OPERATIONS MANAGEMENTOPERATIONS MANAGEMENTfor MBAs for MBAs FourthFourth Edition Edition

1

Meredith and Shafer

John Wiley and Sons, Inc.

Chapters 8 & 8S : Capacity, Forecasting

Topic 2: Capacity Planning & Forecasting

OutlineOutline

2

•Capacity Planning Overview

•Utilization & Efficiency

•Effectively Utilizing Capacity / Resource Planning & SchedulingProduction Planning

Aggregate PlanMaster Production Schedule

•The Learning Curve

• Forecasting

• Homework

Capacity Planning Capacity Planning DecisionsDecisions

3

Demand EstimatesForecast

MarketCorporate StrategySkillsSuppliers & Customers

CapacityCapacity

4

Maximum rate outputs can be produced or services delivered.

Maximum amount of availability for a product or service.

Capacity TimingCapacity Timing

5

Planned unused capacity

Time

Cap

acit

y

Forecast of capacity required

Time between increments

Capacity increment

(a) Preceding Demand or Expansionist strategy

Capacity TimingCapacity Timing

6

Time

Cap

acit

y

(b) Following Demand or Wait-and-see strategy

Planned use of short-term options

Time between increments

Capacity increment

Forecast of capacity required

Location Planning Location Planning StrategiesStrategies

7

Possible Factors affecting location decisions

Breakeven Location ModelBreakeven Location Model

8

Location FC VCA 150000 62B 300000 38C 500000 24D 600000 30

Breakeven Location ModelBreakeven Location Model

9

Q (thousands of units)

0

200

400

600

800

1000

1200

1400

1600

2 4 6 8 10 12 14 16 18 20 22

A best B best C best

Break-even point

6.25 14.3

A

DBC

(20, 1390)

(20, 1200)

(20, 1060)

(20, 980)

An

nu

al c

ost

(th

ou

san

ds

of

do

llars

)

Break-even point

Weighted Score Location Weighted Score Location MethodMethod

10

Factor Wt A B C DTax environment 20 5 1 4 3Employee preference 20 2 2 2 3Accessibility 5 1 3 2 3Community 25 3 3 1 3Costs 30 5 1 4 3               370 180 275 300

UtilizationUtilization

11

Time Busy / Time Available

Actual output / capacity

Average output rate / capacity

Occupied (in use) / amount available

EfficiencyEfficiency

12

total task time / (N X cycle time)

15 units/hr 6 units/hr20 units/hr 30 units/hrCapacity or Output Rates:

Utilization: 100% 75% 100% 20%

Efficiency = 19 / (4 X 10) = .475 = average utilization based on cycles

cycle time time at which every workstation can pass its completed part to the next station

Utilization: 40% 30% 100% 20%

Littlefield

EfficiencyEfficiency

13

total task time / (N X cycle time)

15 units/hr 12 units/hr20 units/hr 30 units/hrCapacity or Output Rates:

Efficiency = 19 / (5 X 5) = .76 = average utilization based on cycles

cycle time time at which every workstation can pass its completed part to the next station

Utilization: 80% 60% 100% 40%

5

100%

BottlenecksBottlenecks

14

BottlenecksBottlenecks

15

Operation 120/hr.

Operation 210/hr.

Operation 315/hr.

Bottleneck

Maximum output ratelimited by bottleneck

16

The following diagram describes a process that consists of eight separate The following diagram describes a process that consists of eight separate operations, with sequential relationships and capacities (units per hour) as operations, with sequential relationships and capacities (units per hour) as shown.shown.

a. What is the current capacity of the entire process?a. What is the current capacity of the entire process?b. If you could increase the capacity of only two operations through process improvement b. If you could increase the capacity of only two operations through process improvement efforts, which two operations would you select, how much additional capacity would you efforts, which two operations would you select, how much additional capacity would you strive for in each of those operations, and what would the resulting capacity of the entire strive for in each of those operations, and what would the resulting capacity of the entire process be?process be?

15/hr. 10/hr. 20/hr.

5/hr. 8/hr. 12/hr.

34/hr. 30/hr.

CushionCushion

17

High Cushion

Low Cushion

Resource PlanningResource Planning

18

Chase Plan Level Plan

19

Resource PlanningResource Planning

20

Resource PlanningResource Planning

MPS gets further broken down in the MRP.

Resource PlanningResource Planning

At the heart of any organizationStarts with sales and operations plans

(or aggregate plan) and plans the input requirements

A process relative to the firm’s competitive priorities and an important part of managing supply chains

21

Resource PlanningResource Planning

Aggregate Plan

22

Materials Requirements Materials Requirements Planning Planning

An information system that translates master schedule requirements for end items into time-phased requirements for subassemblies, components, and raw materials.

Aids in managing dependent demand inventory.

Primary Inputs:Master Production ScheduleBill of MaterialsInventory Records

23

Inventorytransactions

Inventoryrecords

Bills ofmaterials

Engineeringand process

designs

Othersources

of demand

Authorizedmaster production

schedule

Materialrequirements

plan

MRPexplosion

MRP InputsMRP Inputs

24

Master Production Master Production ScheduleSchedule

Aggregate Plan

MPS for a singleend item

25

A record of all components of an item Shows the parent-component relationship The usage quantities are derived from

engineering and process design

Bill of MaterialsBill of Materials

Five common terms End items Intermediate items Subassemblies Purchased items

Part commonality (sometimes called standardization of parts or modularity)

26

Seat cushion

Seat-frame boards

Front legs A

Ladder-back chair

Back legs

Leg supports

Back slats

Bill of MaterialsBill of Materials

BOM for a Ladder-Back Chair

27

J (4)Seat-frame

boards

Bill of MaterialsBill of Materials

G (4)Back slats

F (2)Back legs

I (1)Seat cushion

H (1)Seat frame

C (1)Seat

subassembly

D (2)Front legs

B (1)Ladder-backsubassembly

E (4)Leg

supports

ALadder-back

chair

28

Bill of MaterialsBill of MaterialsIf 50 units of of end item A are to be assembled, how many additional units of D are needed? Of E?

Item A B C D E F G

LT (wks) 1 2 3 3 6 1 3

Amt. OH 0 10 15 10 100 5 5

A

B(3) C(1)

G(1)

E(2) F(1)D(1) D(1)

29

30

Inventory RecordInventory Record Inventory transactions are the basic building

blocks of up-to-date recordsTransactions include releasing new orders,

receiving scheduled receipts, adjusting due dates for scheduled receipts, withdrawing inventory, canceling orders, correcting inventory errors, rejecting shipments, and verifying losses and stock returns

Inventory records divide the future into time periods called time buckets

Keep track of inventory levels and component replenishment needs

31

Inventory RecordInventory RecordThe time-phase information contained in the

inventory record consists of:◦ Gross requirements◦ Scheduled receipts ◦ Projected on-hand inventory◦ Planned receipts ◦ Planned order releases

= + –Projected on-handinventory balanceat end of week t

Inventory onhand at end of

week t–1

Scheduledor plannedreceipts in

week t

Grossrequirements

in week t

32

Lot-sizing rulesFixed order quantity (FOQ) rule

maintains the same order quantity each time an order is issued

Lot for lot (L4L), order what is necessaryPeriodic order quantity (POQ), order

what is necessary to handle P periods

Planning FactorsPlanning Factors

33

MRP Example, Given MPS, Inv Records, BOMMRP Example, Given MPS, Inv Records, BOM

MPS for End Item A, LT=1, Beg Inv=0Week 0 1 2 3 4 5 6 7 8 9 10MPS 0 100 200 120 80 60

A

B(1) C(2)

D(1)

BOM

Item A B C D

LT 1 1 2 3

Sch Rec 200 wk 1, 100 wk 6

Amt OH 0 20 0 425

Rule L4L, min 120 L4L Lot Size, Q=500

Inventory Records

34

MRP Example, SolutionMRP Example, SolutionA (LT=1) Beg. Inv. 1 2 3 4 5 6 7 8 9 10Gross requirements 100 200 120 180 60Schd. ReceiptsProj. OH Net requirements 100 200 120 180 60Planned-order receipts 100 200 120 180 60Planned-order releases 100 200 120 180 60

B (LT=1, L4L, min=120) Beg. Inv. 1 2 3 4 5 6 7 8 9 10Gross requirements 100 200 120 180 60Schd. ReceiptsProj. OH 20 20 20 20 40 40 0 0 0 0 60Net requirements 80 160 120 180 60Planned-order receipts 120 160 120 180 120Planned-order releases 120 160 120 180 120

C (LT=2, L4L) Beg. Inv. 1 2 3 4 5 6 7 8 9 10Gross requirements 200 400 240 360 120Schd. Receipts 200 100Proj. OH 200 200 200 0 0 0 100 0 0Net requirements 0 400 140 360 120Planned-order receipts 400 140 360 120Planned-order releases 400 140 360 120

D (LT=3, Lot Size Q=500) Beg. Inv. 1 2 3 4 5 6 7 8 9 10Gross requirements 400 140 360 120Schd. ReceiptsProj. OH 425 425 425 425 25 25 385 25 405 405 405Net requirements 115 95Planned-order receipts 500 500Planned-order releases 500 500

35

The Learning CurveThe Learning Curve

36

•The ability to increase productive capacity through “learning.”

•Each time the output doubles, the labor hours decrease by a fixed percentage of their previous value.

•Common LC values are 70 to 95 percent.

Units Hours (.9) Hours (.8)1 100 1002 90 804 81 648 72.9 51.2

16 65.61 40.9632 59.049 32.768

LC ApplicationLC Application

37

A customer support center has a 90 (or 0.90) percent learning curve rate for handling customer issues. A new rep has just begun work. Her first support call required 2000 seconds.a)Estimate the time needed to complete her first 5 calls.b)Estimate the time needed to complete her 5th call.c)Estimate the time needed to complete calls 21 through 25.

€

Tn = T1(nln 0.8

ln 2 )

where, Tn = time for the nth unit

1 2000.002 1800.003 1692.414 1620.005 1565.97

Using the Tables

2000 X 4.339 = 8,678

2000 X 0.783 = 1,566

21 1259.0722 1250.1923 1241.7824 1233.7725 1226.14

Using the Tables

2000 X 17.71 = 35,420 (length of first 25 calls)2000 X 14.61 = 29,220 (length of first 20 calls) 6,200

0.9

LC ApplicationLC Application

38

Call Number Length Cumulative1 2000.00 2000.00 2000.00 2000.002 1800.00 3800.00 1800.00 1800.003 1692.41 5492.41 1692.41 1692.414 1620.00 7112.41 1620.00 1620.005 1565.97 8678.39 1565.97 1565.976 1523.17 10201.56 1523.17 1523.177 1487.90 11689.45 1487.90 1487.908 1458.00 13147.45 1458.00 1458.009 1432.13 14579.58 1432.13 1432.1310 1409.38 15988.96 1409.38 1409.3811 1389.11 17378.06 1389.11 1389.1112 1370.85 18748.92 1370.85 1370.8513 1354.28 20103.19 1354.28 1354.2814 1339.11 21442.30 1339.11 1339.1115 1325.14 22767.43 1325.14 1325.1416 1312.20 24079.63 1312.20 1312.2017 1300.16 25379.80 1300.16 1300.1618 1288.92 26668.71 1288.92 1288.9219 1278.37 27947.08 1278.37 1278.3720 1268.44 29215.52 1268.44 1268.4421 1259.07 30474.59 1259.07 1259.0722 1250.19 31724.78 1250.19 1250.1923 1241.78 32966.56 1241.78 1241.7824 1233.77 34200.32 1233.77 1233.7725 1226.14 35426.46 1226.14 1226.14

LC ApplicationLC Application

39

A manager wants to estimate an appropriate LC rate for a new type of work his firm will undertake. He has obtained the following completion times for the initial 8 repetitions of a job of this type. What learning curve rate is appropriate? Estimate the duration to complete job unit 45.

Unit Time (hrs)1 15.902 12.003 10.104 9.105 8.406 7.507 7.408 6.90

Factors that may affect the LC Factors that may affect the LC raterate

40

•Complexity of the task•Human component