Chapter 5 MIS 373 Basic Operations Management Announcements Week 1 problem solving assignment PSA has been graded Q1 a 20 points Q1 b 20 points Q2 a 20 points Q2 c 20 points ID: 533065
Download Presentation The PPT/PDF document "Strategic Capacity Planning" is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Slide1
Strategic Capacity Planning
Chapter 5
MIS 373: Basic Operations ManagementSlide2
Announcements
Week 1 problem
solving
assignment (PSA) has been graded
Q1 (a) 20 points
Q1
(b) 20 pointsQ2 (a) 20 pointsQ2 (c) 20 pointsQ3 20 pointsFuture PSAs will be released on TuesdaysSo that you will have one more day to work on themYou can now come to my Tuesday office hours for PSAsEncourage participation in the next contemporary issues discussion (6/30)Team project proposal due date is postponed to 6/27
Tips for getting higher points in PSAs:
Read the problem description carefully
Answer all (sub-) questions
Show your work
If the problem description is not clear to you, let
me
know ASAPSlide3
contemporary issues
It appears to me that many of you were not particularly excited when peers were sharing contemporary issues.
For the next contemporary issues session:
You can go solo or form a team of two for a contemporary issue
In
your
discussion, give more visual materials, e.g., SlidesVideoPicturePoster Role play… any things that can make the issue more vivid and memorableSlide4
Learning Objectives
After this lecture, students will be able to
Name the three key questions in capacity planning
Explain the importance of capacity
planning
Describe ways of defining and measuring capacityName several determinants of effective capacityPerform cost-volume analysisMIS 373: Basic Operations Management4Slide5
Motivation
wsj.com 1/14/14
-- Auto
Makers Dare to Boost Capacity
A
large increase in production capacity poses a serious risk for auto makers.
They reap strong profits if their factories are running near 100% of capacity, but their losses mount rapidly if the utilization rate falls below 80%. And when manufacturers build more cars than they sell, they often resort to price wars to boost sales. At the end of 2013, auto dealers had 3.45 million cars and trucks in stock… That is enough to last 63 days at the current sales rate, a level the industry considers optimal.Slide6
Capacity Planning
CapacityThe upper limit or ceiling on the load that an operating unit can handle
Capacity needs includeEquipmentSpaceEmployee
skills
Strategic Capacity
PlanningTo achieve a match between the long-term supply capabilities of an organization and the predicted level of long-term demandOver-capacity operating costs that are too highUnder-capacity strained resources and possible loss of customersMIS 373: Basic Operations Management6Slide7
Capacity Planning Questions
Key Questions:What kind
of capacity is needed?How much is needed to match demand?When is it needed
?
Related Questions:
How much will it cost?What are the potential benefits and risks?Are there sustainability issues?Should capacity be changed all at once, or through several smaller changesCan the supply chain handle the necessary changes?MIS 373: Basic Operations Management7Slide8
Capacity Decisions Are
Strategic
Capacity decisions:
impact the ability of the organization to meet
future
demandsWhen Microsoft introduced its new Xbox in late 2005, there were insufficient supplies, resulting in lost sales and unhappy customers.affect operating costsCosts of over- and under-capacityaffect competitivenesscapacity can affect delivery speedaffect the ease of management(often) involve long-term commitment of resourcesMIS 373: Basic Operations Management8Slide9
Capacity
Design capacityMaximum output rate or service capacity an operation, process, or facility is designed
forEffective capacityDesign capacity minus allowances such as personal time, maintenance, and scrap
Actual output
Rate of output actually achieved--cannot
exceed effective capacity.MIS 373: Basic Operations Management9Slide10
Capacity: Illustration
(Suppose) These are
design capacity
from Boeing.
But you typically won’t get to reach this design capacity because some seats are taken out for, say,
galley and emergency exit. That’s why you have effective capacity. Actual output would be equal of less than the effective capacity because you don’t always have that many passengers on the plane.Slide11
Measuring System Effectiveness
Efficiency
(Measured as percentages)
Utilization
(Measured as percentages)
MIS 373: Basic Operations ManagementEfficiency = Actual outputEffective capacityUtilization =
Actual outputDesign capacity11Slide12
Example:
Efficiency
and Utilization
Design Capacity = 50 trucks per day
Effective Capacity = 40 trucks per day
Actual Output = 36 trucks per dayMIS 373: Basic Operations ManagementEfficiency = Actual output=36
= 90%Effective capacity40Utilization = Actual output=36
= 72%
Design capacity
50
12Slide13
Determinants of Effective Capacity
Facilities
Size, expansions, layout, transportation costs, distance to market, labor supply, energy sourcesProduct and service factors
(non) uniformity of output, product/service mix
Process factors
Productivity, quality, setup-timeHuman factorsTasks, variety of activities, training, skills, learning, experience, motivation, labor turnoverMIS 373: Basic Operations Management13Slide14
Determinants of Effective Capacity
Policy factors
Overtime, second/third shiftsOperational factors
Scheduling, inventory, purchasing, materials, quality assurance/control, breakdowns, maintenance
Supply chain factors
Suppliers, warehousing, transportation, distributorsExternal factorsProduct standards, minimum quality, safety, environment, regulations, unionsMIS 373: Basic Operations Management14Slide15
Capacity Cushion /
Safety
Capacity
Capacity Cushion / Safety Capacity
Extra capacity used to offset demand
uncertaintyCapacity cushion = Capacity – expected demandCapacity cushion strategyOrganizations that have greater demand uncertainty typically use greater capacity cushionOrganizations that have standard products and services generally use smaller capacity cushionMIS 373: Basic Operations Management15Slide16
Demand Management Strategies
Strategies used to offset capacity limitations and that are intended to achieve a closer match between supply and demandAppointments
PricingPromotionsDiscountsOther tactics to shift demand from peak periods into slow periods
MIS 373: Basic Operations Management
16Slide17
Bottleneck Operation
An operation in a sequence of operations whose capacity is lower
than that of the other operationsAnimation: http://brams.dk/technotes/flash-mx/performance-bottlenect-simulation
/
MIS 373: Basic Operations Management17Operation 120/hr.Operation 210/hr.
Operation 315/hr.10/hr.BottleneckMaximum output ratelimited by bottleneck?Slide18
Capacity Strategies
Leading
Build capacity in anticipation of future demand increasesE.g., let’s expand the restaurant because we
expect
to serve more customers in the
next yearFollowingBuild capacity when demand exceeds current capacityE.g., let’s expand the restaurant because we have been full up all the time in the past yearTrackingSimilar to the following strategy, but adds capacity in relatively small increments to keep pace with increasing demandE.g., let’s expand the restaurant because we have been full up all the time in the past monthMIS 373: Basic Operations Management18Slide19
Forecasting Capacity Requirements
Long-term considerations relate to overall level
of capacity requirementsRequire forecasting demand over a time horizon and converting those needs into capacity requirements
E.g., Our hotel expect to serve 10 thousand customers next year.
Short-term considerations relate to probable
variations in capacity requirementsLess concerned with cycles and trends than with seasonal variations and other variations from averageE.g., Our hotel expect to serve 10 thousand customers next year. But the demand will be higher in the summer, lower in the winter, and normal in the spring and fall. MIS 373: Basic Operations Management19Slide20
Common demand patterns
MIS 373: Basic Operations Management
20Slide21
Exercise
Suppose that you are a capacity planner in General Motor.
Discuss with a partner. What would you do to make sure you have the right capacity in GM?
Prediction? How?
Planning? How?
What other information do you need?Slide22
Example:
Advanced Forecasting Methods
Choi, H., and Varian, H. 2012. Predicting the Present with Google Trends.
Economic Record
88
2–9. Predicting sales of motor vehicles and parts“We have found that simple seasonal AR models that include relevant Google Trends variables tend to outperform models that exclude these predictors by 5 per cent to 20 per cent.”Auto-regressive (AR) models:
AR(k): Use the values from the past k time periods to predict the current value:
Example
:
AR(4):
Use the values from
the past 4
time periods to predict the current value:
Sales
t
= constant +
α
1
× Sales
t-1
+
α
2
× Sales
t-2
+
α
3
× Sales
t-3
+
α
4
×
Sales
t-4
+
β
1
×
Google_Trend_Car
t-1
+
β
2
×
Google_Trend_Car
t-2
+
β
3
×
Google_Trend_Car
t-3
+
β
4
×
Google_Trend_Car
t-4
Slide23
Example:
Advanced Forecasting Methods
Google Flu TrendSlide24
Calculating Processing Requirements
Product
Annual Demand
Standard processing time per unit (hr.)
Processing time needed (hr.)
#140052000#230082400#370021400Total=5800MIS 373: Basic Operations ManagementIf annual capacity is 2,000 hours/machine, thenUnits of capacity needed
= 5,800 hours ÷ 2,000 hours = 2.90 3 machines 24Units of capacity needed = Processing time neededProcessing time capacity per unitSlide25
Service Capacity Planning
Service capacity planning can present a number of challenges related to:
The need to be near customersConvenience
The inability to store services
Cannot store services for consumption later
The degree of demand volatilityVolume and timing of demandTime required to service individual customersMIS 373: Basic Operations Management25Slide26
in-house or outsource
Once capacity requirements have been determined, the organization must decide whether to produce a good or provide a service itself, or to outsource from another organization.
Factors to consider when deciding whether to operate in-house or outsource
Available
capacity
ExpertiseQuality considerationsThe nature of demandCostRisksMIS 373: Basic Operations Management26Slide27
CASE Study
How much would an all-American iPhone cost
?
NPR
Marketplace
http://
www.marketplace.org/topics/business/ive-always-wondered/how-much-would-all-american-iphone-cost Audio (4:33)Pay attention to: Logistic efficiencyCost structureComponentsInternational expertiseConsumer baseWhile listening, take notes on the above 5 itemsUse the notes, discuss why/when a company decides to outsource?Slide28
Developing Capacity Strategies
There are a number of ways to enhance development of capacity strategies:
Design flexibility into systemsE.g., SSD and USB Flash DriveTake
a “big-picture” (i.e., systems) approach to capacity
changes
Attempt to smooth out capacity requirementsTake stage of life cycle into accountIdentify the optimal operating level: economies of scaleMIS 373: Basic Operations Management28Slide29
Product life cycle
In the introduction
phase, organizations should be cautious in making large and/or inflexible capacity investments.
In the
growth
phase, organizations should consider their market share, competitors’ moves, and establishing competitive advantages.In the maturity phase, organizations may still be able to increase profitability by reducing costs and making full use of capacity. In the decline phase, organizations may eliminate the excess capacity by selling it, or by introducing new products or services.MIS 373: Basic Operations Management
Introduction
Growth
Maturity
Decline
Sales
29Slide30
optimal operating level
MIS 373: Basic Operations Management
Minimum
cost
Average cost per
unit
0Rate of output Minimum average cost per unit
Economies of Scale
If output rate is less than the optimal level, increasing the output rate results in decreasing average per unit costs
Diseconomies of Scale
If the output rate is more than the optimal level, increasing the output rate results in increasing average per unit costs
30Slide31
Economies of Scale
Economies of ScaleIf output rate is less than the optimal level, increasing the output rate results in decreasing average per unit costs
Reasons for economies of scale:Fixed costs are spread over a larger number of units
Processing costs decrease due to
standardization
There are two types of economies of scale:Internal. These are cost savings that accrue to a firm regardless of the industry, market or environment in which it operates.It is easier for large firms to carry the overheads of sophisticated research and development (R&D). E.g., pharmaceuticals industry External. These are economies that benefit a firm because of the way in which its industry is organized.E.g., The creation of a better transportation networkMIS 373: Basic Operations Management31Slide32
Diseconomies of Scale
Diseconomies of ScaleIf the output rate is more than the optimal level, increasing the output rate results in increasing average per unit costs
Reasons for diseconomies of scaleCongestion (transportation)ComplexityInflexibility
Additional levels of management
MIS 373: Basic Operations Management
32Slide33
Discussions
Discuss with a partner:
What are
the
examples that a company/product failed because it did not achieve economies of scale (i.e., too small to compete)?
If possible, also discuss why they failed to achieve economies of scale. Was it because of the problems in marketing, finance, or operations?
What are the examples that a company/product failed because of it encountered diseconomies of scale (i.e., too big to compete)?Slide34
Evaluating Alternatives
Alternatives should be evaluated from varying perspectives
Economic
Is it economically feasible?
How much will it cost?
How soon can we have it?What will operating and maintenance costs be?Will it be compatible with present personnel and present operations?Non-economicPublic opinionMIS 373: Basic Operations Management34Slide35
Evaluating Alternatives
Techniques for Evaluating Alternatives
Cost-volume analysis
Break-even point
Indifference point
Financial analysisCash flowPresent valueDecision theoryComparison of alternatives under risk and uncertainty.Waiting-line analysisBalance waiting cost and increased capacity costSimulationEvaluate “what-if” scenariosMIS 373: Basic Operations Management35Slide36
Cost-Volume Analysis
Cost-volume analysisFocuses on the relationship between cost, revenue, and volume of output
Fixed Costs (FC)tend to remain constant regardless of output volumeVariable Costs (VC)
vary directly with volume of output
VC =
Quantity (Q) x variable cost per unit (v)Total CostTC = FC + VCTotal Revenue (TR)TR = revenue per unit (R) x QMIS 373: Basic Operations Management36Slide37
Break-Even Point (BEP)
Break-Even-Point (BEP)The volume of output at which total cost and total revenue are equal
(profit = 0)Profit (P) = 0 = TR – TC
= (
R
× Q) – (FC + v × Q)= Q(R – v) – FC0 = QBEP(R – v) – FCMIS 373: Basic Operations Management37
Recall:P: ProfitQ: QuantityTR: Total RevenueTR = revenue per unit (R) x QTC: Total CostTC = FC + VCFC: Fixed CostsVC: Variable CostsVC = Q x variable cost per unit (v)Slide38
Reformulation of the equation
The equation can be easily reformulated to obtain other components of interest:
P = TR – TC
= (
R
× Q) – (FC + v × Q)= Q(R – v) – FCQ = (P + FC) / (R – v)R = (P + FC + v × Q) / QMIS 373: Basic Operations Management38
Recall:P: ProfitQ: QuantityTR: Total RevenueTR = revenue per unit (R) x QTC: Total CostTC = FC + VCFC: Fixed CostsVC: Variable CostsVC = Q x variable cost per unit (v)Slide39
Cost-volume relationships
MIS 373: Basic Operations Management
39Slide40
Cost-volume relationships
MIS 373: Basic Operations Management
40
This line shows the difference between TR and TC.Slide41
Exercise Problems
(Textbook page 203) The owner of Old-Fashioned Berry Pies, S. Simon, is contemplating adding a new line of pies, which will require leasing new equipment for a monthly payment of $6,000. Variable costs would be $2 per pie, and pies would retail for $7 each
.
How
many pies must be sold in order to break even
?
What would the profit (loss) be if 1,000 pies are made and sold in a month?How many pies must be sold to realize a profit of $4,000?If 2,000 can be sold, and a profit target is $5,000, what price should be charged per pie?Slide42
Exercise Solutions
(Textbook page 203) The owner of Old-Fashioned Berry Pies, S. Simon, is contemplating adding a new line of pies, which will require leasing new equipment for a monthly payment of $6,000. Variable costs would be $2 per pie, and pies would retail for $7 each
.
How
many pies must be sold in order to break even
?
FC = $6000 VC = $2 per pie R = $7 per pieQBEP = FC / (R – VC) = 6000 / (7 – 2) = 1200 pies/monthSlide43
Exercise Solutions
(Textbook page 203) The owner of Old-Fashioned Berry Pies, S. Simon, is contemplating adding a new line of pies, which will require leasing new equipment for a monthly payment of $6,000. Variable costs would be $2 per pie, and pies would retail for $7 each
.
What would the profit (loss) be if 1,000 pies are made and sold in a month
?
FC = $6000 VC = $2 per pie R = $7 per pie
For Q = 1000, P = Q(R – v) – FC = 1000(7 – 2) – 6000 = –1000Slide44
Exercise Solutions
(Textbook page 203) The owner of Old-Fashioned Berry Pies, S. Simon, is contemplating adding a new line of pies, which will require leasing new equipment for a monthly payment of $6,000. Variable costs would be $2 per pie, and pies would retail for $7 each
.
How many pies must be sold to realize a profit of $4,000?
FC = $6000 VC = $2 per pie R = $7 per pie
Q = (P + FC) / (R
– v) = (4000 + 6000) / (7 – 2) = 2000 piesSlide45
Exercise Solutions
(Textbook page 203) The owner of Old-Fashioned Berry Pies, S. Simon, is contemplating adding a new line of pies, which will require leasing new equipment for a monthly payment of $6,000. Variable costs would be $2 per pie, and pies would retail for $7 each
.
If 2,000 can be sold, and a profit target is $5,000, what price should be charged per pie?
FC = $6000 VC = $2 per pie R = $7 per pie
Profit = Q(R
– v) – FC 5000 = 2000(R – 2) – 6000 R = $7.5R = (P + FC – v × Q) / Q = (5000 + 6000 + 2 × 2000) / 2000 = 7.5Another way to solve it:Slide46
MIS 373: Basic Operations Management
Choose B
Indifference Point (Profit)
Two (multiple) Alternatives
The
quantity at which a decision maker would be indifferent between two competing alternativesAlternative A (in-house)R >> vv lowFC high
BEP high Alternative B (outsource) R > v v high FC low BEP lowChoose A46Slide47
Example: Indifference Point
A manufacturer has 3 options:
Use process A with FC=$80,000 and v=$75/unit
Use process
B
with FC=$200,000 and v=$15/unitPurchase for $200/units (in other words, FC=$0 and v=$200/unit)MIS 373: Basic Operations Management80,000+75Q=200,000+15QQAB=2,000 units80,000+75Q=200Q
QPA=640 unitsChoose lowest cost:0-640 units : Purchase640-2,000 units: Process AAbove 2,000 units: Process B47Slide48
Example:
Indifference Point
A manufacturer has 3 options:
Use process
A
with FC=$80,000 and v=$75/unitUse process B with FC=$200,000 and v=$15/unitPurchase for $200/units (in other words, FC=$0 and v=$200/unit)MIS 373: Basic Operations Management80,000+75Q=200,000+15QQAB=2,000 units80,000+75Q=
200QQPA=640 unitsChoose lowest cost:0-640 units : Purchase640-2,000 units: Process AAbove 2,000 units: Process B48Slide49
Exercise Problems
A firm's manager must decide whether to make or buy a certain item used in the production of vending machines.
Cost
and volume estimates are as follows
:
a. Given these numbers, should the firm buy or make this item
?b. There is a possibility that volume could change in the future. At what volume would the manager be indifferent between making and buying?Slide50
Exercise
Solutions
a. Given
these numbers, should the firm buy or make this item
?
Total cost = Fixed cost
+ Volume
× Variable cost
Make: $150,000 + 12,000 × $60 = $870,000
Buy: $0
+ 12,000 ×
$80
=
$960,000
Because the annual cost of making the item is less than the annual cost of buying it, the manager would reasonably choose to make the item. Slide51
Exercise
Solutions
b
. There is a possibility that volume could change in the future. At what volume would the manager be indifferent between making and buying?
To determine the volume at which the two choices would be equivalent, set the two total costs equal to each other and solve for volume:
TC
make
= TC
buy
Thus
,
$
150,000 +
Q
($60) = 0 +
Q
($80).
Solving
,
Q
= 7,500 units
.
For lower volumes, the choice would be to buy, and for higher volumes, the choice would be to makeSlide52
Key Points
Capacity decisions can be critical to the success of a business organization because capacity is the supply side of the supply-demand equation, and too little or too much capacity is costly
.The key issues in capacity planning relate to determining what kind of capacity is needed, how much is needed, and when it is needed.Volatile demand and long lead times to achieve capacity changes can be challenging.Cost-volume analysis (break-even point and indifference point) can give useful information for capacity planning.
MIS 373: Basic Operations Management
52