Operations Management

STRATEGIC CAPACITY MANAGEMENT

KRISHNA MURARI

CAPACITY MANAGEMENT
Capacity is the rate of production capability of a facility. Salient points  Generally, It is expressed as volume of output per time period.  Sufficient capacity is required to meet the customers demand.  It affects the cost efficiency of operations.  It affects ease or difficulty of scheduling output  It affects the cost of maintaining the facilities.

Need for Capacity Planning

 It is the first step when organisation decides to produce more or a new product.  Once the capacity is evaluated, need for a new or expanded facilities is determined and facility location and process technology occur.  Spare capacity needs exploring the way to utilise or reduce the capacity.  Capacity has direct impact on location. Capacity depends on demand and demand often depends on location. Example : Banks open new branches based on capacity and customers.

Need for Capacity Planning

Capacity planning involves the identification and evaluation of the long term and short term capacity requirement of an organisation and the development plans to satisfy them. Overestimate or underestimate of capacity requirement adversely affects the organisation's performance. Insufficient capacity results in dissatisfied customers and switching over to other suppliers. extra capacity results in unutilized capacity and inventories.

Capacity Planning Decisions Capacity planning involves following activities: 1. Assessing existing capacity 2. Forecasting capacity needs 3. Identifying of alternate ways to modify capacity 4. Evaluating the financial, economical and technological capacity alternatives. 5. Selecting a capacity alternative most suited to achieve strategic mission.

Measuring Capacity
For some organisations, capacity is simple to measure by output like no. of cars made per day by Maruti Udyog. but in case of diverse product lines and services like repair shop, it is expressed in input terms like available labour hours etc. Sometimes, it is difficult to measure realistic capacity due to employees absenteeism, machine break down etc. Capacity Can be measures by following formula Capacity = Available time x utilisation x efficiency Capacity utilisation rate = capacity used/ capacity available x 100 (at which prodn process operates)

Measuring Capacity
Measured by Output Organisation Automobile Steel producer Power Company Brewery Cannery Measure Numbers Tons of steel Megawatt of electricity Barrel of beer Tons of food

Measuring Capacity
Measured by Input Organisation Airlines Hospital Movie theater Restaurant University Warehouse Job shop Measure No. of seats No. of beds No. of seats No. of tables No. of students/faculty Square or cubic feet of storage place Labour/ machine hrs.

Estimate Future Capacity Needs Short Term Requirements

Short term capacity requirements are estimated based on workload on the basis of forecasts of product demands for maximum 12 months .

Long Term Requirements :

This is very difficult to determine as future demand and technology are uncertain. Long term forecasting is risky and difficult task. Long term requirements are based on marketing plans , product development and product life cycle. Change is technology must be anticipated even for existing product.

Strategy for Modifying Capacity

Short Term Response
Capital intensive process rely on physical facilities and can be modified by using more or less intensively than normal. Cost of setting up, changing over, maintaining, procurement of raw materials, inventory and Scheduling can be changed. In labour oriented Process, short term changes can be brought by lay off or hiring people, overtime, or by keeping the labour idle. In case product can be stored, inventory management can be used fro short term response.

Strategy for Modifying Capacity

Long Term Response Capacity contraction - selling off exiting facilities, equipment and inventories. If serious decline in demands occur, operation may be terminated. Constant capacity utilizing facilities for other products. Product design, market research play a role in bringing new product and use the existing capacity.

Strategy for Modifying Capacity Determining capacity Requirements

Steps 1.Forecasting methods are used to find out individual product demands. 2.Equipments and human resource requirements are identified to meet the forecasted demand. In case of multiple products or service, the time required to switch over from one to other product or service is identified. 3.Capacity required and capacity available are compared and gap is identified. 4.Capacity cushion is provided by extra capacity.

Measures of Capacity
Output rate capacity Suitable for a single product or a few homogeneous products Design capacity - The maximum capacity that can be achieved under ideal conditions Effective capacity utilization - The percent of design capacity actually achieved Aggregate capacity Suitable when a common unit of output is used . . . more

Measures of Capacity
Rated capacity Maximum usable capacity of a particular facility Input rate capacity Suitable for service operations Percentage utilization of capacity - Relates output measures to inputs available

Capacity Utilization
Capacity used Utilization ! Best operating level
Capacity used
Rate of output actually achieved

Best operating level

Capacity for which the process was designed

Capacity Utilization--Example
Best operating level = 120 units/week

Actual output = 83 units/week

Utilization = ?

Solution

Capacity used 83 units/wk Utilization ! = ! .692 Best operating level 120 units/wk

Capacity Cushion
A capacity cushion is an additional amount of capacity added onto the expected demand to allow for:
greater than expected demand demand during peak demand seasons lower production costs product and volume flexibility improved quality of products and services

Forecasting Capacity Demand

Consider the life of the input (e.g. facility is 10-30 yr) Understand product life cycle as it impacts capacity Anticipate technological developments Anticipate competitors actions Forecast the firms demand

Other Considerations
Resource availability Accuracy of the long-range forecast Capacity cushion Changes in competitive environment

How to Determine Capacity Requirements?

Forecast sales within each individual product line Calculate equipment and labour requirements to meet the forecasts Project equipment and labour availability over the planning horizon

Expansion of Long-Term Capacity

Subcontract Acquire capacity Develop new sites Expand current sites Reactivate standby facilities

Reduction of Long-Term Capacity

Sell off existing facilities Mothball facilities Develop and phase in new products/services

Economy of Scales
Basic theory of economy of scale is that as the size of an operation increases, per unit cost of production is decreases. Reason is reduction in fixed cost per unit and adoption of efficient process and technology like automation. When firm expands beyond a point, diseconomies of scale become apparent as expenditure on maintaining large scale becomes uneconomical which includes storage cost, high cost of modification, complexities of the operations.

Economies of Scale
Best operating level - least average unit cost Economies of scale - average cost per unit decreases as the volume increases Diseconomies of scale - average cost per unit increases as the volume increases Other considerations
Subcontractor and supplier networks Focused production Economies of scope

Economies and Diseconomies of Scale

Average nit ost of Output (Rs)

Economies of Scale

Diseconomies of Scale

est Operating Level Annual Volume (units)

Economies and Diseconomies of Scale

Average nit ost of Output (Rs) 100-unit plant 200-unit plant 300-unit plant 400-unit plant Optimum Plant Size

Annual Volume (units)

The Learning Curve Effect

100 90 t/ ime per repetiti 80 70 60 50 40 30 20 10 0 20 40 Number f repetiti 60 (V lume) 80 100 C t

The Learning Curve Effect

Observe, that the per unit cost (or price) of the product (or service) declines exponentially as the number of repetitions increases

Analyzing Capacity-Planning Decisions

Break-even Analysis Present-Value Analysis Decision Tree Analysis Computer Simulation Waiting Line Analysis Linear Programming

Determining Capacity Requirements

Forecast sales within each individual product line Calculate equipment and labor requirements to meet the forecasts Project equipment and labor availability over the planning horizon

Example: Capacity Requirements

A manufacturer produces two lines of ketchup, FancyFine and a generic line. Each is sold in small and family-size plastic bottles. The following table shows forecast demand for the next four years.
Year: FancyFine Small (000s) Family (000s) Generic Small (000s) Family (000s) 1 50 35 100 80 2 60 50 110 90 3 80 70 120 100 4 100 90 140 110

Example: Capacity Requirements

The Product from a Capacity iewpoint
Are we really producing two different types of ketchup from the standpoint of capacity requirements?

Example: Capacity Requirements Equipment and Labor Requirements

Year: Small (000s) Family (000s) 1 150 115 2 170 140 3 200 170 4 240 200

Three 100,000-units-per-year machines are available for small-bottle production. Two operators required per machine. Two 120,000-units-per-year machines are available for family-sized-bottle production. Three operators required per machine.

Example: Capacity Requirements Equipment and Labor Requirements

Total machine capacity available for small-bottle

production: 3*100,000=300,000 units/year

Total machine capacity available for family-sizedbottle production: 2*120,000=240,000 units/year

Total labor capacity required for small-bottle

production: 3*2=6 operators

Total labor capacity required for family-sized-bottle

production: 2*3=6 operators

Example: Capacity Requirements

Year: all (000s) Fa il (000s) 0 2 70 0 300,000 2 0,000 200 70 ab r ab r 2 0 200 6 6

Small Family-size Small Perce t ca acit Machi e req ire ab r req ire e Family-size Perce t ca acit Machi e req ire ab r req ire e

Mach. Mach.

a . a .

se e t t se e t t

0.00% .50 3.00 47. 2% 0. 6 2.88

6.67% .70 3.40 58.33% .17 3.50

66.67% 2.00 4.00 70.83% 1.42 4.25

0.00% 2.40 4.80 83.33% 1.67 5.00

Capacity planning using decision Tree

A decision tree is a schematic model of the sequence of steps in a problem and conditions and consequences of each step. Decision tree are composed of decision nodes with branches to and from them. In solving decision tree we work from end to start of the tree and calculated expected values at each step. Finally we select the branch giving the highest expected payoff.

Decision Tree Analysis

Symbols used in decision tree:
square represent the decision point Circle represent the chance event. Branches from the decision point show the choice available to the decision maker Branches from the chance event show the probability of occurrence.

Example

Decision Tree Analysis

Structures complex, multiphase decisions Allows objective evaluation of alternatives Incorporates uncertainty Develops expected values

Decision Tree Analysis

1 Define the problem 2 Structure or draw the decision tree 3 Assign probabilities to the states-of-nature 4 Estimate the payoffs for each possible combination of alternative and state-ofnature 5 Solve the problem by computing expected monetary values (EMV) for each state-ofnature node

Example : Decision Tree Analysis

Good Eats Caf is about to build a new restaurant. An architect has developed three building designs, each with a different seating capacity. Good Eats estimates that the average number of customers per hour will be 80, 100, or 120 with respective probabilities of 0.4, 0.2, and 0.4. The payoff table showing the profits for the three designs is given in the next slide.

Example : Decision Tree Analysis

Payoff Table Average Number of Customers Per Hour c1 = 80 c2 = 100 c3 = 120 Design A Expense $5,000 Design B Expense $3,500 Design C Expense $6,000 $10,000 $15,000 $14,000

$ 8,000

$18,000

$12,000

$ 6,000

$16,000

$21,000

Example : Decision Tree Analysis



Expected Value Approach

Calculate the expected value for each decision. Say, d1, d2, d3 are the decision alternatives of designs A, B, C, and c1, c2, c3 represent the different average customer volumes (80, 100, and 120) that might occur.

Example : Decision Tree Analysis



Decision Tree
Expense 5,000 2

Payoffs
c1 c2 c3 c1
3

.4
.2 .4 .4 .2 .4 .4 .2 .4

10,000 15,000 14,000

d1
1

d2 d3

3,500

8,000 18,000 12,000 6,000 16,000 21,000

c2 c3 c1

6,000

c2 c3

Example : Decision Tree Analysis



Expected Value For Each Decision

d1 Design A Design B d2 EV = .4(8,000) + .2(18,000) + .4(12,000) - 3,500 = $ 8,100
2

EV = .4(10,000) + .2(15,000) + .4(14,000) - 5,000= $ 7,600

Design C

d3
4

EV = .4(6,000) + .2(16,000) + .4(21,000) -6,000 = $8,000

Choose the design ith largest EV -- Design .

Example

Solution
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 its the worst decision:
Take the calculated risk!

Problem
You are given the following estimates concerning a Research and development programme
Decsion Di Probability of decision Probability of Out come outcome xi Numb at given Di er Payoff value of outcome Xi (Rs.,000)

Develop

0.5

Do not develop

05

1 2 3 1 2 3

0.6 0.3 0.1 0.0 0.0 1.0

600 -100 0 600 -100 0

Problem
A glass factory specialized in crystal is developing a substantial back log. It is considering three course of action: subcontracting, begin overtime, construct new facilities. Effects are given below: Form decision tree and find out best soln
Demand Probability subcontra Begin cting overtime Construct New facilities

Low Medium High

0.1 0.5 0.4

10 50 50

-20 60 100

-150 20 200

Planning Service Capacity

Services involve customer participation hence located near the customer like branches of a bank. As services can not be produced in anticipation and kept in inventory, planning should consider when and where capacity is needed. Service organisation based in one geographical area can not efficiently serve customers in other geographical area. Some services like hospital, institutes etc tends to increase capacity at one location. It became easier for some services to operate from one location through internet like retailers.

Master Production Schedule and capacity planning

Master production schedule (MPS) defines the type and volume of each product that is to be produced within a planned period. It is also used to schedule various stages of production based on the type of operations. Function of MPS are Translate aggregate plans Evaluate alternate schedule Identify material requirements Generate capacity requirements Effectively utilize capacity

Master Production Schedule (MPS) and capacity planning

Material requirement planning (MRP) and Capacity Requirement Planning (CRP) are the two planning activities that are part of master production scheduling process. CRP determines whether existing production capacity is sufficient to achieve the objectives of MPS.

Master Production Schedule (MPS) and capacity planning

Preliminary Master Production Schedule MRP MPC

Does MPS needs Any Adjustment ?

Final Master Production Schedule

MPS and Capacity Planning

Steps: Finding out the gross requirement of materials for each products 1. Obtaining the net requirements for each unit of materials taking the inventory into account. 2. Revising the preliminary MPS to accommodate the inadequacy of materials and inventory. 3. Converting adjusted net requirements into planned order releases to determine lot size. 4. Developing load reports 5. Modification the MPS or capacity if required.