Capacity Planning For Products and Services
Capacity Planning For Products and Services
Capacity Planning For Products and Services
Actual output
Efficiency =
Effective capacity
Actual output
Utilization =
Design capacity
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Working 8-hour shift, 250 day/year
1. Available capacity
2. Expertise
3. Quality considerations
4. Nature of demand
5. Cost
6. Risk
Developing Capacity Alternatives
1.Design flexibility into systems
2.Take stage of life cycle into account
3.Take a “big picture” approach to capacity
changes (to focus bottleneck)
4.Prepare to deal with capacity “chunks”
5.Attempt to smooth out capacity
requirements
6.Identify the optimal operating level
(economy of scale)
Product Life Cycle
Introduction Growth Maturity Decline
Best period to Practical to change Poor time to Cost control
Company Strategy/Issues
Internet Drive-through
restaurants
Color printers
Sales
3 1/2”
Floppy
Flat-screen disks
monitors DVD
Product Life Cycle
Introduction Growth Maturity Decline
Product design Forecasting Standardization Little product
and critical differentiation
Less rapid
development Product and product changes Cost
OM Strategy/Issues
10/hr 30/hr
Machine
Machine #2
#2 Bottleneck
Bottleneck 30/hr
Operation
Operation
Machine
Machine #3
#3 10/hr
Machine
Machine #4
#4 10/hr
Bottleneck Operation
Bottleneck
Minimum
cost
0 Rate of output
Economies of Scale
Economies of scale
If the output rate is less than the optimal
level, increasing output rate results in
decreasing average unit costs
Diseconomies of scale
If the output rate is more than the optimal
level, increasing the output rate results in
increasing average unit costs
Economies of Scale
Minimum cost & optimal operating rate are
functions of size of production unit.
Average cost per unit
Small
plant Medium
plant Large
plant
0 Output rate
Evaluating Alternatives
Cost-volume analysis
Break-even point
Financial analysis
Cash flow
Present value
Decision theory
Waiting-line analysis
Cost-Volume Relationships
F C
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Amount ($)
V C C)
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To ri a
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Fixed cost (FC)
0
Q (volume in units)
Cost-Volume Relationships
ue
e n
Amount ($)
v
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To
0
Q (volume in units)
Cost-Volume Relationships
u e
Amount ($) en fit
ev Pr o
l r
t a s t
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0 BEP units
Q (volume in units)
1 machine
Quantity
Step fixed costs and variable costs.
Break-Even Problem with Step
Fixed Costs
$ BEP3
BEP2
TC
TC
3
TC
2
TR
1
Quantity
Multiple break-even points
Assumptions of Cost-Volume
Analysis
1.One product is involved
2.Everything produced can be sold
3.Variable cost per unit is the same
regardless of volume
4.Fixed costs do not change with volume
5.Revenue per unit constant with volume
6.Revenue per unit exceeds variable cost
per unit
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 flows of an
investment proposal.
Decision Theory
Helpful tool for financial comparison of
alternatives under conditions of risk or
uncertainty
Suited to capacity decisions
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
additional capacity
Decision Theory
Decision Theory represents a general
approach to decision making which is suitable for a
wide range of operations management decisions,
including:
Capacity Product
Product and
and
planning service
service design
design
Location Equipment
planning selection
Decision Theory Elements
A set of possible future conditions exists
that will have a bearing on the results of
the decision
A list of alternatives for the manager to
choose from
A known payoff for each alternative
under each possible future condition
Decision Theory Process
Identify possible future conditions called states of
nature
Develop a list of possible alternatives, one of which
may be to do nothing
Determine the payoff associated with each
alternative for every future condition
If possible, determine the likelihood of each
possible future condition
Evaluate alternatives according to some decision
criterion and select the best alternative
Causes of Poor Decisions
Bounded Rationality
The limitations on decision
making caused by costs,
human abilities, time,
technology, and availability of
information
Causes of Poor Decisions (Cont’d)
Suboptimization
The result of different
departments each
attempting to reach a
solution that is
optimum for that
department
Decision Process
1. Identify the problem
2. Specify objectives and criteria for a solution
3. Develop suitable alternatives
4. Analyze and compare alternatives
5. Select the best alternative
6. Implement the solution
7. Monitor to see that the desired result is
achieved
Decision Environments
Certainty - Environment in which
relevant parameters have known
values
Risk - Environment in which
certain future events have
probable outcomes
Uncertainty - Environment in
which it is impossible to assess
the likelihood of various future
events
Decision Making under Uncertainty
Maximin - Choose the alternative with
the best of the worst possible payoffs
a t ure 1 Payoff 1
of n
Decision Point State
Chance Event o o s e A’ 1 Payoff 2
Ch
A’ State
s e of
o natur 2
o e2
h Choose Payoff 3
C A’2
B
1
e A’ 3 Payoff 4
1 Choos
n a t ure
C
o f 2
State
ho
os
Choose Payoff 5
e
A’4
A’ 2
State
of natur Payoff 6
e2
Example of a Decision Tree
4)
an d ( 0. 40M
dem
Decision Point Low
Chance Event n o t h ing 40M
l Do
al
sm High Overtime
de ma n d 2 50M
i ld (0.6)
u Expand 55M
B
B
1
th ing 10M
Do no
n d (0.4)
B
ma
w de 2
ui
Lo
ld
R ed u ce
la
price 50M
r
ge
High
dema 70M
nd (0.6)
Expected Value of Perfect Information
Expected value of perfect information: the
difference between the expected payoff under
certainty and the expected payoff under risk
จงเขขียนภาพแสดง Sensitivity
Sensitivity Analysis
#1 Payoff #2 Payoff
16 B 16
14 14
12 A 12
C
10 10
8 8
6 6
4 4
2 B best C best A best 2
0 0
Sensitivity analysis: determine the range of
probability for which an alternative has the best
expected payoff