Operations Management Chapter 3

1. CHAPTER 3:
SYSTEM
DESIGN AND
CAPACITY
Operation Management

2. 1st
• Manufacturing and
Service System
Manufacturing and service system are
arrangement of facilities, equipment, and
people to provide goods and services
under controlled condition, both must be
design with capacity limitation.

3. - reduce standardized product in
large volumes. this plant and
machinery have a finite capacity
and contribute fixed costs that
must be borne by the product
produced ( finite capacity or
limited capacity)
The cost of output relative to
the cost of input can be
measured.
Manufacturing
System
01
02

4. Service System
- present more
uncertainty with respect
to both capacity and cost.
- service are produced and
consumed in the presence of the
customer and there is a little or
no opportunity to store value, as
in a finished goods inventory

5. Design and
Systems Capacity
Production system design
involves planning for the
inputs, transformation
activities, and outputs of
production operation.
Design plays a major role because
they entail significant investment of
funds and stablish cost and
productivity pattern that continue in
future.
capacity can be expressed in
number of units of output per
period.

6. 02
- reduced by long-range
effect product mix long-range
market conditions, tight
quality specification,
imbalance in equipment or
labor.
-design process primarily
depends on marketing
design and operation
function.
01
- is the plan or engineered
rate of output of goods or
services under normal or
full-scale operating
condition.
•The best approach is to
plan for some in-between
level of capacity
03
DESIGN
CAPACITY

7. Examples of
Design
Capacity
Design capacity for facilities
-restaurant design for 120
seats
- Design capacity of sugar
factory is 150 tons of
sugarcane crash per day.

8. - Reduce by short-range affects,
actual demand, inefficiency of
workers, machine inefficiencies,
scheduling planning and control.
is less than capacity or at the most
equal because of the limitations of
product mix, quality specification, and
break down.
*System efficiency is expressed
as ratio of actual measured
output to the system capacity.
- the maximum output of the specific
product or product makes the
system of workers and machines is
capable of producing as an
integrated whole.
System/ Effective
Capacity

9. Efficiency Utilization
efficiency is the ratio of
actual output to the
effective capacity.
Utilization is the ratio of
actual output to design
capacity.
Two measures of System
effective

10. FORMULA:
Efficiency= Actual output. × 100%
Effective Capacity
Utilization = Actual output x 100%
Design capacity
For system Capacity
Human Capacity
= (Actual working hour)
(attendance rate)(direct
labor rate)(equivalent man
power)
Machine Capacity
= (Operating hours)(operating
rate)(number of machines)

11. capacity decisions are strategic
in nature. capacities will express
as a volume of output per period
of time.
the objective of capacity
management is too much the
level of operations to the level
of demand.
Capacity planning is to be
carried out keeping in mind
future growth and expansion
plans, market trends, sales
forecasting.
- design of the production
system involves planning for the
inputs conversion process and
outputs of production operation.
Capacity planning is to be
carried out keeping in mind
future growth and expansion
plans, market trends, sales
forecasting.
the effective management of
capacity is the most important
responsibility of production
management
Capacity
Planning

12. CAPACITY PLANNING
3 Key Consideration
-level of demand
- Constant production
-Availability of funds
3 Steps of Capacity Planning
-determining the capacity
requirement
-Analyze the current capacity
-Planning for the future

13. Production managers are more
concerned about the capacity
for the following reasons
Capacity affects
the scheduling
system
Sufficient capacity
is required to meet
the customers
demand in time
Capacity creation
requires an
investment
Capacity affects the
cost efficiency of
operations

14. PROCESS OF
CAPACITY PLANNING

15. Capacity requirements can be evaluated from
two perspectives
Long-term capacity
strategies
Because future demand and
technology are uncertain,
determining long-term capacity
requirements is more difficult.
Long-term capacity requirements
are determined by marketing
plans, product development, and
product life-cycle. Long-term
capacity planning is concerned
with accommodating major
changes that have a long-term
impact on output levels.
Short-term capacity
strategies
Fundamental capacity is fixed for
short-term periods of up to one
year. The major facilities will not
be altered. There are numerous
short-term adjustments that can
be made to increase or decrease
capacity. The adjustments
required are determined by the
conversion process, such as
whether it is capital or labor
intensive, or whether the product
can be stored as inventory.

16. Long-term capacity strategies
Parameters that will affect long-range capacity decisions:
● Multiple products. Companies produce multiple products using the same facilities in order to
maximize profits. The production of multiple products reduces the risk of failure. Having more than
one product allows capacity planners to perform better. Because products are at various stages of
their life cycles, scheduling them to maximize capacity utilization is simple.
● Phasing in capacity. The rate of obsolescence is high in high-tech industries and in industries
where technology advances at a rapid pace. The products should be available on the market as
soon as possible. The construction of the facilities will take a long time, and there isn't much time
because the products must be introduced to the market as soon as possible. The solution in this
case is to phase in capacity on a modular basis. A commitment is made for building funds and men
to facilities over a 3-5-year period. This is an efficient method of capitalizing on technological
advances.
● Phasing out capacity. Excessive plant closures and downtime are caused by outdated
manufacturing facilities. Closures have an impact that extends beyond the fixed costs of plant and
machinery. As a result, the phase-out here is done in a humane manner that has no negative impact
on the community. The phasing out options provide alternative arrangements for men, such as
shifting them to other jobs or locations, compensating employees, and etc.
01

17. Short-term capacity strategies
The short-term capacity strategies are:
• Inventories: Stock finished goods during slack periods to meet the demand during peak
period.
• Backlog: During peak periods, the willing customers are requested to wait and their orders
are fulfilled after a peak demand period.
• Employment level (hiring or firing): Hire additional employees during peak demand
period and lay off employees as demand decreases.
• Employee training: Develop multi-skilled employees through training so that they can be
rotated among different jobs. The multi skilling helps as an alternative to hiring employees.
• Subcontracting: During peak periods, hire the capacity of other firms temporarily to make
the component parts or products.
• Process design: Change job contents by redesigning the job.
02

18. Importance of Capacity Decisions
 .
Capacity decisions have a
real impact on the
organization's ability to
meet future product and
service demand; capacity
essentially limits the rate of
output possible. Having
the capacity to meet
demand allows a company
to capitalize on
tremendous opportunities.
Capacity decisions have an impact
on operating costs. Capacity and
demand requirements should
ideally be matched, which will
reduce operating costs. In practice,
this is not always possible because
actual demand differs from
expected demand or varies (e.g.,
cyclically). In such cases, a
decision may be made to try to
balance the costs of excess and
under capacity.
Capacity is typically a
significant determinant of
initial cost. The higher the
capacity of a productive
unit, the higher its cost.
This does not necessarily
imply a one-to-one
relationship; larger units
tend to be less expensive
than smaller units

19. Importance of Capacity Decisions
 .
Capacity decisions
frequently involve
long-term resource
commitments and the
fact that, once
implemented, it may
be difficult or
impossible to change
those decisions
without incurring
significant costs.
Capacity decisions can
have an impact on
competitiveness. If a firm
has excess capacity or the
ability to quickly add
capacity, this may act as a
barrier to entry for other
firms. Capacity can also
influence delivery speed,
which can be a competitive
advantage.
Capacity influences
management ease;
having adequate
capacity makes
management easier
than having insufficient
capacity.

20. THANK
YOU!