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Capacity Decisions

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The blast furnace and scrap handling, supply 3,000 and 1,500 tpd, which is more than adequate for the basic oxygen furnace capacity of 4,200 tpd. – PowerPoint PPT presentation

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Title: Capacity Decisions


1
CHAPTER 9

Capacity Decisions
2
Learning Objectives
  • 1. Define capacity as a measure of the
    organization's ability to provide customers with
    the requested service or good.
  • 2. Explain that capacity estimation is difficult
    because many management decisions affect
    capacity.
  • 3. Describe how overall capacity of the system is
    dependent on the capacities of the departments
    and machines that form the system.
  • 4. Determine the bottleneck in a system and
    demonstrate how that information can be used for
    managerial decision making.
  • 5. Describe the important capacity decisions,
    such as how much capacity to add, when to add
    capacity, where to add capacity, what type
    (process) of capacity to add, and when to reduce
    capacity.

3
Management Decisions
  1. The capacity of the firm to produce the service
    or good
  2. The processes for providing the service or making
    the good
  3. The layout or arrangement of the work space
  4. The design of work processes to enhance
    productivity

4
Important Questions About Capacity
  • (1) How can management estimate capacity?
  • (2) What is system capacity, and why is it
    important?
  • (3) How can capacity decisions be made to gain a
    competitive advantage for the organization?

5
Flexible facilities allow managers to
  1. Change production volume to respond to customer
    demand
  2. Produce different products on the same equipment
    (product mix) to respond to changing customer
    needs
  3. Alter product technology and process technology
    to maintain or improve an organization's
    competitive position

6
Estimating Capacity
7
Estimating Capacity -- Continued
8
Example
9
Examined Decisions
  1. Changing the mix of products produced by the
    facility
  2. Adding people to the production process
  3. Increasing the motivation of production employees
  4. Increasing the operating rate of a machine
  5. Improving the quality of the raw materials and
    the work in process
  6. Increasing product yield

10
Changing Product Mix
Example 1
TYPE MIX 1 MIX 2
Life insurance House insurance Automobile insurance 0.20 0.30 0.50 0.40 0.40 0.20
Assume Life insurance 3
hours House insurance 2
hours Automobile insurance 1 hours
11
Changing Product Mix -- Continued
Production Rate (hours worked per week)/(hour
required per unit) Production RateLife (40
hrs./wk.)/(3 hrs/unit) 13.33 contacts per
week Production RateHouse (40 hrs./wk.)/(2
hrs/unit) 20 contacts per week Production
RateAuto (40 hrs./wk.)/(1 hr/unit) 40
contacts per week
12
Changing Product Mix -- Continued
Example 2
  • Assume that steel
  • Is one-eighth of an inch thick
  • Has a density of .2833 pounds per cubic inch
  • The machines roll steel for 80 hours per week at
    an average speed of 30 inches per second
  • The company produces both 40- and 60-inch widths
    of steel

Determine the capacity of each of the product
mixes shown below
SIZE MIX 1 MIX 2
40 inches 60 inches 80 20 50 50
13
Changing Product Mix -- Continued
The company's production rate
The production rate for the 40-inch size (
)
14
Changing Product Mix -- Continued
the overall production rate if Mix 1 is assumed
Convert this figure to tons per hour.
Convert the production rate into an estimate of
capacity for a week.
15
Adding People
16
Increasing Motivation
  • Shared decision making provides the following
    benefits to organizations
  • Organizations can tap talents that already exist
    in their workforces.
  • Workforces are more receptive to training and new
    ideas.
  • People work harder and smarter.

17
Increasing Machine Production Rate
  • Machine constrained.
  • The methods to increase capacity
  • increase preventive maintenance
  • develop procedures more efficiently utilize
    existing machines.
  • Continuing process improvements
  • Are not the same as increases in production rates
    caused by implementing new technology and
    equipment, but result instead from working
    smarter.

18
Improving Quality
  • Example of Downey Carpet Cleaning Company
  • Downey Carpet Cleaning is a family-owned cleaning
    business. They decide to give away a call back
    carpet service .
  • Why
  • to re-clean a carpet for a dissatisfied customer
    takes much more time.
  • Callbacks require much longer drives.
  • Each callback robs Downey of capacity and
    additional revenue.
  • the extra time and money for the chemicals needed
    to clean the high-traffic areas right the first
    time are small.

19
Improving Quality -- Continued
  • Example of Downey Carpet Cleaning Company
  • Cost
  • (1) The worker can perform ten jobs per day with
    an average revenue of 43 per job.
  • (2) One callback for no additional revenue causes
    Downey to lose 86 in revenue.
  • (3) The company misses out on two regular jobs at
    43 per job.
  • (3) The out-of-pocket costs for the chemicals to
    re-clean the carpet
  • (4) The costs of operating the truck for the
    return trip are incurred.
  • (5) The extra costs of the chemicals and the time
    for the worker to do all ten jobs right the first
    time is less than 20.
  • Then, by avoiding callbacks, Downey is able to
    increase its capacity. In addition to being a
    financially sound decision, customers like the
    policy and frequently have Downey return for
    other services as well as for their next carpet
    cleaning.

20
Increasing Product Yield
21
Determining System Capacity
  • Product Layout
  • Process Layout

Product-Oriented Layoutof Paper Mill
22
Determining System Capacity -- Continued
Process-Oriented Layout of an Automotive Service
Center
23
Process Layout
CUSTOMER SERVICES REQUESTED
A B C D E Tires, shock absorbers, wheel alignment Tires, brakes, tune-up Brakes, tune-up, exhaust system Tires, brakes, shock absorbers, muffler Shock absorbers
24
The Product Layout and System Capacity
  • Analysis of System Capacity
  • Determining the Bottleneck
  • Rounding Out System Capacity

25
A Bottleneck in the Product Flow
26
Sequential Approach toBottleneck Analysis
27
Simple Steel Production Flow
28
Steel Production FlowA Product Layout
29
Determining System Capacity
30
Determining the Bottleneck
  • Example
  • Iron ore processing can deliver 3,000 tpd
  • Coke ovens can deliver 1,000 tpd
  • Only 3,000 tons can be used from iron ore
    processing
  • The combined 4,000 tpd is more than sufficient
    for the blast furnace, which requires only 3,000
    tpd total.

31
Determining the Bottleneck --Continued
  • Example
  • The blast furnace is holding back production.
  • The blast furnace and scrap handling, supply
    3,000 and 1,500 tpd, which is more than adequate
    for the basic oxygen furnace capacity of 4,200
    tpd.
  • The basic oxygen furnace cannot process all
    available inputs, the blast furnace cannot be the
    bottleneck.
  • The basic oxygen furnace cannot deliver
    sufficient output to the remaining departments.

32
Determining the Bottleneck -- Continued
  • Example
  • The basic oxygen furnace is the bottleneck for
    the system, and the capacity of the system is
    4,200 tpd
  • blast furnace (?)(4,200) 2,800 tpd
  • scrap (?)(4,200) 1,400
  • basic oxygen furnace input blast furnace
    scrap 4,200 tpd
  • The blast furnace requires (¾)(2,800) 2,100 tpd
    of iron ore (¼)(2,800) 700 tpd of coke
  • The requirement for moving from the basic oxygen
    furnace to the end of the process is 4,200 tpd.

33
Rounding Out Capacity
34
The Process Layout and System Capacity
  • Analysis of System Capacity
  • Product Mix and Capacity in a Process Layout

35
A Process Layout of a Medical Center
36
A Process Layout of a Medical Center--Continued
The system's capacity is a function of the job
types presented.
MIX SYSTEMS CAPACITY BOTTLENECK DEPARTMENT
100 A 100 B 100 C 100 D 250 ppw 500 ppw 300 ppw 400 ppw Orthopedic care Cardiology Neurology X-ray
37
Product Mix and Capacity in a Process Layout
38
Capacity Decisions for Service Operations
  • Services are direct. Service organizations must
  • (1) build enough capacity to meet maximum demand,
  • (2) manage demand so that people will use the
    services at off-peak times,
  • (3) and choose not to satisfy all the demand.

39
Capacity Decisions for Service Operations --
Continued
  • High degree of producer-consumer interaction.
  • Significant amount of uncertainty about
    processing time, and processing time is a
    determinant of capacity.
  • location decision
  • If services are not transported to the
    customer, the customer must come to the service
    delivery system.

40
Service Operations and System Capacity
DEPARTMENT/AREA CAPACITY/SIZE
Parking area Bar area Dining area Cooking area 100 spaces 80 seats 200 seats 600 square feet
41
Service Operations and System Capacity --
Continued
DEPARTMENT/AREA CAPACITY/SIZE CAPACITY/SIZE
Parking area Bar area Dining area Cooking area (100 spaces)(2.2 people/car)(1.5 hrs.) (80 seats)(.8)(1.5 hrs.) (200 seats)(.85)(1.5 hrs.) (600 square feet)/(4 sq. ft./meal) 147 people/hr. 43 people/hr. 113 people/hr. 150 people/hr.
42
Service Operations and System Capacity --
Continued
Department/ Area Capacity (People/hr.) 100 People/Hr. 125 People/Hr. 147 People/Hr. 113/.8 141 People/Hr.
Parking area 147 100 125 147 141
Bar area 43 20 25 29 28
Dining area 113 80 100 118 113
Cooking area 150 88 110 130 124
43
Service Operations and System Capacity --
Continued
  • The system capacity must be between 125 and 147
    people/hour.
  • With demand set at 147 people/hour, the parking
    lot is at capacity, but demand in the dining area
    exceeds capacity.
  • Bar demand is (147)(.2) 29.
  • Dining demand is (147)(.8) 118.
  • Cooking demand is 118 (29)(.4) 130.
  • The bottleneck is the dining area
  • Divide the capacity of the dining area by 0.8
  • System capacity 141 people per hour.

44
Making Capacity Decisions for Competitive
Advantage
  • Informed capacity decisions can be made only when
    management
  • (1) knows the ability of its present resources
    (capacity estimation)
  • (2) knows the bottlenecks and what is causing
    them (system capacity)
  • (3) has an estimate of future demand (forecast of
    customer need).

45
We can use this information to discuss the
capacity decisions listed below
  • When to add capacity
  • How much capacity to add
  • Where to add capacity
  • What type of capacity to add
  • When to reduce capacity

46
When to add capacity Capacity vs. Demand
47
How Much Capacity To Add
ADVANTAGES OF OPTION 1 ADVANTAGES OF OPTION 2
1. Limits short-term investment and risk. Changes in technology will not find the organization with as much capital tied up in outdated technology. 2. Limits unused capacity for which no return on investment is provided. 1. May reduce long-term investment. Building capacity in one lump instead of two is bound to save total construction costs. 2. May reduce inflationary effects on construction costs by building now.
48
Capacity, Demand andProduction Rate
49
How Much Capacity to Add
50
How much capacity to add -- Continued
  • The major questions associated with Option 2 are
  • (1) How long will it be before the capacity is
    needed?
  • (2) How likely is it that the forecasted need
    will occur?
  • (3) How stable is the technology?

51
How much capacity to add -- Continued
  • Where to Add Capacity
  • What Type of Capacity to Add
  • Integrating Capacity, Production Planning,
    Marketing, and Finance Decisions

52
Adjusting Capacity to Meet Changing Ends
  • In change, organizations are faced with
  • (1) reducing capacity
  • (2) shifting capacity to another location
  • (3) building new facilities to replace existing
    facilities

53
Role of Computers and Information Systems in
Capacity
  • Capacity planning requires
  • (1) Access to substantial amounts of operating
    data
  • (2) Estimates of future purchases of services and
    goods
  • (3) Tools to analyze the relationships between
    demand and system capacity
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