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# 6

Capacity Planning

Homework 5, 6,14,
Sup1, Sup2
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.

## For Operations Management, 9e by

Krajewski/Ritzman/Malhotra
2010 Pearson Education

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Sup Homework #1
The following diagram shows a 4-step process that begins with Operation 1 and ends
with Operation 4. The rates shown in each box represent the effective capacity of that
operation.
a.Determine the capacity of this process.
b.Which action would yield the greatest increase in process capacity?
1.
increase the capacity of operation 1 by 15%
2. increase the capacity of operation 2 by 10%
3. increase the capacity of operation 3 by 10%
c.
What is the new capacity of the process for each scenario?

12/hr.

15/hr.

11/hr.

14/hr.

## Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.

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Sup Homework #2
A producer of pottery is considering the addition of a new plant to absorb the backlog of
demand that now exists. The primary location being considered will have fixed costs of
\$9,200 per month and variable costs of 70 cents per unit produced. Each item is sold to
retailers at a price that averages 90 cents.
a.What volume per month is required in order to break even?
b.What profit would be realized on a monthly volume of 61,000 units, 87,000 units?
c.What volume is needed to obtain a profit of \$16,000 per month?
d.What volume is needed to provide a revenue of \$23,000 per month?
e.Plot the total cost and total revenue lines.

## Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.

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Planning Capacity
Capacity
Utilization

Learning Objectives

## Overview of capacity planning

Utilization

Cushion

Capacity Bottlenecks

## Estimating Capacity Requirements

Decision Trees

Cost-Volume Analysis
o
Break Even Point

## Choosing Capacity (In / Out)

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Planning Capacity
Average output rate
Utilization = Maximum capacity

100%

## Ex: Barbershop 2 barbers. Capacity is defined as cutting hours per week.

Under peak conditions the effective capacity is 100 cutting hours per week. Design cap.

Idea of Cushion

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Cushion
High Cushion

Low Cushion

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Bottleneck Operation
Bottleneck

Operation 1
20/hr.

Operation 2
10/hr.

Operation 3
15/hr.

## Maximum output rate

limited by bottleneck

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67

The following diagram describes a process that consists of eight separate operations, with
sequential relationships and capacities (units per hour) as shown.

## a. What is the current capacity of the entire process?

b. If you could increase the capacity of only two operations through process improvement efforts, which two
operations would you select, how much additional capacity would you strive for in each of those operations,
and what would the resulting capacity of the entire process be?

15/hr.

10/hr.

20/hr.

5/hr.

8/hr.

12/hr.

34/hr.

30/hr.

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## Tools for Capacity Planning

Waiting-line models
Useful

Supplement

## C, Waiting Lines is a fuller

treatment of the models

Simulation
Can

## be used when models are too complex for

waiting-line analysis

Decision trees
Useful

## when demand is uncertain and

sequential decisions are involved

## Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.

69

Decision Theory
Helpful tool for financial comparison of alternatives
under conditions of risk or uncertainty
Suited to capacity decisions
See Supplement Decision Making

## Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.

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Waiting-Line Analysis
Useful for designing or modifying service
systems
Waiting-lines occur across a wide variety of
service systems
Waiting-lines are caused by bottlenecks in
the process
Helps managers plan capacity level that will
be cost-effective by balancing the cost of
having customers wait in line with the cost of
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## Planning Service Capacity

Need to be near customers
Capacity and location are closely tied

## Inability to store services

Capacity must be matched with timing of
demand

## Degree of volatility of demand

Peak demand periods

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In-House or Outsourcing
Outsource: obtain a good or service
from an external provider

1.
2.
3.
4.
5.
6.

Available capacity
Expertise
Quality considerations
Nature of demand
Cost
Risk

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## Determine the Break Even Quantity for purchasing 1, 2, and 3 machines.

For all possible demand scenarios, determine profits.

Number of
Machines

Total Annual
Fixed Costs

Corresponding
Range of Output

\$ 9,600

0 to 300

15,000

301 to 600

20,000

601 to 900

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## Capacity and Scale

Economies of scale
Reducing

fixed costs

construction costs

Cutting

## costs of purchased materials

Finding

Diseconomies of scale
Complexity
Loss

of focus

Inefficiencies

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## Average unit cost

(dollars per patient)

250-bed
hospital

500-bed
hospital

Economies
of scale

750-bed
hospital

Diseconomies
of scale

## Output rate (patients per week)

Figure 6.1 Economies and Diseconomies of Scale

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## Capacity Timing and Sizing

Sizing capacity cushions
Capacity cushions are the amount of
reserve capacity a process uses to handle
sudden changes
Capacity cushion = 100% Average Utilization rate (%)

Expansionist strategies
Wait-and-see strategies
Combination of strategies

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## Capacity Timing and Sizing

Forecast of capacity
required

Capacity

Planned unused
capacity

Capacity
increment
Time between
increments
Time

## (a) Expansionist strategy

Figure 6.2 Two Capacity Strategies
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## Capacity Timing and Sizing

Capacity

Planned use of
short-term options

Forecast of capacity
required
Capacity
increment

Time between
increments

Time
(b) Wait-and-see strategy
Figure 6.2 Two Capacity Strategies
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Systematic Approach
For one service or product processed at
one operation with a one year time period,
the capacity requirement, M, is
Processing hours required for years demand
Capacity
=
requirement
Hours available from a single capacity unit
(such as an employee or machine) per year,
after deducting desired cushion
Dp
M = N[1 (C/100)]
where
D=
demand forecast for the year (number of customers
serviced or units of product)
p=
processing time (in hours per customer served or unit
produced)
N=
total number of hours per year during which the process
operates
Education,
as Prentice
Hall.
= Inc. Publishing
desired
capacity
cushion (expressed as a percent)

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Systematic Approach
Setup times may be required if multiple
products are produced

Capacity
=
requirement

M=

## Processing and setup hours required for

years demand, summed over all services
or products
Hours available from a single capacity unit
per year, after deducting desired cushion
[Dp + (D/Q)s]product 1 + [Dp + (D/Q)s]product 1 + +
[Dp + (D/Q)s]product n
N[1 (C/100)]

where
Q=
s=

## number of units in each lot

setup time (in hours) per lot

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## Estimating Capacity Requirements

EXAMPLE 6.1
A copy center in an office building prepares bound reports for
two clients. The center makes multiple copies (the lot size) of
each report. The processing time to run, collate, and bind each
copy depends on, among other factors, the number of pages.
The center operates 250 days per year, with one 8-hour shift.
Management believes that a capacity cushion of 15 percent
(beyond the allowance built into time standards) is best. It
currently has three copy machines. Based on the following table
of information, determine how many machines are needed at
the copy center.
Item

Client X

Client Y

2,000

6,000

0.5

0.7

20

30

0.25

0.40

## Standard setup time (hours)

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SOLUTION

M=

N[1 (C/100)]

____ machines.

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Solved Problem 1
You have been asked to put together a capacity plan for a critical
operation at the Surefoot Sandal Company. Your capacity
measure is number of machines. Three products (mens,
womens, and childrens 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.
Time Standards
Processing
(hr/pair)

Setup
(hr/pair)

Lot size
(pairs/lot)

Mens sandals

0.05

0.5

240

80,000

Womens sandals

0.10

2.2

180

60,000

Childrens sandals

0.02

3.8

360

120,000

Product

Demand Forecast
(pairs/yr)

## a. How many machines are needed? If no setup or production in lots?

b. If the operation currently has two machines, what is the capacity gap?

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Solved Problem 1
SOLUTION
a. The number of hours of operation per year, N, is N = (2
shifts/day)(8 hours/shifts) (250 days/machine-year) = 4,000
hours/machine-year
The number of machines required, M, is the sum of machinehour requirements for all three products divided by the
number of productive hours available for one machine:
M=

N[1 - (C/100)]

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