Presentation on theme: "Capacity After deciding what products/services should be offered and how they should be made, management must plan the capacity of its processes. Capacity."— Presentation transcript:
1 CapacityAfter deciding what products/services should be offered and how they should be made, management must plan the capacity of its processes.Capacity is the maximum rate of output for a process. Must have capacity to meet current and future demands. Long-term capacity plans deal with investments in new facilities and equipment. Short-term capacity plans focus on workforce size, overtime budgets, and inventories.This presentation covers the material in Chapter 8, Capacity. The graphic is a mock decision tree.1
2 Capacity PlanningThis activity is central to the long-term success of an organization.Too much capacity can be as problematic as too littleCapacity planning considers questions such as:How much of a cushion is needed?Should we expand capacity before the demand is there or wait until demand is more certain?
3 Capacity PlanningCapacity can be defined as the ability to hold, receive, store, or accommodate.Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size.
4 Measuring capacityNo single capacity measure is universally applicable.Capacity can be expressed in terms of outputs or inputs.Output measures—the usual choice for line flow processes, usually high-volumeLow amount of customizationProduct mix becomes an issue when the output is not uniform in work content.Input measures—used for flexible flow, low-volume processesHigh amount of customizationOutput varies in work content; a measure of total units produced is meaningless.Output is converted to some critical homogeneous input, such as labor hours or machine hours.
5 Utilization Fabrication can make 100 engines/day Management wants 45 engines/dayCurrently producing 50 engines/dayUtilizationpeak =Average output ratePeak capacityx 100%And this is the basic equation for Utilization. In this application we are looking at utilization with respect to the designed capacity of the system.Utilizationeffective =Average output rateEffective capacityx 100%4
6 Utilization Fabrication can make 100 engines/day Management wants 45 engines/dayCurrently producing 50 engines/day50100Utilizationpeak = x 100% = 50%We solve for the utilization.5045Utilizationeffective = x 100% = 111%The average output rate and the capacity must be measured in the same terms.9
7 Types of Capacity Peak capacity Effective capacity Calling for extraordinary effort under ideal conditions that are not sustainableAllows for downtime for maintenance and repair.Engineering assessment of maximum annual outputEffective capacityEconomically sustainable under normal conditions
8 UtilizationThis slide presents the output of the OM Explorer Capacity Utilization analysis showing the same results we obtained manuallyWhat does it mean? Even through the department falls well short of peak capacity, it is well beyond the output rate judged to be most economical. It’s operations could be sustained at that level only through the use of considerable overtime; capacity expansion should be evaluated.13
9 Utilization Utilizationpeak = 50% Utilizationeffective = 111% Capacity cushion – amount of reserve capacity that a firm maintains to handle sudden increases in demand or temporary loss of production capacity.We find the capacity cushions are as shown. This might support an extended discussion of the implications of a negative capacity cushion.Capacity cushionpeak = 100% – 50% = 50%Capacity cushioneffective = 100% – 111% = – 11%13
10 Best Operating Level Average unit cost of output Underutilization OverutilizationBest OperatingLevelVolume4
11 Capacity Bottlenecks“A bottleneck is an operation that has the lowest effective capacity of any operation in the facility and thus limits the system’s output.”InputsTo customers(a) Operation 2 a bottleneck50/hr123200/hrThis slide and the next are based on Figure 8.2. The Figure is shown in two sections to improve legibility.14
12 Capacity Bottlenecks 2 3 1 Inputs To customers 200/hr (b) All operations bottlenecksIn effect, the process can produce only as fast as the slowest operation. True expansion of a process’s capacity occurs only when bottleneck capacity is increased. In the first slide, adding capacity at Operation 1 or 3 will not impact system capacity. However, when adding capacity to Operation 2, must then increase capacity at all 3 operations to increase capacity further.To increase capacity: new equipment, new facilities, expanded operating hours, increased shifts, increased work hours, or redesign the process15
13 Theory of ConstraintsFocus is on whatever impedes, (i.e., bottlenecks) progress toward the goal of maximizing flow of total value-added funds (sales less discounts and variable costs)The focus on bottlenecks is the means to increase throughput and, consequently, the flow of value added funds.The performance of the overall system is a function of how bottleneck operations or processes are scheduled.
14 Theory of ConstraintsShort-term: overtime, temporary employees, outsourceIncrease effective capacity utilization at bottlenecks without experiencing the higher costs and poor customer service usually associated with maintaining output rates at peak capacity.Carefully monitor short-term schedules, minimize idle time, setups (changes from one product to another).
15 Theory of Constraints Identify the system bottleneck(s) Exploit the bottleneck(s)Subordinate all other decisions to step 2Elevate the bottleneck(s)Do not let inertia set inThis slide presents the basic elements of the Theory of Constraints as listed in the text.14
16 Economies of ScaleIncreasing output rate decreases the average unit costFixed costs are spread over more unitsConstruction costs are reducedCosts of purchased materials are cutProcess advantages are found
17 Diseconomies of ScaleWhen the average costs per unit increases as the facility’s size increases.Excessive size can bring complexity, loss of focus, and inefficiencies, which raise the average unit cost.Characterized by loss of agility, less innovation, risk avoidance, and excessive analysis and planning at the expense of action.Nonlinear growth of overhead leads to employee ceilings.
18 Average unit cost (dollars per patient) Economies and Diseconomies of ScaleBest operating level is 500-beds; optimal depends on number of patients per week.250-bed hospital750-bed hospital500-bed hospitalAverage unit cost (dollars per patient)The extended overall cost curve shows diseconomies of scale in this size range.Economies of scaleDiseconomies of scaleOutput rate (patients per week)21
19 Capacity strategy Sizing capacity cushions Average utilization rates near 100% indicate:Need to increase capacityPoor customer service or declining productivityUtilization rates tend to be higher in capital-intensive industries.
20 Capacity Strategy Factors Leading to Large Capacity Cushions When demand is variable, uncertain, or product mix changesWhen finished goods inventory cannot be storedWhen customer service is importantWhen capacity comes in large incrementsWhen supply of material or human resources is uncertainFactors leading to small capacity cushionsUnused capacity costs money.Large cushions hide inefficiencies, absenteeism, unreliable material supply.When subcontractors are available to handle demand peaks
21 Capacity Strategy Timing and sizing of expansion Expansionist strategy Keeps ahead of demand, maintains a capacity cushionLarge, infrequent jumps in capacityHigher financial riskLower risk of losing market shareEconomies of scale may reduce fixed cost per unitMay increase learning and help compete on pricePreemptive marketing
22 Capacity Strategy Wait-and-see strategy Lags behind demand, relying on short-term peak capacity options (overtime, subcontractors) to meet demandLower financial risk associated with overly optimistic demand forecastLower risk of a technological advancement making a new facility obsoleteHigher risk of losing market shareFollow-the-leader strategyAn intermediate strategy of copying competitors’ actionsTends to prevent anyone from gaining a competitive advantage
23 Capacity Strategies Forecast of capacity required Planned unused capacityForecast of capacity requiredCapacity incrementCapacityTime between incrementsWe add in the details describing the various components of the graph.Time(a) Expansionist strategy26
24 Capacity Strategies Forecast of capacity required Planned use of short-term optionsForecast of capacity requiredCapacity incrementCapacityTime between incrementsThe detailed descriptions are added in this slide.Time(b) Wait-and-see strategy29
25 Linking Capacity and Other Decisions Competitive PrioritiesQuality ManagementCapital IntensityResource FlexibilityInventorySchedulingThe authors present a systematic approach to capacity decisions and this series of slides supports that discussion. This slide advances automatically.30
26 [Dp + (D/Q)s]product 1 + ... + [Dp + (D/Q)s]product n Capacity DecisionsEstimate Capacity RequirementsItem Client X Client YAnnual demand forecast (copies)Standard processing time (hour/copy)Average lot size (copies per report)Standard setup time (hours)We need to determine the number of machines required for this set of tasks. This is the basic equation. Note, this has been shortened from the example in the book due to space limitations.[Dp + (D/Q)s]product [Dp + (D/Q)s]product nN[1 – (C/100)]M =32
27 (250 days/year)(1 shift/day)(8 hours/shift)(1.0 – 15/100) Capacity DecisionsEstimate Capacity RequirementsItem Client X Client YAnnual demand forecast (copies)Standard processing time (hour/copy)Average lot size (copies per report)Standard setup time (hours)This slide allows for a detailed discussion of the equation.M =[2000(0.5) + (2000/20)(0.25)]client X + [6000(0.7) + (6000/30)(0.4)]client Y(250 days/year)(1 shift/day)(8 hours/shift)(1.0 – 15/100)34
28 Capacity Decisions Estimate Capacity Requirements Item Client X Client YAnnual demand forecast (copies)Standard processing time (hour/copy)Average lot size (copies per report)Standard setup time (hours)The equation is solved and the number of machines is known. Notice the rounding up, necessary to actually meet the capacity requirements.M = = 4 machines53051700Example 8.235
31 Expand capacity to meet expected demand through Year 5 Capacity DecisionsEvaluate AlternativesExpand capacity to meet expected demand through Year 5Year Demand Cash Flow1 90,000 (90,000 – 80,000)2 = $20,0002 100,000 (100,000 – 80,000)2 = $40,0003 110,000 (110,000 – 80,000)2 = $60,0004 120,000 (120,000 – 80,000)2 = $80,0005 130,000 (130,000 – 80,000)2 = $100,000This slide completes the analysis. It might be important to stress that such an analysis is only valuable in-so-far as it is measured against other alternatives or some pre-defined standard. Students with some background in finance might point out that this is a simplistic example but as long as one methodology is applied consistently, the comparison between alternatives should be meaningful.50
32 Capacity Decisions Evaluate Alternatives This slide shows the results of this analysis using the OM Explorer software.50
33 Capacity Decisions Simulation TIME TO PERFORM (SECONDS) Standard OPERATION Average DeviationReview renewal application for correctness 15 3Check file for violations and restrictions 60 15Process and record payment 25 6Conduct eye test 35 10Photograph applicant 20 5Issue temporary license 30 5The example starts with the basic data about the operation.AVERAGE CUSTOMER ARRIVALTIME (PEOPLE PER MINUTE)8:00 A.M. — 9:00 A.M. 1.259:00 A.M. — 12:00 P.M. 0.7512:00 P.M. — 1:00 P.M. 2.001:00 P.M. — 4:00 P.M. 0.7551
34 Capacity Decisions Bottleneck These two slides support Solved Problem 1 at the end of the Chapter.51