Technological Institute of the Philippines

Quezon City Campus

MM323

Summary of

CHAPTER FIVE

CAPACITY PLANNING

SUPPLEMENT TO CHAPTER FIVE

DECISION THEORY

CHAPTER 6

PROCESS SELECTION AND FACILITY LAYOUT

SUPPLEMENT TO CHAPTER 6

LINEAR PROGRAMMING

John Frederick O. Abubo

MM32FB2

CHAPTER FIVE

CAPACITY PLANNING

Capacity refers to the upper limit or ceiling on the load that an operating unit can handle.

The capacity of an operating unit is important piece of information for planning purpose: it enables managers to qualify production capacity in terms inputs or output, and thereby make other decisions or plans related to those quantities.

IMPORTANCE OF CAPACITY PLANNING

Capacity decisions have a real impact on the ability of the organization to meet future demands for products and services: capacity essentially limits the rate of the output possible.

Capacity decisions affect operating costs. Capacity is usually a major determinant of initial cost. Capacity decision can affect competitiveness. Capacity affects the ease of management.

DEFINING AND MEASURING CAPACITY

Two useful definitions of capacity:

Design capacity: the maximum output that can possibly be attained. Effective capacity: the maximum possible output given a product mix,

Scheduling difficulties. Machine maintenance, Quality factors, And so on.

Design capacity id the maximum rate of output achieved under ideal conditions. Effective capacity is usually less than design capacity owing to realities of changing product mix, the need for periodic maintenance of equipment, and similar circumstances.

Efficiency and Utilization

Efficiency: is the ratio of actual output to effective capacity Utilization: is the ratio of actual capacity output to design capacity

Efficiency= Actual outputEffectivecapacity

Utilization= Actual outputDesigncapacity

DETERMINANTS OF EFFECTIVE CAPACITY

Facilities Factors: the design of facilities, including size and provision for expansion is the key.

Product/Service Factors: product or service design can have a tremendous influence on capacity.

Process Factors: the quality capability of a process is an oblivious determinant of the capacity.

Human Factors: the tasks that make up a job, the variety of activities involved, and the training, skill, and experience required to perform a job all have an impact on the potential and actual output.

Operational Factors: Scheduling problems may occur when a organization has differences in equipment or differences in job requirements.

External Factors: product standard, especially minimum quality and performance standards can restrict management is options for increasing and using capacity.

DETERMINANT CAPACITY REQUIREMENTS

Long –term capacity: capacity needs by forecasting demand over a time horizon and then converting those forecasts into capacity requirements.

Short-term capacity: needs are less concerned with cycles or trends than with seasonal variation and other variations from average.

DEVELOPING CAPACITY ALTERNATIVES

Design flexibility into systems. Differentiate between new and mature products or services. Take a “big picture” approach to capacity changes. Prepare to deal with capacity “chunks.” Attempt to smooth out capacity requirements. Identify the optimal operating level.

PLANNING SERVICE CAPACITY

Three very important factors:

The need to be the near customers, The inability to store services, and The degree of volatility of demand.

Capacity must also be matched with timing of demand.

Demand management: is a strategy that can be used to offset capacity limitations. Pricing, promotions, discount, and similar tactics can help to shift some demand away from peak periods and into slow periods, allowing organizations to achieve a closer match in supply and demand.

EVALUATING ALTERNATIVES

Calculating Processing Requirements

When evaluating capacity alternatives, a necessary piece of information is the capacity requirements of products that will be processed with a given alternative.

Cost-Volume Analysis

Cost-Volume analysis focuses on relationship between cost, revenue, and volume of output. The purpose of cost-volume analysis is to estimate the income of the organization under different operating conditions.

Fixed costs: tend to remain constant regardless of volume of output.

Variable cost: vary directly with volume of output. Break-even point (BEP): the volume of output at which total cost

and total revenue are equal.

Financial Analysis

A problem that is universally encountered by managers is how to allocate scare funds. Two important terms:

Cash flow: difference between cash received form sales and other sources, and cash outflow for labor, material, overhead, and taxes.

Present value: the sum in current value of all future cash flows of an investment proposal.

Three most commonly used methods of financial analysis:

Payback: is a crude but widely used method that focuses on the length of time it will take for an investment to return its original cost.

Present value (PV): method summarizes the initial cost of an investment.

Internal rate of return (IRR): summarizes the initial cost. Decision Theory

Decision theory is helpful tool for financial comparison of alternatives under conditions of risk or uncertainty.

Waiting-line Analysis

Analysis of lines is often useful for designing service systems. Waiting lines have a tendency to form in a wide variety of service systems.

SUPPLEMENT TO CHAPTER FIVE

DECISION THEORY

INTRODUCTION

Decision theory represents a general approach to decision making. Decisions that lend themselves to a decision theory approach tend to be characterized by these elements:

A set of possible future conditions exist that will have a bearing on the results of the decision.

A list of alternatives for the manager to choose from. A known payoff for each alternative under each possible future

condition.

To use this approach, a decision maker would employ this process:

Identify the possible future conditions. These are called states of nature.

Develop a list of possible alternatives, one of which may be to do nothing.

Determine or estimate the payoff associated with each alternative for every possible future condition.

If possible, estimate the likelihood of each possible future condition. Evaluate alternatives according to some decision criterion and select

the best alternative.

CAUSES OF POOR DECISIONS

Bounded rationality: the limitations on decision making caused by costs, human abilities, time, technology and availability of information.

Sub-optimization: the result of different departments each attempting to reach a solution that is optimum for that department.

DECISION ENVIRONMENTS

Certainty: environment in which relevant parameters have known values. (cost, capacity)

Risk: environment in which certain future events have probable outcomes.

Uncertainty: environment in which it is impossible to assess the likelihood of various future events.

DECISION MAKING UNDER CUNCERTAINTY

Maximin: Choose the alternative with the best of the worst possible payoffs.

Maximax: Choose the alternative with the best possible payoff. Laplace: Choose the alternative with the best average payoff of any of

the alternatives. Minimax regret: Choose the alternative that has the least of the worst

regrets. Regret: The difference between a given payoff and the best payoff for

a state of nature.

DECISION TREES

A schematic representation of the available alternatives and their possible consequences.

EXPECTED VALUE of PERFECT INFORMATION (EVPI)

Expected value of perfect information (EVPI), the difference between the expected payoff with perfect information and the expected payoff under risk.

SENSITIVITY ANALYSIS

Determining rage of probability for which an alternative has the best expected payoff.

CHAPTER 6

PROCESS SELECTION AND FACILITY LAYOUT

Process selection refers to the way production of goods or service is organized.

Key aspects include:

Make or buy decisions: The extent to which the organization will produce goods or provide services in-house as opposed to relying or outside organizations to produce or provide them.

Capital intensity: The mix of equipment and labor that will be used by the organization.

Process flexibility: The degree to which the system can be adjusted to changes in processing requirements due to such factors as changes its product or service design, changes in volume processed, and changes in technology.

Capital intensity and process flexibility are major factors if the organization chooses to make rather than buy.

MAKE OR BUY DECISIONS

The very first step in process planning is so consider whether to make or buy (outsource) some or all of a product or some or all of a service.

Outsource: obtain a good or service from an external provider.

In make or bus’ decisions, a number of factors are usually considered:

Available Capacity Expertise Quality considerations The nature of demand Cost

PROCESS SELECTION

Process Selection refers to the way production of goods or services is organized. It has major implications for capacity planning, layout of facilities, equipment, and design of work systems.

Process types: Job Shop: a job shop usually operates on a relatively small scale. Batch: batch processing is used when a moderate volume of

goods or service is desired. Repetitive: when higher volumes of more standardized goods or

service are needed repetitive processing is used. Continuous: very highly standardized output is desired, a

continuous systems is used. Project: a nonrepetitive set of activities directed toward a unique

goal within a limited time frame.

Automation Machinery that has sensing and control devices that enables it to operate automatically.

Generally speaking there are three kinds of automation: Fixed: is the most rigid of the three types. Sometimes referred to

as Detroit-type automation, it uses high cost, specialized equipment for fixed sequence of operations.

Programmable: is at the opposite end of the spectrum. It involves the use of high-cost, general purpose equipment controlled by a computer program that provide both the sequence of operations and specific details about each operation.

o Computer-aided manufacture (CAM): uses of computer in process

o Numerically controlled (N/C) machines: machines that perform operations by following mathematical processing instruction.

o Robot: a machine consisting of a mechanical arm, a power supply, and a controller.

Flexible: evolved from programmable automation. It uses equipment that is more customized than that of programmable automation.

Manufacturing cell: one or a few computer-controlled machines that produce a wide variety of parts.

Flexible Manufacturing System (FMS): is a group of machines that include supervisory computer control, automatic material handling, and robots or other automated processing equipment. FMS produce a variety of similar products.

Computer Integrated Manufacturing: a system for linking a broad range of manufacturing activities through an integrating computer system.

SERVICE PROCESS DESIGNService process design focuses on the service delivery system.

Service blueprint: a method used ion service design to describe and analyze a proposed service.

LAYOUT

Layout refers to the configuration of departments, work center, and equipment, with particular emphasis on movement of work through the system.

Product Layout

Layout that uses standardized processing operating to achieve smooth, rapid, high-volume flow.

Production line: standardized layout arranged according to a fixed sequence of production.

Assembly line: standardized arranged according to a fixed sequence of assembly tasks.

The main advantages of product layouts are:

1. A high rate of output.2. Low unit cost due to high volume: the high cost of specialized

equipments is spread over many units.3. Labor specialization reduces training costs and time, and results

in a wide span of supervision.4. Low material-handling cost per unit: material handling is

simplified because units follow the same sequence of operations.5. A high utilization of labor and equipment.6. Routing and scheduling are established in the initial design of the

system: they do not require much attention once the system is operating.

7. Accounting, purchasing, and inventory control are fairly routine.

The primary disadvantages of product layouts include:

1. The intensive division of labor usually creates dull, repetitive jobs that provide little opportunity for advancement and may lead to morale problems and to repetitive stress injuries.

2. Poorly skilled workers may exhibit little interest in maintaining equipment or in the quality of output.

3. The system is fairly inflexible in response to changes in the volume of output or changes is product or process design.

4. The system is highly susceptible to shutdowns caused by equipment breakdowns or excessive absenteeism.

5. Preventive maintenance, the capacity for quick repairs, and spare-parts inventories are necessary’ expenses.

6. Incentive plans tied to individual output are impractical since they would cause variations among outputs of individual workers, which would adversely affect the smooth flow of work through the system.

U-Shaped Layouts: One disadvantage of a long, straight line is that it interferes with cross-travel of workers and vehicles. A U-shaped line is more compact: it often requires approximately half the length of a straight production line. In addition, a U-shaped line permits increased communication among workers on the line because workers are clustered, thus facilitating teamwork.

Process layout

Layout that can handle varied processing requirements.

In sum, process layouts have both advantages and disadvantages. The advantages of process layouts include:

1. Systems can handle a variety of processing requirements.2. Systems are not particularly numerable to equipment failures.3. General-purpose equipment is often less costly than the

specialized equipment used in product layouts and is easier and less costly so maintain.

4. It is possible to use individual incentive systems.

The disadvantages of process layouts include:

1. In-process inventory Costs can be high if batch processing is used in manufacturing systems.

2. Routing and scheduling pose continual challenges.3. Equipment utilization rates are low.

4. Material handling is slow and inefficient, and more costly per unit than in product layouts.

Fixed-position layout

Layout in which the product or project remains stationary and workers, materials, and equipment are moved as needed.

Combination layout

The three basic layout types are ideal models, which may be altered to satisfy the needs of the particular situation. Ex. Supermarkets

Cellular layout

Cellular manufacturing layout in which machines are grouped into a cell that can process items that have similar processing requirements.

Group technology: the grouping into part families of items with similar design

or manufacturing characteristics. Flexible manufacturing systems:

are more fully automated versions of cellular manufacturing.

Retail layout: the objectives that guide design of manufacturing layouts

often pertain to cost minimization and product. Office layout:

are undergoing transformations as the flow of paperwork is replaced with the increasing use of electrons communications.

DESIGNING PRODUCT LAYOUT

Line balancing: process of assigning tasks to workstations in such a way that

the workstations have approximately equal time requirements. Cycle time:

the maximum time allowed at each workstation to connect its set of tasks on a unit. Precedence diagram:

diagram that shows elemental tasks and their precedence requirements.

Balance delay:

percentage of idle time of a line

COMPUTER ANALYSIS

The size and complexity of process layout problem have led to the development of a number of computerized packages.

SUPPLEMENT TO CHAPTER 6

LINEAR PROGRAMMING

Is a powerful quantitative tool used by the operations managers and other managers to obtain optimal solutions to problems that involve restrictions or limitations, such as the available materials, budgets, and labor and machine time.

LINEAR PROGRAMMIMG TECHNIQUESConsist of a sequence of steps that will lead to an optimal solution to problems, in cases where an optimum exist

Two general-purpose solution techniques:

Graphical linear programming It provides a visual portrayal of many of the important

concepts of linear programming It is limited to problems with only two variables

Computers Are used to obtain solution for problems, some of which

involve a large number of variables.

LINEAR PROGRAMMING MODELS

Are mathematical representations of constrained optimization problems.

Four components provide the structure of a linear programming model: Objective Decision variables Constraints Parameters

Two general types of objectives:

Maximization: An objective involves profits, revenues, efficiency, or rate of return.

Minimization: An objective might involve cost, time, distance, traveled, or scrap.

Objective function Is a mathematical expression that can be used to determine

the total profit for a given solution.

Decision variables Represents choices available to the decision maker in terms

of amounts either inputs or outputs.

Constraints Are limitations that restrict the alternatives available to the

decision makers.

Feasible solution space The set of all feasible combinations of decision variables as

defined by the constraints.

Parameters A mathematical statement of the objective and a

mathematical statement of each constraint.

MODEL FORMULATION

An understanding of the components of linear programming models is necessary for model formulation. This helps provide organization to the process of assembling information about a problem into a model.

GRAPHICAL LINEAR PROGRAMMING

Is a method for finding optimal solutions to two variable problems.

General procedure followed in the graphical approach is:

Set up the objective function and the constraints in mathematical format.

Plot the constraints. Identify the feasible solution space. Plot the objective function. Determine the optimum solution.

The feasible solution space is the set of all points that satisfies all constraints.

REDUNDANT CONSTRAINTS

A constraint that does not form a unique boundary of the feasible solution space.

BINDING CONSTRAINT

A constraint that forms the optimal corner point of the feasible solution that space.

SURPLUSIs when the value of decision variables in the left side is greater than the right side.

SLACKIs when the value of decision variables in the left side is less than the

right side.

SIMPLEX METHOD

A linear programing algorithm that can solve problems having more than two decision variables.

SENSITIVITY ANALYSIS

Assessing the impact of potential changes to the numerical values of a linear programming model.

RANGE OPTIMALITY

Range of values over which the solution quantities of all the decision variables remains the same.

A constraint is binding if substituting the values of the decision variables of that solution into the left side of the constraint results in a value that is equal to the right hand side value.

SHADOW PRICE

Amount by which the value of the objective function would change with one unit change in the right hand side value of a constraint.

RANGE OF FEASIBILITY

Range of values for the RHS of a constraint over which the shadow price remains the same.