Management and Operations: Capacity Planning and Decision Theory

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MD 021 - Management and Operations

Capacity Planning and Decision Theory

▪ Measures of capacity

▪ Bottlenecks

▪ Capacity strategies

▪ A systematic approach to capacity decisions

▪ Make or Buy Problem

▪ Decision Making Under Uncertainty and Risk, Decision Trees Capacity Planning

Capacity is the maximum rate of output for a facility.

Capacity planning considers questions such as:

Should we have one large facility or several small ones?

Should we expand capacity before the demand is there or wait until demand is more certain?

Measuring Capacity

Measurement Type
Output measure for product focus

Input measure for process focus

Utilization = [pic]

Efficiency = [pic]

Effective Capacity = Design Capacity (maximum output rate) – Allowances (e.g. personal time, maintenance, and scrap)

Sizing Capacity Cushion

Cushion: the amount of the reserved capacity that a firm maintains to handle sudden increase in demand or temporary losses of production capacity

Capacity cushion =1 - Utilization

Pressures for Large Cushion

Uneven demand

Uncertain demand

Changing product mix

Capacity comes in large increments

Uncertain supply

Pressure for Small Cushion

Capital costs

Links with Other Areas

|Other Choice |Cushion | |Faster delivery times |Larger | |Smaller yield losses |Smaller | |Higher capital intensity |Smaller | |Less worker flexibility |Larger | |Lower inventories |Larger | |More stable schedules |Smaller |

A Systematic Approach to Capacity Decisions

1.Estimate capacity requirements

2.Identify gaps

3.Develop alternatives

4.Evaluate the alternatives

Estimate Capacity Requirements

1. One type of product


whereD = number of units (customers) forecast per year
p = processing time (in hours per unit or customer)
N = total number of hours per year during which the process operates
C = desired capacity cushion rate (%)
2. More than one type of product: n types of products



Q = number of units in each lot
s = setup time (in hours) per lot

Note: Always round up the fractional part for the number of machines required.

Capacity Planning 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.

| |Time Standards | | | | | | | | |Demand Forecast | | |Processing |Setup |Lot Size |(pairs/yr) | |Product |(hr/pair) |(hr/lot) |(pairs/lot) | | |Men’s sandals |0.05 |0.5 |240...
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