MBA, Semester 2 Operations Management Prof. Aarti Mehta Sharma

1. MBA, Semester 2Operations ManagementProf. Aarti Mehta Sharma

2. Capacity Planning

3. The ability to hold, receive, store or accommodate Amount of output that a system is capable of achieving over a period of time For Example : No. of customers that can be handled between 11am and 1pm No. of automobiles that can be produced in a single shift. Capacity

4. Long term capacity plans – investments in new facilities and equipments covering requirements at least two years in the future.eg. Samsung, Pepsi Short term capacity plans – focus on work – force size, overtime budgets, inventories etc. eg. Accenture

5. Fixed Capacity : capital assets (buildings, machinery, equipment etc) Adjustable Capacity : size of the workforce, no. of hours per week hey work, no. of shifts and the extent of subcontracting

6. Continued investment in people, technology, research and development, and capital assets. Long term effects on Finance and Production. How should a plant be able to produce ? How many customers should a service facility be able to serve ? How much of a cushion is needed for uncertain, variable demand ? Long term Capacity Planning Questions

7. Should the capacity be expanded based on forecast of demand or should the capacity expansion be taken up only after the demand becomes more certain ?

8. Forecast growth in demand Future upgrading of technology Anticipated moves by competitors Reliance on learning curves Availability of funds for future investments Cost of new capacities to provide economies of scale Factors affectingLong Term Capacity Planning

9. Economies of Scale

10. The average unit cost of a good or service can be reduced by increasing the rate of output The annual volume of output which results in the least cost = best operating level Fixed costs are driven down when : fixed costs can be spread over a large no. of units produced Economies of Scale

11. 2. Production costs do not increase linearly with output levels 3. Quantity discounts are available for material purchases 4. Operating efficiency increases as workers gain experience

12. Above a certain level of output, additional volume of output results in ever increasing average unit costs. Due to overloading of machines, increased congestion of materials and handling equipments, slower service times, poor quality requiring rework, difficulty in management Diseconomies Of Scale

13. A line displaying the relationship between unit production time and the cumulative no. of units produced Integral part in planning corporate strategy As plants produce more – gain experience in the best production methods – reduce cost of production Varies across industries First applied in the airline industry The ExperienceCurve - Practice Makes Perfect

14. The amount of time required to complete a given task or unit of a product will be less each time the task is undertaken. The unit time will decrease at a decreasing rate The reduction of time will follow a predictable pattern Assumptions

15. As Output doubled – 20 % reduction in production worker hours 1,00,000 hours for plane 1 80,000 hours for plane 2 64,000 hours for plane 4 ----- known as 80 % learning curve Airline Industry

16. Wrt TIME

17. wrt no. of units

18. Yx = kxⁿ x = unit number Yx = Number of direct labor hours required to produce the xth unit k = Number of direct labor hours required to produce the first unit n = log b / log 2 where b = learning % Logarithmic Analysis

19. Q

20. To calculate time for eighth unit Y8 = (1,00,000)(8)ⁿ Y8 = (1,00,000) log 0.8 / log 2 = 51,192 Q

21. Gain from Economies of Scale and the Experience curve Build larger plants – larger capacity But … - product must meet customer needs - Demand should be large Advantage : Larger Plants

22. Production capacity maximum rate of production ( or output ) in a day - 100 cars per day - 200 refrigerators per day Factors : - employee absenteeism, equipment breakdown, holidays, delays in material procurement / delivery, overtime, temporary workers, outsourcing Various types of capacities

23. Output measures to express the capacity of line flow processes Input measures for flexible flow processes Capacity utilisation rate = capacity used (actual output ) best operating level ( design capacity ) Efficiency = actual output effective capacity Measures of capacity

24. Automobile factory – no. of vehicles Steel Mill – Tonnes of stel Power Plant – megawatts of elec generated Job Shop – Labour Hours worked Airline – No. of seats Hospital – No. of Beds Movie Theatre – No. of seats Restaurant – no. of seats Measures of Capacity

25. Unevenness in capacity may be due to seasonal (predictable) / random (unpredictable) variations – can cause overloading / underloading of machines & personnel solution – produce complementary products ( air conditioning / heating ) – stable capacity Determinant - To smooth out capacity requirements

26. must consider how different parts interrelate For eg. When mgt of a 5 star hotel decides to increase the number of rooms – increase in parking space, restaurant seating, staff etc Taking a “big picture” approach

27. Cost of upgrading too frequently expensive – cost of m/c and installation Cost of upgrading too infrequently expensive – capacity is purchase in chunks, larger overheads Frequency of Capacity Additions

28. Use forecasting techniques to predict sales for individual products Calculate equipment and labor requirements Project labor and equipment availabilities over the planning horizon Determining capacity requirements

29. Capacity Alternatives

30. The whitening company produces two varieties of detergents : Sirf and ExSirf. Each is available in bags and single serving pouches. Management would like to determine equipment and labor requirements for the same. The marketing department has provided the following forecast for the next five years. Q

32. Currently, there are three machines that can package upto 150,000 bags each. Each machine requires 2 operators and can produce bags of Sirf and ExSirf. six bag operators are available. 5 machines that can package upto 250,000 pouches each per year are available. Three operators are reqd for each machine, which can produce pouches of both Sirf and ExSirf. Currently, 20 pouching machine operators are available

33. Total product line forecasts

34. Total capacity for bags = 3 * 1,50,000 = 4,50,000 We will be using 135 / 450 = 0.3 for yr 1 0.3 * 3 = 0.9 machines Total capacity for bags = 5 * 250,000 = 1,250,000 For yr 1 , usage = 300 / 1250 = 0.24 Machine usage = 0.24 * 5 = 1.2 machines

35. For yr 1 0.9 * 2 = 1.8 operators = 2 1.2 pouch machines * 3 = 3.6 = 4 operators Labor Requirement

36. Project Laborand Equipment availabilities

37. Available capacity exceeds demand for all five years --- positive capacity cushion

38. Where present capacity is not sufficient to meet the forecast demand for the products and services Subcontracting component parts, sub units or even entire products to other firms Acquiring other firms, facilities or resources Building new plants, equipments, machinery Expanding, modernising or modifying existing facilities Reactivating facilities which are on stand by status. Identifying and Analysing Sources Of Capacity

39. Selling off existing facilities, selling inventories and laying off or transferring employees Placing some facilities on stand by status and selling the inventories Developing and phasing in new products as other products decline When the present capacity is in excess of the future needs

40. Economically feasible ? Operating and maintenance costs Time taken to acquire ? Useful life ? compatible with present personnel and operating methods ? Community attitude ? Selecting from the alternative sources of capacity

41. Decision tree analysis Break even analysis Financial analysis Computer simulation or waiting line analysis Analysis

42. Schematic model of the sequence of steps in a problem and consequence of each step Squares – decision points Circles – chance events Branches from chance events - probabilities Decision tree analysis

43. Helpful in visually displaying the problem and then organizing the computational work . Very useful when a sequence of decisions must be made

44. The owner of Hacker computer store is considering what to do with his business over the next 5 yrs. Sales growth has been good but could grow more if a major electronics firm is built in his area as proposed. Hackers owner sees three options – enlarge his current store, locate to a new site. Or do nothing. The decision to expand or move would take little time, and, therefore, the store would not lose time. If nothing were done the first year and strong growth occurred, the decision to expand would be Case

45. reconsidered. Waiting longer than one year would allow competition to move in and make expansion no longer feasible. The assumptions and conditions are as follows : Strong growth as a result of the increased population of computer fanatics from the new electronics firm has a 55 % prob Strong growth with a new site would give annual returns of Rs. 195,000 per year. Weak growth with a new site would mean annual returns of Rs. 115,000

46. Strong growth with an expansion would give annual returns of Rs. 190,000 per year. Weak growth with an expansion would mean annual returns of Rs. 100,000 At the existing store with no changes, there would be returns of Rs. 170,000 per year if there is strong growth and Rs. 105,000 per year if growth is weak. Expansion at the current site would cost Rs. 87,000 The move to the new site would cost Rs. 210,000

47. 7. If growth is strong and the existing site is enlarged during the second year, the cost would still be Rs. 87,000 8. Operating costs for all options are equal.

48. strong growth = 765,000 move 0.55 585,000 weak growth-0.45= 365,000 strong growth = 863,000 expand 0.55 660,000 weak growth = 413,000 0.45 expand843000 do nothing strong growth(0.55) do nothing 703,750 850,000 weak growth(0.45) = 525,000 Solution

49. To move move to new location, strong growth: (rev)195,000 * 5 – 210,000(cost) = 765,000 (value ) move to new location, weak growth: (rev)115,000 * 5 – 210,000(cost) = 365,000 (value ) Total value = Rs.765,000 × 0.550 + ( Rs. 365,000 × 0.45 ) = Rs. 585,000

50. Expand expand store, strong growth 190,000× 5 – 87,000 = 863,000 Expand store, weak growth 100,00 × 5 – 87,000 = 413,000 Total value = 863,000 × 0.550 + 413,000 × 0.45 = 660,500