CAPACITY PLANNING

DECISION MAKING UNDER RISK

Use the expected value decision rule
Weigh each payoff with associated probability and add the weighted
payoff scores.
Choose the alternative with the best expected value (highest for profits
and lowest for costs)
A PROBLEM STATEMENT
Reconsider the payoff matrix in previous example. For the expected value decision rule, which is the best
alternative if the probability of small demand is estimated to be 0.4 and the probability of large demand is
estimated to be 0.6?
The expected value for each alternative is as follows:

Alternative Possible Future Demand Low Possible Future Demand High

Small facility 200 270
Large facility 160 800
Do nothing 0 0

Alternative Expected Value

Small facility 0.4 * 200 + 0.6 * 270 = 242
Large facility 0.4 * 160 + 0.6 * 800 = 544

The large facility is the best alternative.

MAKING CAPACITY PLANNING DECISION
Identify Capacity Develop Capacity Evaluate Capacity
Requirements Alternatives Alternatives

Decision Tree Analysis

DECISION TREES (2 OF 2)

Decision Tree
­ A schematic model of
alternatives available to
the decision maker along
with their possible
consequences.
EXAMPLE
A retailer will build a small or a large facility at a new location
Demand can be either small or large, with probabilities estimated to be 0.4 and 0.6, respectively
For a small facility and high demand, not expanding will have a payoff of $223,000 and a
payoff of $270,000 with expansion
For a small facility and low demand, the payoff is $200,000
For a large facility and low demand, doing nothing has a payoff of $40,000
The response to advertising may be either modest or sizable, with their probabilities estimated to
be 0.3 and 0.7, respectively
For a modest response, the payoff is $20,000 and $220,000 if the response is sizable
For a large facility and high demand, the payoff is $800,000
EXAMPLE
LAYOUT DECISIONS
OBJECTIVES
Maximax:
Minimize movement and material handling costs
Utilize space and labor efficiently
Eliminate bottlenecks
Reduce manufacturing cycle and customer service time
Safety & Security
Promote product and service quality
Encourage proper maintenance activities
Provide a visual control of activities
Provide flexibility
Increase capacity
BASIC LAYOUTS
Process Layout Product Layout Product Layout
DESIGNING PROCESS LAYOUTS : BLOCK DIAGRAMMING
UNIT LOAD: Quantity in which NON ADJACENT LOAD: Distance farther than the next
material is normally moved block
DESIGNING PROCESS LAYOUTS : BLOCK DIAGRAMMING
DESIGNING PROCESS LAYOUTS : BLOCK DIAGRAMMING
DESIGNING PROCESS LAYOUTS : RELATIONSHIP DIAGRAM

Schematic Diagram that uses weighted lines to

denote location preference.

Muther’s Grid: Format for displaying manager

preferences for department locations