Presentation on theme: "MD707 Operations Management Professor Joy Field"— Presentation transcript:
1MD707 Operations Management Professor Joy Field Capacity PlanningMD707 Operations ManagementProfessor Joy Field
2Capacity PlanningCapacity is the maximum rate of output for a facility.Capacity planning considers questions such as:What should be the balance between long-term and short-term capacity?Should we expand capacity before the demand is there or wait until demand is more certain? What facility size is optimal?Capacity decisions follow from a firm’s operations strategy and forecasted demand pattern.
3Measuring Capacity Type Utilization Output measures Input measures Average output rate/maximum capacityMaximum capacity = effective or design capacity?
4Capacity Bottlenecks and Flow Three-Stage Process 1200/hr250/hr3InputsOutputs
5Capacity Cushion Pressures for a large capacity cushion Uneven demandUncertain demandUncertain supplyChanging product mixCapacity comes in large increments (economies of scale)Pressures for a small capacity cushionCapital costs
6Links with Other Operational Characteristics and Priorities Operational Characteristic/PriorityCapacity CushionFaster delivery timesLargerHigh quality levelsSmallerHigher capital intensityLess worker flexibilityMore stable schedules
7Timing of Capacity Increments Two Capacity Strategies Planned unused capacityForecast of capacity requiredPlanned use of short-term options
9Steps in the Capacity Planning Process Estimate capacity requirementsIdentify gapsDevelop alternativesEvaluate the alternatives Select an alternative and implement
10Make or Buy Decision Problem Hahn Manufacturing has been purchasing a key component of one of its products from a local supplier. The current purchase price is $1,500 per unit. Efforts to standardize parts have succeeded to the point that this same component can now be used in five different products. Annual component usage should increase from 150 to 750 units. Management wonders whether it is time to make the component in-house, rather than to continue buying it from the supplier. Fixed costs would increase by about $40,000 per year for the new equipment and tooling needed. The cost of raw materials and variable overhead would be about $1,100 per unit, and labor costs would go up by another $300 per unit produced.Should Hahn make rather than buy?What is the break-even quantity?What other considerations might be important?
11Determining Resource Requirements The amount of resources (e.g., machines, people, service counters, etc.) needed at a bottleneck operation is based on the total processing and setup time required to meet demand.whereM = number of bottleneck resources needed to meet production requirementsD = yearly demand (in number of units/year)p = processing time per unit (in hours)Q = lot sizes = setup time/lot (in hours)N = number of hours available/machine/yearc = capacity cushion (in percentage)
12Resource Capacity Problem You have been asked to put together a capacity plan for a critical bottleneck operation at the Surefoot Sandal Company. Your capacity measure is number of machines. Three products (men’s women’s, and kid’s sandals) are manufactured. The time standards (processing and setup), lot sizes, and demand forecasts are given in the following table. The firm operates two 8-hour shifts, 5 days per week, 50 weeks per year. Experience shows that a capacity cushion of 5 percent is sufficient. Assume a new setup for each lot produced.ProductProcessing (hr/pair)Setup (hr/lot)Size (pairs/lot)Demand Forecast (pairs/yr)Men’s sandals0.050.524080,000Women’s sandals0.102.218060,000Kid’s sandals0.023.8360120,000How many machines are needed at the bottleneck?If the operation currently has two machines, what is the capacity gap?If the operation can not buy any more machines, which products can be made?If the operation currently has five machines, what is the utilization?
13Resource Capacity Problem Solutions Total time available per machine per year(2 shifts/day)(8 hours/shift)(5 days/week)(50 weeks/year) = 4000 hours/machine/yearWith a 5% capacity cushion, the hours/machine/year that are available = 4000(1-0.05) = 3800 hours/machine/yearTotal time to produce the yearly demand of each product (this is equal to the processing time plus the setup time)Men’s =(0.05)(80,000)+(80,000/240)(0.5)= 4167 hrsWomen’s =(0.10)(60,000)+(60,000/180)(2.2)= 6733 hrsKid’s =(0.02)(120,000)+(120,000/360)(3.8)= 3667 hrsTotal time for all products = = hrs
14Resource Capacity Problem Solutions (cont.) Machines needed = (14,567/3800) = 3.83 = 4 machinesCapacity gap is = 2 machinesWith two machines, we have (3800)(2) = 7600 hours of machine capacity. We can make all of the women’s sandals (6733 hours) and some of the men’s sandals, for example.With five machines, (5)(4000) = 20,000 machine-hours/year are available. The total number of machine-hours/year needed for production are 14, Utilization = (14,567/20,000)(100%) = 73%. Thus, the capacity cushion is (100% - 73%) = 27%.