Download - 05 Capacity
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5. Strategic
Capacity Planning
Dr. Ron LembkeOperations Management
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Ideal Capacity of a Process
What is the capacity of the system?
Should we add any capacity?
How should we run the system? Where should we keep inventory?
50/hr 20/hr 10/hr 40/hr
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Ideal Capacity of a Process
What is the capacity of the system?
6 min 5 min 4 min 5 min
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What Would Henry Say?
Ford introduced the $5 (per day) wage in 1914
He introduced the 40 hour work week
so people would have more time to buy It also meant more output: 3*8 > 2*10
Now we know from our experience in changing fromsix to five days and back again that we can get at
least as great production in five days as we can in six,and we shall probably get a greater, for the pressurewill bring better methods.
Crowther, Worlds Work, 1926
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Forty Hour Week
Ernst Abbe, Karl Zeissoptics
1896: as much done in9 as in 8.
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How much do we have?
Design capacity: max output designed for
Effective Capacity
We can only sustain so much effort.Output level process designed for
Lowest cost per unit
Efficiency = Actual OutputEffective Capacity
Possible to run > 1.0 for long
Utilization = Actual Output/Design Capacity
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Marginal Output of Time
As you work more hours, your productivityper hour goes down
Eventually, it goes negative.
Chapman, 1909
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Time Horizons
Long-Range: over a yearacquiring,disposing of production resources
Intermediate Range: Monthly or quarterlyplans, hiring, firing, layoffs
Short Rangeless than a month, daily or
weekly scheduling process, overtime,worker scheduling, etc.
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Adding Capacity
Expensive to add capacity
A few large expansions are cheaper (per
unit) than many small additions
Large expansions allow of clean sheet of
paper thinking, re-design of processes
Carry unused overhead for a long time
May never be needed
Small expansions may pave the cow path
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Capacity Planning How much capacity should we add? Conservative Optimistic
Forecast possible demand scenarios(Chapter 10)
Determine capacity needed for likely levels
Determine capacity cushion desired
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Capacity Sources
In addition to expanding facilities:
Two or three shifts
Outsourcing non-core activities
Training or acquisition of faster equipment
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Cost-Volume Analysis
FC = Fixed Cost
v = variable cost per unit
Q = quantity
R = revenue per unit
R-v=contrib. margin
FC+VC*Q
Volume, Q
R*Q
Break-Even
Point
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Cost Volume Analysis
Solve for Break-Even Point
For profit of P,
Q = P + FC
R - v
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Decision Trees
Consider different possible decisions, anddifferent possible outcomes
Compute expected profits of each decision
Choose decision with highest expectedprofits, work your way back up the tree.
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Draw the decision tree
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Working Right to Left, eliminate anyPossible decisions we can.
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Compute Expected Values ofRemaining Decisions
Build small
= 0.4 * $40 + 0.6 * $55= $16 + $33 = $49
Build large= 0.4 * $50 + 0.6 * $70= $20 + $42 = $62
$49
$62
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Decision Trees Example
Computer store thinks demand may grow. Expansion costs $87k, new site $210k, and would cost same if
wait a year New site:
55% chance of profits of $195k. 45% chance of $115k profits.
Expand Current 55% chance of $190k profits 45% chance of $100k profits
Wait and see- enlarge store next year if demand grows If high demand, $190k with expanded store If high demand, $170 with current store If weak demand, $105k with current store
Find the expected profits over 5 years, choose best one.
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Decision Trees
Decision point
Chance events
Outcomes
Calculate expected value of each chanceevent, starting at far right
Working our way back toward thebeginning, choosing highest expectedoutcome at each decision
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Decision Trees
Revenue - Move Cost
Revenue - Move Cost
Revenue Expand Cost
Revenue Expand CostWeak Growth
Weak Growth
Strong Growth
Strong Growth
Move
Expand
Revenue
Rev
Expand Cost
Rev - Expand Cost
0.45
0.55
0.55
0.45
WaitandSee
Weak Growth
Strong Growth0.55
0.45
Expand
Do nothing
HackersComputerStore
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Possible 5 year Revenues
New, growth: 195*5210 = 765
New, low: 115*5210 = 365 Expand, growth: 190*587 = 863
Expand, low: 100*587 = 413
Wait, strong, expand: 170+190*4-87=843 Wait, strong, do nothing: 170*5 = 850
Wait, low, do nothing: 105*5 = 525
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Decision Trees
765
365
863
413Weak Growth
Weak Growth
Strong Growth
Strong Growth
Move
Expand
525
843
850
0.45
0.55
0.55
0.45
WaitandSee
Weak Growth
Strong Growth0.55
0.45
Expand
Do nothing
HackersComputerStore
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Making the Decision
Starting at the far right, look at the Wait
and See option. If demand is strong, we
would obviously not expand. $850k is better than $843.
Eliminate the Expand option
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Decision Trees
765
365
863
413Weak Growth
Weak Growth
Strong Growth
Strong Growth
Move
Expand
525
843
850
0.45
0.55
0.55
0.45
WaitandSee
Weak Growth
Strong Growth0.55
0.45
Expand
Do nothing
HackersComputerStore
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Expected Values
Move:
0.55* 765 + 0.45*365 = $585,000
Wait and See:0.55*850 + 0.45*525 = $703,750
Expand:
0.55 * 863 + 0.45 * 413 = $660,500
Highest expected value is to Wait and see,and either way, do nothing!
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Decision Trees
765
365
863
413Weak Growth
Weak Growth
Strong Growth
Strong Growth
Move
Expand
525
843
850
0.45
0.55
0.55
0.45
WaitandSee
Weak Growth
Strong Growth0.55
0.45
Expand
Do nothing
HackersComputerStore
$585,000
660,500
703,750
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Time Value of Money?
Another criteria to use is to pick the onewith the highest down side.
Under this, do nothing still wins.
We could also consider the expectedvalue of the future cash streams.
PV = $100/(1+r) = $100/(1.16)=$86.27
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Decision Tree-NPV
428,487
166,544
535,116
240,429Weak Growth
Weak Growth
Strong Growth
Strong Growth
Move
Expand
343,801
529,874
556,630
0.45
0.55
0.55
0.45
WaitandSee
Weak Growth
Strong Growth0.55
0.45
Expand
Do nothing
HackersComputerStore
$310,613
402,507
460,857
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Real Options
Assess the value to me of being able tochange my mind in the future
Changed problem slightly -Reduced benefit doing nothing, high demand
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Decision Trees765
365
863
413
Weak
StrongMove
Expand
525
843
820
0.25
0.75
Wait and See
Expand
Do nothing
Hackers
ComputerStore
Weak
Strong0.25
0.75
Weak
Strong0.25
0.75
$465,000
533,000
604,500
820
525Weak
Strong0.25
0.75
Do Nothing
598,750
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Real Options
If we didnt have the wait and see option,
we would Do Nothing.
Option to wait and see is worth $5,750
Move
Expand
Wait and See
465,000
533,000
604,500
Do Nothing 598,750$5,750