Omgt Mid2

3/7/22, 8:07 AM 741-OMGT 1013: OPERATIONS MANAGEMENT & TOTAL QUALITY MANAGEMENT - https://usl-tuguegarao.neolms.com/student_lesson/show/3150285?
lesson_id=15139989§ion…
Home
741-OMGT 1013: OPERATIONS MANAGEMENT & TOTAL QUALITY MANAGEMENT

MIDTERM - WEEK 2
Lesson 2
For this week, the following shall be your guide for the different lessons prepared for you. Be patient, read them carefully and understand the concepts.
HAVE A FRUITFUL LEARNING EXPERIENCE!!!
Defining and Measuring Capacity

Topic: Forecasting Capacity requirement
Developing capacity strategies
After reading this module, you are

expected to:
Learning Calculate capacity
Outcomes: utilization;
Identify different ways to

measure capacity and
establish maximum
capacity.
Before starting, may I invite you to reflect on this bible verse silently. . . . as we continue to pray for one another and offer all our prayers
to the LORD. . . .
LEARNING CONTENT
Introduction:
After deciding what products or services should be offered and how they should be made, management must plan the system’s capacity. Capacity is the maximum rate of output for a facility.
The facility can be a workstation or an entire organization. The Operations manager must provide the capacity to meet current and future demand; otherwise, the organization will miss opportunities
for growth and profits.
https://usl-tuguegarao.neolms.com/student_lesson/show/3150285?lesson_id=15139989&section_id=last 1/6
3/7/22, 8:07 AM 741-OMGT 1013: OPERATIONS MANAGEMENT & TOTAL QUALITY MANAGEMENT - https://usl-tuguegarao.neolms.com/student_lesson/show/3150285?lesson_id=15139989§ion…
Capacity plans are made at two levels. Long-term capacity plans, which we describe in this chapter, deal with investments in new facilities and equipment. These plans cover at least two years into
the future, but construction lead times alone can force much longer time horizons. Currently, US firms invest more than $600 billion annually in new plant and equipment. Service industries account
for more than 68 percent of the total. Such sizable investments require top-management participation and approval because they are not easily reversed. Short-term capacity plans focus on work-
force size, overtime budgets, inventories, and other types of decisions that we explore later.
Lesson Proper:
STRATEGIC CAPACITY PLANNING

Capacity planning is central to the Iong-term success of an organization. Too much capacity can be as agonizing as too little. When choosing a capacity strategy, managers have to consider
questions such as the following: How much of a cushion is needed to handle variable, uncertain demand? Should we expand capacity before the demand is there or wait until demand is more
certain? A systematic approach is needed to answer these and similar questions and to deveIop a capacity strategy appropriate for each situation.
CAPACITY
Maximum rate of output for a facility; refers to an upper limit or ceiling on the load that an operation unit can handle (operating unit might be a plant, department, machine store or worker).
The load can be specified in terms of either inputs or outputs
According to the dictionary, the ability to hold, receive, store or accommodate
In general business sense, it is the amount of output that a system is capable of achieving over a specific period of time
TWO LEVELS OF CAPACITY PLANS
LONG TERM CAPACITY PLANS- deal with investments in new facilities and equipment.
Cover at least two years into the future but construction lead times alone can force much longer time horizons

SHORT TERM CAPACITY PLANS- focus on work-force size, overtime budgets, inventories and other types of decisions
Note: The capacity of an operation unit is an important piece of information for planning purposes. It enables managers to quantify production in terms of inputs or outputs and thereby make other
decisions or plans related to those qualities.
The basic questions in capacity plans are:

1. What kind of capacity is needed?
2. How much is needed?
3. When is it needed?

*the question of what kind of capacity is needed relates to the products and services that management intends to produce or provide.
MEASURES OF CAPACITY

OUTPUT MEASURES
Usual choice for line flow processes

As the amount of customization and the variety in the product mix becomes excessive, output-based capacity measures become less useful
Best utilized when the firm provides a relatively small number of standardized products and services
ex: produce one product

INPUT MEASURES
Usual choice for flexible flow processes

Demand (can complicate input measures), which invariably is expressed as an output rate, must be converted to an input measure. Only after making the conversion can a
manager compare demand requirement and capacity on an equivalent basis
ex: manager of a copy contest must convert its annual demand for copies from different clients to the number of machines required.
1. UTILIZATION
-Degree to which equipment, space or labor is currently being used

*average output rate and capacity must be measured in the same terms
*utilization rate indicates the need for adding extra capacity or eliminating unneeded capacity
PEAK
2. CAPACITY
Maximum output that a process or facility can achieve under ideal conditions
When capacity is measured relative to equipment alone, the appropriate measure is rated capacity: an engineering assessment of maximum annual output, assuming
continuous operation except for an allowance for normal maintenance and repair downtime.
Can be sustained for only a short time (few hours in a day or few days in a month)
EFFECTIVE
3. CAPACITY
Maximum output that a process or firm can economically sustain under normal conditions
CAPACITY- greatest level of output the firm can reasonably sustain by using realistic employee work schedules and the equipment currently in place
Example:

If operated around the clock under ideal conditions, the fabrication department of an engine manufacturer can make 100 engines per day. Management believes that a maximum output rate of
only 45 engines per day can be sustained economically over a long period of time. Currently the department is producing an average of 50 engines per day.
Solution:
Calculating Utilization
Utilizationpeak = x 100%
= x 100%
= 50%
Utilizationeffective = x 100%
= x 100%
= 111%
BOTTLENECK- An operation that has the lowest effective capacity of any operation in the facility and thus limits the system’s output
ECONOMIES OF SCALE
The average unit cost of a good or service can be reduced by increasing its output rate
Deciding on the best level of capacity involves consideration for the efficiency of the operations. A concept known as economies of scale states that the average unit cost of a service or
good can be reduced by increasing its output rate.
4 PRINCIPAL REASONS why it can drive costs down when output increases:
Spreading fixed costs
When the output rate - and therefore the facility’s utilization rate – increases, the average unit cost drops because fixed costs are spread over more units
Reducing construction costs
Doubling the size of the facility usually doesn’t double construction cost
Cutting costs of purchased materials
Higher volumes can reduce the costs of purchased materials and services. They give the purchaser a better bargaining position and the opportunity to take advantage of quantity
discounts
Finding process advantages
Firms may be able to justify the expense of more efficient technology or more specialized equipment
DISECONOMIES OF SCALE
The average cost per unit increases as the facility’s size increases
Reason is that excessive size can bring complexity, loss focus and inefficiencies that raise the average unit cost of a product or service
CAPACITY STRATEGIES
1. Sizing Capacity Cushion
Average utilization rates should not get too close to 100 percent. That usually is a signal to increase capacity or decrease order acceptance so as to avoid declining productivity
Capacity cushion- amount of reserve capacity that a firm maintains to handle sudden increases in demand or temporary losses of production capacity; it measures the amount by
which the average utilization (in terms of effective capacity) falls below 100%
business find large cushions when demand varies and when future demand is uncertain, particularly if resource flexibility is low
2. Timing and Sizing Expansion
When to expand and by how much

If demand is increasing and the time between increments increases, the size of the increments must also increase
A. Expansionist strategy
involves large, infrequent jumps in capacity

stays ahead of demand, minimizes the chance of sales lost to insufficient capacity
B. Wait-and-see strategy
involves smaller, more frequent jumps

lags behind demand, relying on short-term options (overtime, temporary workers, subcontractors, stock outs) and postponement of preventive maintenance to meet any
shortfalls
C. Follow-the-leader
intermediate strategy, expanding when others do

if others are right, so are you, and nobody gains a competitive advantage
if they make a mistake and over expand, so have you, but everyone shares in the agony of over capacity
3. Linking capacity and other decisions
When managers make decisions about location, resource flexibility, and inventory, they must consider the impact on capacity cushions
capacity cushions- buffer the organization against uncertainty
Examples of links with capacity:
1.
Competitive priorities- a change in competitive priorities that emphasizes faster deliveries requires a larger capacity cushion to allow for quick response and uneven
demand, if holding finished goods inventory is infeasible or uneconomical
2.
Quality management- a drive that has obtained higher levels of quality allows for a smaller capacity cushion because there will be less uncertainty caused by yield losses
3.
Capital intensity- an investment in expensive new technologies makes a process more capital intensive and increases pressure to have a smaller capacity cushion to get
an acceptable return on investment
4.
Resource flexibility- a change to less worker flexibility requires a larger capacity cushion to compensate for the operation overloads that are more likely to occur with a
less flexible workforce
5.
Inventory- a change to less reliance on inventory in order to smooth the output rate requires a larger capacity cushion to meet increased demands during peak periods
6.
Scheduling- a change to more stable environment allows a smaller cushion because products or services can be scheduled with more assurance
STEPS IN CAPACITY PLANNING
1. ESTIMATE CAPACITY REQUIREMENTS
A. When one product/service is being processed
Where: D= number of units (customers) forecast per year
p= processing time
N= total number of hours per year during which the process operates
C= desired capacity cushion
B. When multiple products/services are involved, extra time needed to change over from one product or service to the next
*Set up time- time required to change a machine from making one product or service to making another
Where: Q= number of units in each lot
s= set up time (in hours) per lot
*ALWAYS round up the fractional part unless it is cost efficient to use short-term options such as overtime or stockouts to cover any shortfalls
Example:
A copy center in an office building prepares bound reports for two clients. The center makes multiple copies (the lot size) of each report. The processing time to run, collate, and bind each copy
depends on, among other factors, the number of pages. The center operates 250 days per year, with one eight-hour shift. Management believes that a capacity cushion of 15% is best. Based on the
following table of information, determine how many machines are needed at the copy center.
Item Client X Client Y

Annual demand forecast (copies) 2000 6000
Standard processing time (hour/copy) 0.50 0.70
Average lot size (copies per report) 20 30
Standard set up time (hours) 0.25 0.40
Solution:
M = 5305
1700
= 3.12 (Rounding up to the next integer gives a requirement of 4 machines)
*Note: N = (250 days/year)(1 shift/day)(8 hours/shift) = 2000 hours/year
2. IDENTIFY GAPS
*CAPACITY GAPS- any difference (positive or negative) between projected demand and current capacity
Example: Say that the copy center currently has 3 machines, so
= 4 – 3
= 1 machine
This means that the copy center will need 1 more machine to be able to fully serve its 2 clients. The copy center may either opt to buy a new one or rent from another.
NOTE: Capacity gap may either be positive or negative
3. DEVELOP ALTERNATIVES
*BASE CASE- to do nothing and simply lose orders from any demand
4. EVALUATE THE ALTERNATIVES
*QUALITATIVE CONCERNS- manager has to look at how each alternative fits the overall capacity strategy and other aspects of the business not covered by the financial analysis
*QUANTITATIVE CONCERNS- manager estimates the change in cash flows for each alternative
*Cash flows- difference between the flow of funds into and out of an organization over a period of time
TOOLS FOR CAPACITY PLANNING
1. WAITING LINE MODELS- use probability distributions to provide estimates of average customer time, average length of waiting lines, and utilization of the work center
2. DECISION TREES- can be particularly valuable for evaluating different capacity expansion alternatives when demand is uncertain and sequential
decisions are involved
*** END of LESSON***
WARNING: No part of this E-module/LMS Content can be reproduced, or transported or shared to others without permission from the University. Unauthorized use of the materials, other than personal learning use, will be
penalized. Please be guided accordingly.
REFERENCES
Textbooks
Chase, Richard,et.al. Production and Operations management: Manufacturing and Services 8th ed. Irwin/McGrwa-Hill. Boston
Stevenson, William J. (2018). Operations management thirteenth edition. McGraw Hill Education, 2 Penn Plaza, New York, NY 10121.

Omgt Mid2

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Omgt Mid2

Uploaded by

Copyright:

Available Formats

3/7/22, 8:07 AM 741-OMGT 1013: OPERATIONS MANAGEMENT & TOTAL QUALITY MANAGEMENT - https://usl-tuguegarao.neolms.com/student_lesson/show/3150285?

741-OMGT 1013: OPERATIONS MANAGEMENT & TOTAL QUALITY MANAGEMENT

HAVE A FRUITFUL LEARNING EXPERIENCE!!!

Defining and Measuring Capacity

Developing capacity strategies

After reading this module, you are

STRATEGIC CAPACITY PLANNING

TWO LEVELS OF CAPACITY PLANS

The basic questions in capacity plans are:

Usual choice for line flow processes

Usual choice for flexible flow processes

-Degree to which equipment, space or labor is currently being used

1. Sizing Capacity Cushion

2. Timing and Sizing Expansion

When to expand and by how much

involves large, infrequent jumps in capacity

involves smaller, more frequent jumps

intermediate strategy, expanding when others do

3. Linking capacity and other decisions

STEPS IN CAPACITY PLANNING

1. ESTIMATE CAPACITY REQUIREMENTS

A. When one product/service is being processed

Where: D= number of units (customers) forecast per year

p= processing time

C= desired capacity cushion

Where: Q= number of units in each lot

s= set up time (in hours) per lot

Item Client X Client Y

= 3.12 (Rounding up to the next integer gives a requirement of 4 machines)

*Note: N = (250 days/year)(1 shift/day)(8 hours/shift) = 2000 hours/year

NOTE: Capacity gap may either be positive or negative

4. EVALUATE THE ALTERNATIVES

TOOLS FOR CAPACITY PLANNING

*** END of LESSON***

You might also like

* END of LESSON*