Process Capacity Chapter 6 To Accompany Krajewski Ritzman

Redesigning a Process Through Capacity Change Define scope 2 Identify opportunity 1 Document process

Utilization Average output rate Utilization = x 100% Maximum capacity To Accompany Krajewski &

Capacity Bottlenecks Inputs 1 2 3 200/hr 50/hr 200/hr To customers (a) Operation 2

Capacity Bottlenecks Inputs 1 2 3 200/hr To customers (b) All operations bottlenecks Figure

Theory of Constraints 1. Identify the system bottleneck(s) 2. Exploit the bottleneck(s) 3. Subordinate

Average unit cost (dollars per patient) Economies and Diseconomies of Scale 250 -bed hospital

Capacity Cushions Capacity Cushion = 100% - Utilization Rate (%) To Accompany Krajewski &

Capacity Strategies Capacity Planned unused capacity Forecast of capacity required Capacity increment Time between

Capacity Strategies Capacity Planned use of short-term options Forecast of capacity required Capacity increment

Linking Process Capacity and Other Decisions • • • Competitive Priorities Quality Process Design

Estimating Capacity Requirements A process serves 50 customers per day, utilization is about 90%,

Estimating Capacity Requirements Capacity requirement = Processing hours required for year’s demand Hours available

Capacity Decisions To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition

Capacity Decisions Estimate Capacity Requirements Item Client X Client Y Annual demand forecast (copies)

Capacity Decisions Evaluate Alternatives Expand capacity to meet expected demand through Year 5 Year

Capacity Decisions Simulation Figure 6. 5 To Accompany Krajewski & Ritzman Operations Management: Strategy

Capacity Decisions Simulation Figure 6. 6(a) To Accompany Krajewski & Ritzman Operations Management: Strategy

Capacity Decisions Simulation Figure 6. 6(b) To Accompany Krajewski & Ritzman Operations Management: Strategy

Capacity Decisions Decision Trees Low demand ion s n pa x e all Sm

Capacity Decisions Decision Trees Low demand [0. 40] ion s n pa x e

Expected Payoff = Event * Event Probability Capacity Decisions Decision Trees Low demand [0.

Expected Payoff = Event * Event Probability Capacity Decisions Small/Low = $70 (0. 40)

Expected Payoff = Event * Event Probability Capacity Decisions Decision Trees Small/Low = $70

Expected Payoff = Event * Event Probability Capacity Decisions Decision Trees Large/Low = $40

Capacity Decisions Solved Problem 1 Figure 6. 8(a) To Accompany Krajewski & Ritzman Operations

Capacity Decisions Solved Problem 1 Figure 6. 8(b) To Accompany Krajewski & Ritzman Operations

Capacity Decisions Solved Problem 2 TABLE 6. 1 CASH FLOWS FOR TWO-STAGE EXPANSION OF

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Redesigning a Process Through Capacity Change Define scope 2 Identify opportunity 1 Document process 3 Implement changes 6 Evaluate performance 4 Redesign Process (Capacity change) 5 Figure 6. 1 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Utilization Average output rate Utilization = x 100% Maximum capacity To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Capacity Bottlenecks Inputs 1 2 3 200/hr 50/hr 200/hr To customers (a) Operation 2 a bottleneck Figure 6. 2 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Capacity Bottlenecks Inputs 1 2 3 200/hr To customers (b) All operations bottlenecks Figure 6. 2 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Theory of Constraints 1. Identify the system bottleneck(s) 2. Exploit the bottleneck(s) 3. Subordinate all other decisions to Step 2 4. Elevate the bottleneck(s) 5. Do not let inertia set in To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Average unit cost (dollars per patient) Economies and Diseconomies of Scale 250 -bed hospital Economies of scale 500 -bed hospital 750 -bed hospital Diseconomies of scale Output rate (patients per week) Figure 6. 3 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Capacity Cushions Capacity Cushion = 100% - Utilization Rate (%) To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Capacity Strategies Capacity Planned unused capacity Forecast of capacity required Capacity increment Time between increments Time (a) Expansionist strategy Figure 6. 4 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Capacity Strategies Capacity Planned use of short-term options Forecast of capacity required Capacity increment Time between increments Time (b) Wait-and-see strategy Figure 6. 4 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Linking Process Capacity and Other Decisions • • • Competitive Priorities Quality Process Design • Aggregate Planning To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Estimating Capacity Requirements A process serves 50 customers per day, utilization is about 90%, and demand is expected to double in five years. Management wants to increase the capacity cushion to 20%. M= 50 50[1. 0 –. 20)] = 62. 5 customers per day In 5 years if demand doubles, M = 2 x 62. 5 or 125 customers per day Example 6. 1 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Estimating Capacity Requirements Capacity requirement = Processing hours required for year’s demand Hours available from a single capacity unit per year, after deducting desired cushion M= D p N C = = Dp N[1 – (C/100)] demand forecast for the year processing time total number of hours per year during which the process operates desired capacity cushion To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Capacity Decisions Estimate Capacity Requirements Item Client X Client Y Annual demand forecast (copies) 2000. 00 Standard processing time (hour/copy) 0. 50 Average lot size (copies per report) 20. 00 Standard setup time (hours) 0. 25 6000. 00 0. 70 30. 00 0. 40 Example 6. 2 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Capacity Decisions Estimate Capacity Requirements Item Client X Client Y Annual demand forecast (copies) 2000. 00 Standard processing time (hour/copy) 0. 50 Average lot size (copies per report) 20. 00 Standard setup time (hours) 0. 25 6000. 00 0. 70 30. 00 0. 40 M= [Dp + (D/Q)s]product 1 +. . . + [Dp + (D/Q)s]product n N[1 – (C/100)] Example 6. 2 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Capacity Decisions Estimate Capacity Requirements Item Client X Client Y Annual demand forecast (copies) 2000. 00 Standard processing time (hour/copy) 0. 50 Average lot size (copies per report) 20. 00 Standard setup time (hours) 0. 25 6000. 00 0. 70 30. 00 0. 40 M= [2000(0. 5) + (2000/20)(0. 25)]client X + [6000(0. 7) + (6000/30)(0. 4)]client Y (250 days/year)(1 shift/day)(8 hours/shift)(1. 0 – 15/100) Example 6. 2 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Capacity Decisions Estimate Capacity Requirements Item Client X Client Y Annual demand forecast (copies) 2000. 00 Standard processing time (hour/copy) 0. 50 Average lot size (copies per report) 20. 00 Standard setup time (hours) 0. 25 6000. 00 0. 70 30. 00 0. 40 5305 M= = 3. 12 4 machines 1700 Example 6. 2 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Capacity Decisions Evaluate Alternatives Expand capacity to meet expected demand through Year 5 Year Demand Cash Flow Example 6. 3 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Capacity Decisions Evaluate Alternatives Expand capacity to meet expected demand through Year 5 Year 1 Demand Cash Flow 90, 000 (90, 000 – 80, 000)2 = $20, 000 Example 6. 3 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Capacity Decisions Evaluate Alternatives Expand capacity to meet expected demand through Year 5 Year Demand Cash Flow 1 2 3 4 5 90, 000 100, 000 110, 000 120, 000 130, 000 (90, 000 – 80, 000)2 = $20, 000 (100, 000 – 80, 000)2 = $40, 000 (110, 000 – 80, 000)2 = $60, 000 (120, 000 – 80, 000)2 = $80, 000 (130, 000 – 80, 000)2 = $100, 000 Example 6. 3 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Capacity Decisions Decision Trees Low demand ion s n pa x e all Sm 1 Lar ge exp ans ion Don’t expand High demand 2 Expand Low demand High demand Figure 6. 7 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Capacity Decisions Decision Trees Low demand [0. 40] ion s n pa x e all Sm 1 Lar ge exp ans ion High demand [0. 60] $70 Don’t expand 2 Expand Low demand [0. 40] High demand [0. 60] $90 $135 $40 $220 Figure 6. 7 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Capacity Decisions Decision Trees Low demand [0. 40] ion s n pa x e all Sm 1 Lar ge exp ans ion High demand [0. 60] $70 High demand [0. 60] $90 2 $135 Low demand [0. 40] Don’t expand Expand $135 $40 $220 Figure 6. 7 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Expected Payoff = Event * Event Probability Capacity Decisions Decision Trees Low demand [0. 40] ion s n pa x e all Sm 1 Lar ge exp ans ion High demand [0. 60] $70 High demand [0. 60] $90 2 $135 Low demand [0. 40] Don’t expand Expand $135 $40 $220 Figure 6. 7 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Expected Payoff = Event * Event Probability Capacity Decisions Small/Low = $70 (0. 40) Decision Trees Low demand [0. 40] ion s n pa x e all Sm 1 Lar ge exp ans ion High demand [0. 60] $70 High demand [0. 60] $90 2 $135 Low demand [0. 40] Don’t expand Expand $135 $40 $220 Figure 6. 7 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Expected Payoff = Event * Event Probability Capacity Decisions Small/Low = $70 (0. 40) = $28 Decision Trees Low demand [0. 40] ion s n pa x e all Sm 1 Lar ge exp ans ion High demand [0. 60] $70 High demand [0. 60] $90 2 $135 Low demand [0. 40] Don’t expand Expand $135 $40 $220 Figure 6. 7 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Expected Payoff = Event * Event Probability Capacity Decisions Decision Trees Small/Low = $70 (0. 40) = $28 Small/High = $135 (0. 60) Low demand [0. 40] ion s n pa x e all Sm 1 Lar ge exp ans ion High demand [0. 60] $70 High demand [0. 60] $90 2 $135 Low demand [0. 40] Don’t expand Expand $135 $40 $220 Figure 6. 7 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Expected Payoff = Event * Event Probability Capacity Decisions Decision Trees Small/Low = $70 (0. 40) = $28 Small/High = $135 (0. 60) = $81 Low demand [0. 40] ion s n pa x e all Sm 1 Lar ge exp ans ion High demand [0. 60] $70 High demand [0. 60] $90 2 $135 Low demand [0. 40] Don’t expand Expand $135 $40 $220 Figure 6. 7 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Expected Payoff = Event * Event Probability Capacity Decisions Decision Trees Small/Low = $70 (0. 40) = $28 Small/High = $135 (0. 60) = $81 Small = $28 + $81 = $109 Low demand [0. 40] ion s n pa x e all Sm 1 Lar ge exp ans ion High demand [0. 60] $70 High demand [0. 60] $90 2 $135 Low demand [0. 40] Don’t expand Expand $135 $40 $220 Figure 6. 7 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Expected Payoff = Event * Event Probability Capacity Decisions Decision Trees Small/Low = $70 (0. 40) = $28 Small/High = $135 (0. 60) = $81 Small = $28 + $81 = $109 Low demand [0. 40] ion s n pa x e $109 all Sm 1 Lar ge exp ans ion High demand [0. 60] $70 High demand [0. 60] $90 2 $135 Low demand [0. 40] Don’t expand Expand $135 $40 $220 Figure 6. 7 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Expected Payoff = Event * Event Probability Capacity Decisions Decision Trees Large/Low = $40 (0. 40) = $16 Large/High = $220 (0. 60) = $132 Large = $16 + $132 = $148 Low demand [0. 40] ion s n pa x e $109 all Sm 1 Lar ge exp ans ion High demand [0. 60] $70 High demand [0. 60] $90 2 $135 Low demand [0. 40] Don’t expand Expand $135 $40 $220 Figure 6. 7 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Expected Payoff = Event * Event Probability Capacity Decisions Decision Trees Large/Low = $40 (0. 40) = $16 Large/High = $220 (0. 60) = $132 Large = $16 + $132 = $148 Low demand [0. 40] ion s n pa x e $109 all Sm 1 Lar ge exp ans ion $148 High demand [0. 60] $70 High demand [0. 60] $90 2 $135 Low demand [0. 40] Don’t expand Expand $135 $40 $220 Figure 6. 7 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Capacity Decisions Decision Trees Low demand [0. 40] ion s n pa x e $109 all Sm 1 Lar ge exp ans ion $148 High demand [0. 60] $70 High demand [0. 60] $90 2 $135 Low demand [0. 40] Don’t expand Expand $135 $40 $220 Figure 6. 7 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Capacity Decisions Decision Trees Low demand [0. 40] ion s n pa x e $109 all Sm 1 $148 Lar ge exp ans ion $148 High demand [0. 60] $70 High demand [0. 60] $90 2 $135 Low demand [0. 40] Don’t expand Expand $135 $40 $220 Figure 6. 7 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Capacity Decisions Solved Problem 2 TABLE 6. 1 CASH FLOWS FOR TWO-STAGE EXPANSION OF GRANDMOTHER’S CHICKEN RESTAURANT Projected Demand Year (meals/yr) 0 1 2 3 4 5 80, 000 90, 000 100, 000 110, 000 120, 000 130, 000 Projected Capacity (meals/yr) 80, 000 105, 000 130, 000 Calculation of Incremental Cash Flow Compared to Base Case (80, 000 meals/yr) Cash Inflow (outflow) Increase kitchen capacity to 105, 000 meals = 90, 000 – 80, 000 = (10, 000 meals)($2/meal) = 100, 000 – 80, 000 = (20, 000 meals)($2/meal) = 105, 000 – 80, 000 = (25, 000 meals)($2/meal) = Increase total capacity to 130, 000 = ($80, 000) $20, 000 $40, 000 $50, 000 ($170, 000) 120, 000 – 80, 000 = (40, 000 meals)($2/meal) = 130, 000 – 80, 000 = (50, 000 meals)($2/meal) = ($120, 000) $80, 000 $100, 000 To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.