20
• Often 35 utilization is the point at which you
  add more capacity

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Using capacity utilization to diagnose problems

• High capacity efficiency is usually GOOD
• assumes you have some notion of historical
  effective capacity, which you often dont have
• High capacity utilization may be GOOD
• correct type of process
• assuming all of your other performance measure
  objectives are being achieved (e.g., high
  quality, low cost, fast delivery)
• High capacity utilization may be BAD if it is
  observed with
• high costs
• low revenues
• low quality
• slow deliveries

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Efficiency/Utilization Example
Design capacity 50 trucks/day Effective
capacity 40 trucks/day Actual output 36
units/day

• Actual output 36
  units/day
• Efficiency
  90
• Effective capacity 40
  units/ day
• Utilization Actual output 36
  units/day
• 72
  Design capacity 50 units/day

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Planning for Capacity
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Operational tradeoffs concerning capacity
decisions
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Numerous factors determine effective capacity

• Facilities design
• Product and service factors
• Process factors
• Human factors
• Operational factors
• Supply chain factors
• External factors

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Capacity Strategy Formulation

• Capacity strategy for long-term demand will
  depend on
• Expected demand patterns
• Expected growth rate and variability of demands
• Facilities
• Cost of building and operating
• Technological changes
• Rate and direction of technology changes
• Behavior of competitors
• Availability of capital and other inputs

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Key Decisions of Capacity Planning

• Amount of capacity needed
• Timing of changes
• Need to maintain balance throughout the system
• Extent of flexibility of facilities and the
  workforce

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Steps in the Capacity Planning Process

• Estimate future capacity requirements
• Evaluate existing capacity
• Identify alternatives
• Conduct financial analysis
• Assess key qualitative issues
• Select one alternative
• Implement alternative chosen
• Monitor results

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Estimating capacity requirements for a single
product

• Number of machines required (processing hours
  required for periods demand)/(hours available
  from one machine in the period, after removing
  desired capacity cushion)
• M Dp/N(1-C)
• D number of units (customers) forecast
• p processing time (in hours per unit or
  customer)
• N total number of hours per year during which
  the process operates
• C desired capacity cushion rate

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Estimating capacity requirements for several
products
Q number of units in each lot s setup time
(in hours) per lot
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Estimating Capacity Requirements
One eight hour shift, 250 days/year 2000 labor
hours/year at each machine
5800 processing hours/2000 labor hours/shift
2.9 shifts OR machines
If company wants to remain with one shift, will
buy 3 machines
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Several determinants of whether to make yourself
or buy (outsource)

• Available capacity/Cost of capacity
• Expertise/Lack of expertise
• Quality considerations can we achieve high
  quality requirements?
• Nature of demand steady or variable?
• Cost savings of outsourcing
• Risks of losing control over operations
  disclosing proprietary information/intellectual
  capital

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Common issues in planning and managing capacity

• Try to design flexibility into production systems
• Take account of stage of the product life cycle a
  product is in
• Take a big picture systems-oriented approach to
  capacity changes how will it affect interrelated
  systems
• You can only buy capacity in chunks it is
  lumpy
• Attempt to smooth out capacity requirements
• pricing promotions to change demand from period
  to period
• Demand Side Management
• countercyclical demands Lawn mowers and Snow
  blowers Water skis and Snow skis
• Try to identify the optimal operating level

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Analyzing the production function to determine
minimum average cost
Production units have an optimal rate of output
for minimal cost.
Minimum average cost per unit
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Comparing minimum average costs from several
sizes of plants

Minimum cost optimal operating rate are
functions of size of production unit.
Small plant
Average cost per unit
Medium plant
Large plant
0
Output rate
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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

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Can be much more challenging when planning
service capacity

• May 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 of demand
• Peak demand periods

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Evaluating Alternative Capacity Scenarios
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Assumptions Underlying Cost-Volume Analysis

• One product is involved
• Everything produced can be sold
• Variable cost per unit is the same regardless of
  volume
• Fixed costs do not change with volume or they
  are stepwise changes
• Revenue per unit constant with volume
• Revenue per unit exceeds variable cost per unit

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Cost-Volume Relationships
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Cost-Volume Relationships
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Cost-Volume Relationships
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Breakeven Point
P TR TC R Q (FC v Q)
P Q(R v) - FC
Q (P FC) / (R v)
If TR TC, P 0
Breakeven Q (0 FC) / (R v)
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Break-Even Problem with Step Fixed Costs
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Break-Even Problem with Step Fixed Costs
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Standard financial (cost-benefit) analysis
techniques also can be used

• Cash Flow - the difference between cash received
  from sales and other sources, and cash outflow
  for labor, material, overhead, and taxes.
• Present Value - the sum, in current value, of all
  future cash flows of an investment proposal.