Post on 27-Dec-2015
DOM 511: OPERATIONS MANAGEMENT PRACTICE
Magutu Obara Peterson University of Nairobi
School of BusinessDépartement of Management
ScienceMay - August 2012
1magutumop2011
CAPACITY MANAGEME
NT2
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Understanding CapacityCapacity Utilization & Best Operating
LevelEconomies & Diseconomies of ScaleThe Experience CurveCapacity Focus, Flexibility & PlanningDetermining Capacity RequirementsDecision TreesCapacity Utilization & Service Quality
Objectives
The Airbus A380 is the largest plane ever built with 555 seats. With some modest redesign, such as extending the length of the plane, it could carry as many as 800 airline passengers. The pieces of the plane are so big, such as the cockpit, tail, wings, and cabin sections that the factories must be reconfigured. The European Consortium that builds the Airbus must make and transport these parts, some weighing 100 tons each, among many countries such as Spain, Britain, France, and Germany. Not only must factory capacity and scale be upsized, the elaborate transportation system to move these parts among European factories must also be changed. At a maximum speed of 15 miles per hour, the trip to Toulouse, France, from the seaport of Bordeaux takes three days. The French government has redone the entire 159-mile route, including 18 miles of new bypass routes around five towns, to handle the six giant truck trailers that carry these manufactured parts.
Introduction
Capacity Management - The Meaning Of CapacityCapacity is the capability of a manufacturing or service resource such as a facility, process, workstation, or piece of equipment to accomplish its purpose over a specified time period.
The capacity of a production unit (e.g. machine, factory) is its ability to produce or do that which the customer requires.
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Capacity Management - The Meaning Of Capacity In operations management, three types of capacity are
often referred to:Potential Capacity - The capacity that can be made
available to influence the planning of senior management. This is essentially a long-term decision that does not influence day-to-day production management
Immediate Capacity - The amount of production capacity that can be made available in the short-term. This is the maximum potential capacity - assuming that it is used productively
Effective Capacity - An important concept. Not all productive capacity is actually used or usable. It is important for production managers to understand what capacity is actually achievable.
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Typical capacity issues to address include:Can the facility, process, or equipment
accommodate new goods and services and adapt to changing demand for existing goods and services?
How large should facility, process, or equipment capacity be?
When should capacity changes take place?
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Capacity is determined by;Resources available to the organization
– facilities, equipment & labor (technology & process selection)
How resources available are organized (process design & facility layout)
Efficiency of resources as determined by specific work methods & procedures (work & supply chain design)
Capacity is vital to designing and managing value chains
At every stage of a chain, sufficient capacity must exist & be coordinated with other stages & processes
Capacity and Value Chain
Issues of concern in capacity;Can the facility, process or equipment accommodate new goods & services & adapt to changing demand for existing goods & services?
How large should facility, process, or equipment capacity be?
When should capacity changes take place?
Issues of concern in capacity;
Capacity is the capability of a manufacturing or service resource such as facility, process, workstation, or piece of equipment to accomplish its purpose over a specified time period
Capacity can be view from 4 dimensions;Quantity QualityTime Location
What are the units of measuring capacity?
Understanding Capacity
Capacity is the capability of a manufacturing or service resource such as facility, process, workstation, or piece of equipment to accomplish its purpose over a specified time period
Capacity can be view from 4 dimensions; Quantity Quality Time Location
Time may be a constraint where a customer has a particular required delivery date. In this situation, capacity managers often "plan backwards". In other words, they allocate the final stage (operation) of the production tasks to the period where delivery is required; the penultimate task one period earlier and so on.
What are the units of measuring capacity?
Understanding Capacity
Capacity PlanningOperations managers must decide
on the appropriate levels of capacity to meet current & future demand – hence need for proper planning
Capacity planning should take place at multiple levels i.e capacity planning is generally viewed in 3 durations
Long range – Annual plans for 2-5 years. Basically plans on the productive resources; Takes a long time to acquire & needs top mgt participation & approval
Capacity PlanningIntermediate range ; monthly/quarterly
plans for the next 6 to 18 months – decisions to make include, hiring, layoffs, new tools & minor equipment purchases & subcontracting
Short range ; less than one month, capacity issues addressed thro’ overtime, personnel transfers & production routings
Capacity PlanningProduction SchedulingA schedule is a representation of the time
necessary to carry out a particular task.A job schedule shows the plan for the
manufacture of a particular job. It is created through "work / study" reviews which determine the method and times required.
Most businesses carry out several production tasks at one time - which entails amalgamating several job schedules. This process is called "scheduling". The result is known as the production schedule or factory schedule for the factory/plant as a whole.
Capacity PlanningIn preparing a production schedule, attention
needs to be paid to:- Delivery dates (when are finished products
due?) - Job schedules for each relevant production task- Capacities of production sections or departments involved- Efficiency of these production sections or departments- Planned holidays- Anticipated sickness / absenteeism / training- Availability of raw materials, components and packaging
Strategic Capacity PlanningDefined
Capacity planning is the analysis of what you are capable of producing versus what your expected demand will be.
Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size that best supports the firms long range competitive strategy. This plans constrain the firm on volume & variety to deliver to the market place.
components of capacity managementThere are two components of capacity
management:Capacity Planning (creating sufficient,
flexible, capable, capacity & a valid, best, "do-able", resilient, plan, to accommodate demand)
Capacity Control (ensuring the plan is met by managing resources)
Without capacity (and materials) to meet the demand, the plan cannot be valid.
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A. Capacity PlanningThere are, in a typical business, four levels where
capacity planning (& control) is required (as shown below). At each of these levels there may be a one-to-many relationship with the level below.
There are certainly differences in both planning detail and planning horizon required to satisfy each level. For example at strategic planning level one, product groups (not necessarily individual products) are being forecast with an horizon of perhaps years. At level four, when you are managing an individual resource, you are dealing with detailed operating instructions for an individual process and horizons of perhaps seconds:
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Level 1: Strategic Capacity ManagementCapacity should be first be analyzed during business
planning sessions. The company should have a good sense of their current capacity and at what percentage they are operating.
(as a part of business planning) includes capacity management activity to:
Define longer term capacity goals (time phased resources required to meet the business plan) Capability Capacity Impact of New Product Introduction / old product kill
Manage gross and long term capacity to meet it which will include the following considerations and actions: Devise upsize / downsize strategy (output or
responsiveness)
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Level 1: Strategic Capacity Management
Manage volume & variety change Place products in business units / locations & position
capacity geographically (to source supply) Devise strategies to manage seasonal demand /
demand variability
Attack the drivers of performance & attributes of resources to provide: Resource Viability & Core Competence
Capacity (line) balancing Replacement theory (Repair or replace?) Create resilience and consistency of service in the supply
chain
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Level 2. Development, Sales and Operations Management(Management of the demands on the
business and the gross capacity to meet it and make it happen!) (The Sales & Operations part of this process is mainly covered in a separate article from our early work in this area "Participative Sales and Operations Planning".)
We have two general views of this process, as we will explain further:
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Level 2. Development, Sales and Operations Management
If you basically, sell what you can make, you need a "Participative Master Production Scheduling Process" assisted by a simple capacity modelling system, (to organise resources to deliver it, which basically is answering the question, "When?")
Otherwise, you need or a full "Development, Sales & Operations Management Process" to make the trade-offs between the difficulty of selling vs. the difficulty of providing and to additionally manage the development and sales processes, which answers the three questions, "What, If and When?".
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Level 3: Workflow Management / Scheduling(Scheduling of individual functions, cells or process
areas)In the mid 1970's the commercial availability of
computers also spawned capacity planning tools, whose models were very sophisticated even by comparison with today's systems. It is mathematically possible to create a comprehensive model of the manufacturing or supply chain processes run on powerful computers, which use a variety of optimising techniques, in recently created "Advanced Scheduling Systems", in order to schedule work. (Previous Technique T020: "Close Scheduling" provides an introduction to scheduling.)
Also MRP2 Systems took the MRP1 plan and scheduled operations to create a "work-to" list at operational level in the early 1980's.
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Level 3: Workflow Management / SchedulingHowever it is difficult to justify the additional
cost and administration that these systems require, if:Less sophisticated processes such as an
effective master production scheduling process supported by a rough-cut capacity model is implemented first.
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Level 4: Process Management(E.g. individual settings, speeds, feeds, skills, set /
make ready times etc.)At level four we have been involved in some
interesting & lively debates about:What is the best method (running speeds, feeds,
process settings, least waste, shortest lead-time etc.)? This is where Taguchi methods (Design Of Experiments) is particularly useful. (In one recent example we showed that by reducing conveyor speed, more throughput could be achieved.)
Identifying and then driving skills development (versatility / mobility) using skills matrices
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B. Capacity ControlHow much output should operations ideally
produce if the order book is empty?The answer of course is zero and of course
ideally they should incur zero cost (a zero capacity floor) in doing so. So why are operations measured on maximising output?
The key question is how can we de-bottleneck, perhaps by reassigning underutilised resources.
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B. Capacity ControlStrategic / Business Planning (where typically
budgetary type controls operate) but this plan must be "do-able" (established by modelling it using the level 2 Rough Cut Capacity Planning tools)
Development, Sales and Operations Management / Master Production Schedule, where the overall plan is measured and performance against the plan analysed and actions taken to bring output into line with demand, but any conflict between the business plan and what customers want has to be reconciled at this level, not passed to level 3 unresolved.
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Importance of Capacity Decisions:
1.Impacts ability to meet future demands2.Affects operating costs3.Major determinant of initial costs4.Involves long-term commitment5.Affects competitiveness6.Affects ease of management7.Globalization adds complexity8.Impacts long range planning
Capacity is measured as efficiency and utilization
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Measuring CapacityThe decision to increase capacity is not easy and can be
extremely costly.Make sure you've fully analyzed all of your options and
backed them with financial calculations. If you do purchase a new piece of equipment, there's a
tendency to want to operate them at full-capacity to reduce the return on investment. This is a false way of thinking. You should be operating to meet your demand, not to keep the machines running. This line of thinking will lead to excess materials and increased costs.
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
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Actual outputEfficiency =
Effective capacity
Actual outputUtilization =
Design capacity
Both measures expressed as percentages
Efficiency/Utilization Example
Actual output = 36 units/day
Efficiency = = 90% Effective capacity 40 units/ day
Utilization = Actual output or used = 36 units/day
= 72% Design capacity 50 units/day
Design capacity is a.k.a best operating levelActual output is a.k.a capacity used
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Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
Capacity Utilization
WhereCapacity used
rate of output actually achieved Best operating level
capacity for which the process was designed
level operating Best
usedCapacity rate nutilizatioCapacity
Best Operating LevelExample: Engineers design engines and assembly lines to operate at an ideal or “best operating level” to maximize output and minimize ware
Example: Engineers design engines and assembly lines to operate at an ideal or “best operating level” to maximize output and minimize ware
Underutilization
Best OperatingLevel
Averageunit costof output
Volume
Overutilization
Example of Capacity Utilization
During one week of production, a plant produced 83 units of a product. Its historic highest or best utilization recorded was 120 units per week. What is this plant’s capacity utilization rate?
During one week of production, a plant produced 83 units of a product. Its historic highest or best utilization recorded was 120 units per week. What is this plant’s capacity utilization rate?
Answer: Capacity utilization rate = Capacity used .
Best operating level = 83/120 =0.69 or 69%
Answer: Capacity utilization rate = Capacity used .
Best operating level = 83/120 =0.69 or 69%
Economies & Diseconomies of Scale
100-unitplant
200-unitplant 300-unit
plant
400-unitplant
Volume
Averageunit costof output
Economies of Scale and the Experience Curve workingEconomies of Scale and the Experience Curve working
Diseconomies of Scale start workingDiseconomies of Scale start working
Economies & Diseconomies
•Economies of scale are achieved when the average unit cost of a good or service decreases as the capacity and/or volume of throughput increases
•Reverse for diseconomies of scale
The Experience Curve
As plants produce more products, they gain experience in the best production methods and reduce their costs per unit
As plants produce more products, they gain experience in the best production methods and reduce their costs per unit
Total accumulated production of units
Cost orpriceper unit
Yesterday
TodayTomorrow
The Experience Curve
Class Exercise :
Discuss the impact of the experience curve on effective capacity and state the issues which may hinder a firm from riding smoothly down the experience curve.
Capacity Focus
The concept of the focused factory holds that production facilities work best when they focus on a fairly limited set of production objectives
Plants Within Plants (PWP) (from Skinner)Extend focus concept to operating level
Capacity FocusDimensions of capacity focus
CostQualityFlexibilityNew product introductionReliabilityShort lead times
With the new manufacturing technology it is possible for a firm to focus on a selected set of dimensions that most work towards corporate objectives
Capacity FlexibilityFlexible plants – Having the ability to
rapidly increase or decrease production levels & change from one product to another.
Flexible processes ( Economies of scope ) – permit rapid low cost switching from one product to another
Flexible workers – Multi skilled, ability to switch easily from one kind of task to another, require broad based training
Capacity Planning: Balance
Stage 1 Stage 2 Stage 3Unitsper
month6,000 7,000 5,000
Unbalanced stages of productionUnbalanced stages of production
Stage 1 Stage 2 Stage 3Unitsper
month6,000 6,000 6,000
Balanced stages of productionBalanced stages of production
Capacity Planning(i) Maintaining System Balance: Output
of one stage is the exact input requirements for the next stage
Balancing Techniques
• Add capacity to bottleneck work centers• Scheduling overtime
• Leasing equipment
• subcontracting
• Use of buffer inventories in front of the bottleneck
• Duplicate the facilities of bottleneck dept.
Capacity Planningii) Frequency of Capacity Additions
Frequent Additions ; Costs• Removing old & replacing new
• Training employees on new
• Purchase cost of new
• Opportunity cost of idle plant during changeover
Infrequent Additions ; Costs• Purchase cost very high – big chunks
• Overhead of underutilization –
• Lost sales/market share during waiting
period
Managing Capacity By Adjusting Short-Term Capacity Levels
•Add or share equipment
•Sell unused capacity
•Change labor capacity & schedules
•Change labor skill mix
Managing Capacity By Shifting & stimulating Demand
•Vary the price of goods or services
•Provide customers information e.g call centers personal service time
•Advertising & promotion eg Valetine day promotions
•Add peripheral goods and/or services
•Provide reservations
Capacity Planning
iii) External Sources of Capacity
May be cheaper in the short run; Methods of achieving this include;
•Outsourcing
•Sharing
Determining Capacity Requirements
1. Forecast sales within each individual product line
2. Calculate equipment and labor requirements to meet the forecasts
3. Project equipment and labor availability over the planning horizon
Capacity CushionA firm may decide to have capacity in
excess of expected demand I.e capacity cushion
Reasons
Anticipation of growth in demand
Provision for errors in estimation of demand
Compensation for any loss in capacity if BOL is not attainable
** Positive Vs Negative capacity cushion
Decision TheoryHelpful tool for financial comparison of
alternatives under conditions of risk or uncertainty Suited to capacity decisions
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Example of a Decision Tree Problem
A glass factory specializing in crystal is experiencing a substantial backlog, and the firm's management is considering three courses of action:
A) Arrange for subcontractingB) Construct new facilitiesC) Do nothing (no change)
The correct choice depends largely upon demand, which may be low, medium, or high. By consensus, management estimates the respective demand probabilities as 0.1, 0.5, and 0.4.
A glass factory specializing in crystal is experiencing a substantial backlog, and the firm's management is considering three courses of action:
A) Arrange for subcontractingB) Construct new facilitiesC) Do nothing (no change)
The correct choice depends largely upon demand, which may be low, medium, or high. By consensus, management estimates the respective demand probabilities as 0.1, 0.5, and 0.4.
Example of a Decision Tree Problem (Continued): The Payoff Table
0.1 0.5 0.4Low Medium High
A 10 50 90B -120 25 200C 20 40 60
The management also estimates the profits when choosing from the three alternatives (A, B, and C) under the differing probable levels of demand. These profits, in thousands of dollars are presented in the table below:
The management also estimates the profits when choosing from the three alternatives (A, B, and C) under the differing probable levels of demand. These profits, in thousands of dollars are presented in the table below:
Example of a Decision Tree Problem (Continued): Step 1. We start by drawing the three decisions
A
B
C
Example of Decision Tree Problem (Continued): Step 2. Add our possible states of nature, probabilities, and payoffs
A
B
C
High demand (0.4)
Medium demand (0.5)
Low demand (0.1)
$90k
$50k
$10k
High demand (0.4)
Medium demand (0.5)
Low demand (0.1)
$200k
$25k
-$120k
High demand (0.4)
Medium demand (0.5)
Low demand (0.1)
$60k
$40k
$20k
Example of Decision Tree Problem (Continued): Step 3. Determine the expected value of each decision
High demand (0.4)High demand (0.4)
Medium demand (0.5)Medium demand (0.5)
Low demand (0.1)Low demand (0.1)
AA
$90k$90k
$50k$50k
$10k$10k
EVA=0.4(90)+0.5(50)+0.1(10)=$62kEVA=0.4(90)+0.5(50)+0.1(10)=$62k
$62k$62k
Example of Decision Tree Problem (Continued): Step 4. Make decision
High demand (0.4)
Medium demand (0.5)
Low demand (0.1)
High demand (0.4)
Medium demand (0.5)
Low demand (0.1)
A
B
CHigh demand (0.4)
Medium demand (0.5)
Low demand (0.1)
$90k
$50k
$10k
$200k
$25k
-$120k
$60k
$40k
$20k
$62k
$80.5k
$46k
Alternative B generates the greatest expected profit, so our choice is B or to construct a new facility
Alternative B generates the greatest expected profit, so our choice is B or to construct a new facility
Planning Service Capacity vs. Manufacturing Capacity
Time: Services can not be stored for later use and capacity must be available to provide a service when it is needed
Location: Service must be at the customer demand point and capacity must be located near the customer
Volatility of Demand: Much greater than in manufacturing. Services can not be stored hence hence inventory can not smooth demand. Also customers directly interact with system & have varying needs
Capacity Utilization & Service Quality
Best operating point is near 70% of capacity - Enough to keep servers busy but allows enough time to serve customers individually and keep enough capacity in reserve so as not to create too many managerial headaches.
From 70% to 100% of service capacity, what do you think happens to service quality?
Capacity Utilization & Service Quality
0102030405060708090100
10 20 30 40 50 60 70 80 90 100
100%
70%
Critical zone
Mean service rate
Mean arrival rate
Capacity Utilization & Service Quality
From 70% to 100% of service capacity, ( The critical zone) customers are processed through the system but service quality declines. Above the critical zone, the line builds up & it is likely that many customers may never be served.
Capacity Utilization & Service Quality
Optimal utilization rate is very context specific. Low rates are appropriate when both the degree of uncertainty & the stakes are high. Eg hospitals & fire depts. Commuter trains & postal sorting operations are relatively predictable services & one can plan to operate much near 100% utilization
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Capacity Expansion Strategies:Entrepreneurial StageShift resources to different tasks as needed
Customer coproduction
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Capacity Expansion Strategies: Multisite Rationalization StageAdd services to existing site
Duplicate existing services at additional sites
Do both
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Capacity Expansion Strategies: Growth Stage“Bermuda Triangle” of operational
complexityManagement difficulty exceeds management
ability
New capacity management challengesNeed for fresh ideasNeed to upgrade older facilities
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Capacity Expansion Strategies: Maturity StageFocus on operational efficiencies
Remodeling and replacement
Service modification
Duplication across entire service system
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Capacity Expansion Strategies: Maturity StageFocus on operational efficiencies
Remodeling and replacement
Service modification
Duplication across entire service system
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