Operations management report on capacity planniing

1. Benedicta Ochuwa Idaewor
Grace Angela Marasigan
Ma Chere Gracita Reyes-Bilog

2. Capacity
The number of units a facility can hold,
receive, store or produce in a period of time.
The upper limit or ceiling on the load that
an operating unit can handle.
Capacity needs include:
Equipment
Space
Employees Skills

3. Goal
 To achieve a match between the long-term supply
capabilities of an organization and the predicted level of
long-run demand.
 Overcapacity - causes operating costs that are too high.
 Under-capacity – causes strained resources and possible
loss of customers.

4. Overcapacity
 The factory's overcapacity led
to falling prices in the stores.
Under-capacity
 An event that has a small
venue but a lot of attendees.

5. Key Questions:
 What kind of capacity is needed?
 How much capacity is needed to match demand?
 When is it needed?
Related Questions:
 How much will it cost?
 What are the potential benefits and risks?
 Should capacity be changed all at once or through several
smaller changes?
 Can the supply chain handle the necessary changes?

6. Capacity decisions
1.) Impact the ability of the organization to meet future
demands
2.) Affect operating costs
3.) Are a major determinant of initial cost
4.) Often involve long-term commitment of resources
5.) Can affect competitiveness
6.) Affect the ease of management
7.) Are more important and complex due to globalization
8.) Need to be planned for in advance due to their
consumption of financial and other resources

7. 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.

8. Actual output
 The rate of output actually achieved
 It cannot exceed effective capacity
Efficiency
Utilization
Measured as percentages

9. Design Capacity = 50 trucks per day
Effective Capacity = 40 trucks per day
Actual Output = 36 trucks per day

10.  Facilities
 Product and Service Factors
 Process Factors
 Human Factors
 Policy Factors
 Operational Factors
 Supply Chain Factors
 External Factors

11. An organization typically bases its capacity strategy on
assumptions and predictions about long-term demand
patterns, technological changes, and the behavior of its
competitors.
Key decisions of capacity planning relate to:
1.) The amount of capacity needed.
2.) The Timing of changes.
3.) The need to maintain balance throughout the system.
4.) The extent of flexibility of facilities and the workforce.

12.  Deciding on the amount of capacity involves
consideration of expected demand and capacity cost.
 Capacity Cushion, which is an amount of excess capacity
in excess of expected demand when there is uncertainty
about demand.
The greater the degree of demand uncertainty, the
greater the amount cushion used.

13. 1.) Estimate future capacity requirements.
2.) Evaluate existing capacity and facilities and identify gaps.
3.) Identify alternatives for meeting requirements.
4.) Conduct financial analyses of each alternative.
5.) Asses key qualitative issues for each alternative.
6.) Select the best alternative for the long term.
7.) Implement the selected alternative.
8.) Monitor results.

14.  Long-term considerations relate to overall level of
capacity requirements
 Short-term considerations relate to probable
variations in capacity requirements

15. Volume
Volume
Volume
Volume
0 0
0 0
Time Time
Time Time
Growth Decline
Cyclical Stable

16. Calculating processing requirements requires reasonably accurate
demand forecasts, standard processing times and available work time

17. Capacity planning for services can present special
challenges due to the nature of services.
Three very important factors in planning service
capacity are:
1.) Need to be near customers
2.) Inability to store services
3.) Degree of demand volatility balance

18. The make-or-buy decision is the act of making
a strategic choice between producing an item
internally (in-house) or buying it externally
(from an outside supplier). The buy side of the
decision also is referred to as outsourcing.
Factors Considered:
1.) Available Capacity
2.) Expertise
3.) Quality Considerations
4.) Nature of Demand
5.) Cost
6.) Risks

19. Aside from the general considerations about the development of
alternatives, other things that can enhance capacity
management such as:
1.) Design Flexibility into system
2.) Take Stage of life cycle into account
- Capacity requirements are often closely linked to the stage of the
life cycle that a product or service is in.

20. 3.) Take a “big picture” approach to capacity changes
- Consider how parts of the system interrelate
4.) Prepare to deal with capacity “chunks”
- Capacity increases are often acquired in fairly large chunks rather
than smooth increments, making it difficult to achieve a match
between desired capacity and feasible capacity
5.) Attempt to smooth out capacity requirements
- Unevenness in capacity requirements also can create certain
problems.
6.) Identify the optimal operating level
- Production units have an optimal rate of output for minimal cost.

21. At the ideal level, cost per unit is the lowest level for that production
unit. Outside the ideal, it will result to either economies of scale or
diseconomies of scale.

22. Economies of scale - If the output
rate is less than the optimal level,
increasing the output rate will result
in decreasing average unit cost, i.e.,
the cost per unit of output drops as
volume of output increases
The reasons for economies of
scale include the following:
a. Fixed costs are spread over more
units, reducing the fixed cost per
unit.
b. Construction costs increase at a
decreasing rate with respect to the
size of the facility to be built.
c. Processing costs decrease as
output rates increase because
operations become more
standardized, which reduces unit
costs.

23. However, if output is increased beyond the optimal level, average unit costs
would become increasingly larger. This is known as the diseconomies of
scale. The reasons for diseconomies of scale are as follows:
a. Distribution costs increase due to traffic congestion and shipping from one
large centralized facility instead of several smaller, decentralized facilities.
b. Complexity increases costs; control and communication become more
problematic.
c. Inflexibility can be an issue.
d. Additional levels of bureaucracy exist, slowing decision making and
approvals for changes.
7.) Choose a strategy if expansion is involved – Consider whether
incremental expansion or single step is more appropriate. Factors include
competitive pressures, market opportunities, costs and availability of finds,
disruption of operations, and training requirements, Also, decide whether to
lead or follow competitors. Leading is more risky but it may have greater
potential for rewards.

24.  The Theory of Constraints was developed and
popularized by Eliyahu Goldratt. TOC, as it is
commonly called, recognizes that organizations exist
to achieve a goal.
 A factor that limits a company's ability to achieve more
of its goal is referred to as a "constraint"

25. 1.) The focus is on balancing flow, not on balancing capacity.
2.) Maximizing output and efficiency of every resource will not maximize
the throughput of the entire system.
3.) An hour lost at a bottleneck or constrained resource is an hour lost for
the whole system. An hour saved at a non-constrained resource does not
necessarily make the whole system more productive.
4.) Inventory is needed only in front of the bottlenecks to prevent them
from sitting idle, and in front of assembly and shipping points to protect
customer schedules. Building inventories elsewhere should be avoided.

26. 5.) Work should be released into the system only as frequently as the
bottlenecks need it. Bottleneck flows should be equal to the market
demand. Pacing everything to the slowest resource minimizes inventory
and operating expenses.
6.) Activation of non-bottleneck resources cannot increase throughput,
nor promote better performance on financial measures.
7.) Every capital investment must be viewed from the perspective of its
global impact on overall throughput (T), inventory (I), and operating
expense (OE).

27.  Market
 Resource
 Material
 Financial
 Supplier
 Knowledge or competency
 Policy
However, in general, these types of
constraints can just be either internal or
external to the system. An internal
constraint is in evidence when the
market demands more from the system
than it can deliver. If this is the case,
then the focus of the organization
should be on discovering that constraint
and following the five focusing steps to
open it up (and potentially remove it).
An external constraint exists when the
system can produce more than the
market will bear. If this is the case, then
the organization should focus on
mechanisms to create more demand for
its products or services.

28. Step 1: Identify the
constraint
Step 2: Develop a plan for
overcoming the constraints
Step 3: Focus resources on
accomplishing Step 2
Step 4: Reduce the effects of
constraints by offloading
work or expanding capability
Step 5: Once overcome, go
back to Step 1 and find new
constraints
EXAMPLE
The demand for parts produced by a
computer-controlled piece of equipment
known as the NCX10 exceeded the
machine's capacity.
Since the factory could only assemble and
sell as many products as they had parts
from the machine.
The capacity of the factory to make
money was tied directly to the output of
the NCX10. The NCX10, therefore, was the
constraint.

29.  In order to manage a constraint, it is first necessary to
identify it.
 In the above example, the NCX10 was identified as the
constraint.
 This knowledge helped the company determine where an
increase in "productivity" would lead to increased profits.
 Concentrating on a non-constraint resource would not
increase the throughput because there would not be an
increase in the number of products assembled.
 To increase throughput, flow through the constraint must
be increased.

30.  Once the constraint is identified, the next step is to focus
on how to get more production within the existing capacity
limitations.
 When the company and the labor union agreed to stagger
lunches, breaks, and shift changes so the machine could
produce during times it previously sat idle.
 This added significantly to the output of the NCX10, and
therefore to the output of the entire plant.
 To manage the output of the plant, a schedule was created
for the constraint. The schedule showed the sequence in
which orders would be processed and their approximate
starting time.

31.  Exploiting the constraint does not ensure that the materials
needed next by the constraint will always show up on time.
 The most important component of subordination is to
control the way material is fed to the non-constraint
resources.
 TOC says that non-constraint resources should only be
allowed to process enough materials to match the output of
the constraint.
 The release of materials is closely controlled and
synchronized to the constraint schedule

32.  The next step is to determine if the output of the constraint is
enough to supply market demand. If not, it is necessary to find
more capacity by "elevating" the constraint.
 In the above example, schedulers were able to remove some of
the load from the constraint by rerouting it across two other
machines.
 They also outsourced some work and brought in an older
machine that could process some of the parts made by the
NCX10.
 These were all ways of adding capacity, or elevating the
constraint.

33.  Once the output of the constraint is no longer the
factor that limits the rate of fulfilling orders, it is
no longer a constraint.
 Step 5 is to go back to Step 1 and identify a new
constraint because there always is one.

34. Alternatives should be evaluated from varying perspectives.
1.) ECONOMIC
 Cost-volume analysis
Break-even point
 Financial analysis
Cash flow
Present value
 Decision theory
 Waiting-line analysis
 Simulation
2.) NON-ECONOMIC
 Public opinion

35.  Focuses on the relationship between cost, revenue
and volume of out-put.
 Purpose of cost-volume analysis is to estimate the
income of an organization under different operating
conditions.
 It is particularly useful as a tool for comparing
capacity alternatives.

37.  One product is involved.
 Everything produced can be sold.
 The variable cost per unit is the same regardless of the
volume.
 Fixed costs do not change with volume changes, or they are
step changes.
 The revenue per unit is the same regardless of volume.
 Revenue per unit exceeds variable cost per unit.

38. Important terms in financial analysis:
 Cash flow
 The difference between cash received from sales and
other sources, and cash outflow for labor, material,
overhead, and taxes
 Present value
 The sum, in current value, of all future cash flow of an
investment proposal

39. a. Payback - a crude but widely used method that focuses on the length
of time it will take for an investment to return its original costs. Payback
ignores the time value of money. Its use is easier to rationalize for short-
term than for long-term projects.
b. Present Value – summarizes the initial costs of an investment, its
estimated annual cash flows, and any expected salvage value in a single
value called equivalent current value, taking into account the time value
of money (interest rates)
c. Internal Rate of Return (IRR) – summarizes the initial cost, expected
annual cash flows, and estimated future salvage value of an investment
proposal in an equivalent interest rate. In other words, this method
identifies the rate of return that equates the estimate future returns and
the initial costs.

40. These techniques are appropriate when there is a
high degree of certainty associated with estimates of
future cash flows. In many instances, however,
operations managers and other managers must deal
with situations better described as risky or
uncertain.

41. A helpful tool for financial comparison of alternatives under conditions
of risk or uncertainty. It is suited to capacity decisions and to a wide
range of other decisions managers must make such as product and
service design, equipment selection and location planning.

44. 1.) Mistakes in Decision Process
2.) Bounded Rationality
3.) Suboptimization

45. It happens because of mistakes on the following
decisions steps:
1 • Identify the problem.
2 • Specify the objectives and criteria for solution.
3 • Develop suitable alternatives.
4 • Analyze and compare alternatives.
5 • Select the best alternative.
6 • Implement the solution.
7 • Monitor to see that desired result is achieved.

46. Bounded Rationality
Limitations on decision making caused by costs,
human abilities, time, technology, and availability of
information.
Because of these limitations, managers can’t always
expect to reach decisions that are optimal in the
sense of providing the best possible outcome. They
might instead, resort to a satisfactory solution.

47. Usually occurs because
organizations typically
departmentalize decisions. The
result of different departments
each attempting to reach a
solution that is optimum for that
department. Unfortunately, what
is optimal for one department
may not be optimal for the
organization as a whole.

49. Decision-making under Certainty
 When it is known for certain which of the possible future
conditions will actually happen, the decision is usually
relatively straightforward – simply choose the alternative
that has the best payoff under that state of nature.
Decision-making under Uncertainty
 At the opposite extreme is complete uncertainty. No
information on how likely the various states of nature are.

50. Under those conditions, 4 possible decision criteria
are:
Maximin
Choose the alternative with the best of the
worst possible payoff.
Maximax
Choose the alternative with the best
possible payoff.
Laplace
Choose the alternative with the best
average period of any of the alternatives.
Minimax Regret
Choose the alternative that has the least
of worst regrets.

51. Decision-making under Risk
 Between the two extremes of certainty and uncertainty
lies the case of risk: the probability of occurrence for
each state is known. Decisions made under the condition
that the probability of occurrence for each state of nature
can be estimated. A widely applied criterion is expected
monetary value (EMV).
 In EMV, the manager determines the expected payoff of
each alternative, and then chooses the alternative that
has the best expected payoff. This approach is most
appropriate when the decision maker is neither risk
averse nor risk seeking

52. Decision Tree
 A schematic representation of the alternatives available to a decision
maker and their possible consequences. The term gets its name from
the tree-like appearance of the diagram. The decision tree is
particularly useful for analyzing situations that involve sequential
decisions. A decision tree is composed of a number of nodes that have
branches emanating from them.

53. Other methods under Decision Theory are:
 Expected Value of Perfect Information (EPVI) -
The difference between the expected payoff with
perfect information and the expected payoff under
risk
 Sensitivity Analysis – provides a range of
probability for which an alternative has the best
expected payoff.

54. Analysis of lines is often useful for
designing or modifying service
systems. Waiting lines have a
tendency to form in a wide variety of
service systems. The lines are
symptoms of bottleneck operations.
Analysis is useful in helping managers
choose a capacity level that will be
cost-effective through balancing the
cost of having customers wait with
the cost of providing additional
capacity.

55. This is useful in evaluating “what
if” scenarios. What if analysis is a
powerful tool for improvement
that evaluates how strategic,
tactical or operational changes may
impact the business. Through
different scenarios you will be able
to perform a true-to-life analysis of
your processes without putting
your business operation at risk.
One will be able to answer questions
like:
How would the processing time of a
case decrease if the number of
available resources is doubled?
What would be the cost/benefit rate
of reducing the process time in a
specified activity?
What would be the effect of altering
the working shift configuration in
the operational cost and service
level?

56. Capacity planning impacts all areas of the organization
 It determines the conditions under which operations will have to function
 Flexibility allows an organization to be agile
 It reduces the organization’s dependence on forecast accuracy and
reliability
 Many organizations utilize capacity cushions to achieve flexibility
 Bottleneck management is one way by which organizations can
enhance their effective capacities
 Capacity expansion strategies are important organizational considerations
 Expand-early strategy
 Wait-and-see strategy
 Capacity contraction is sometimes necessary
 Capacity disposal strategies become important under these conditions

57. Thank You!!!
Happy Valentines Day…

58. Next is Chapter 6A
Process Selection