# Management and Operations: Capacity Planning and Decision Theory

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Management and Operations: Capacity Planning and Decision Theory
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

Links: a. Machines needed = (14,567/3800) = 3.83 = 4 machines b c. With two machines, we have (3800)(2) = 7600 hours of machine capacity. We can make all of the women’s sandals (6733 hours) and some of the men’s sandals, for example. d. With five machines, (5)(4000) = 20,000 machine-hours/yr are available. The total number of machine-hours/yr needed for production are 14,567.

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