To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Process

To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved.

Process CapacityProcess Capacity

Chapter 6Chapter 6


Implementchanges

6

Redesign Process (Capacity change)

5

Redesigning a Process Redesigning a Process Through Capacity ChangeThrough Capacity Change

Documentprocess

3

Definescope

2

Evaluateperformance

4

Figure 6.1Figure 6.1

Identify opportunity

1


UtilizationUtilization

Utilization = x 100%Utilization = x 100%Average output rateAverage output rate

Maximum capacityMaximum capacity


Capacity BottlenecksCapacity Bottlenecks

(a) Operation 2 a bottleneck(a) Operation 2 a bottleneck

InputsInputs To To customerscustomers

50/hr50/hr

11 22 33

200/hr200/hr 200/hr200/hr



(b) All operations bottlenecks(b) All operations bottlenecks

2 31InputsInputs To To customerscustomers

200/hr 200/hr 200/hr

Capacity BottlenecksCapacity Bottlenecks



Theory of ConstraintsTheory of Constraints1.1. Identify the system Identify the system

bottleneck(s)bottleneck(s)2.2. Exploit the bottleneck(s)Exploit the bottleneck(s)3.3. Subordinate all other Subordinate all other

decisions to Step 2decisions to Step 24.4. Elevate the bottleneck(s)Elevate the bottleneck(s)5.5. Do not let inertia Do not let inertia

set inset in


Economies and Economies and Diseconomies of ScaleDiseconomies of Scale


250-bed 250-bed hospital hospital 500-bed 500-bed

hospital hospital

750-bed 750-bed hospital hospital

Economies Economies of scale of scale

Diseconomies Diseconomies of scale of scale

Output rate (patients per week)Output rate (patients per week)

Av

era

ge

un

it c

os

t A

ve

rag

e u

nit

co

st

(do

llars

pe

r p

atie

nt)

(do

llars

pe

r p

atie

nt)


Capacity CushionsCapacity Cushions

Capacity Cushion = 100% - Utilization Rate (%)Capacity Cushion = 100% - Utilization Rate (%)


Planned unused Planned unused capacity capacity

Capacity StrategiesCapacity Strategies

TimeTime

Ca

pac

ity

Ca

pac

ity


Forecast of Forecast of capacity required capacity required

Time between Time between increments increments

Capacity Capacity increment increment

(a) Expansionist strategy(a) Expansionist strategy


Capacity StrategiesCapacity Strategies

TimeTime

Ca

pac

ity

Ca

pac

ity

(b) Wait-and-see strategy(b) Wait-and-see strategy

Forecast of Forecast of capacity required capacity required

Planned use of Planned use of short-term options short-term options


Time between Time between increments increments

Capacity Capacity increment increment


Linking Process Capacity Linking Process Capacity and Other Decisionsand Other Decisions

• Competitive PrioritiesCompetitive Priorities• QualityQuality• Process Process

DesignDesign• Aggregate Aggregate

PlanningPlanning


Estimating Capacity Estimating Capacity RequirementsRequirements

MM = = 62.5 customers per day = = 62.5 customers per day5050

50[1.0 – .20)]50[1.0 – .20)]

A process serves 50 customers per day, utilization is about 90%, A process serves 50 customers per day, utilization is about 90%, and demand is expected to double in five years. Management and demand is expected to double in five years. Management wants to increase the capacity cushion to 20%.wants to increase the capacity cushion to 20%.

In 5 years if demand doubles,In 5 years if demand doubles,M M = 2 x 62.5 or 125 customers per day= 2 x 62.5 or 125 customers per day

Example 6.1Example 6.1


Estimating Capacity Estimating Capacity RequirementsRequirements

Capacity requirement =Capacity requirement =

Processing hours required for year’s demandProcessing hours required for year’s demand

Hours available from a single capacity unit Hours available from a single capacity unit per year, after deducting desired cushionper year, after deducting desired cushion

MM = =DpDp

NN[1 – ([1 – (CC/100)]/100)]

DD == demand forecast for the yeardemand forecast for the yearpp == processing timeprocessing timeNN == total number of hours per year during which the process total number of hours per year during which the process

operatesoperatesCC == desired capacity cushiondesired capacity cushion


Capacity DecisionsCapacity Decisions


Capacity DecisionsCapacity DecisionsEstimate Capacity RequirementsEstimate Capacity Requirements

ItemItem Client XClient X Client YClient Y

Annual demand forecast (copies)Annual demand forecast (copies) 2000.002000.00 6000.006000.00Standard processing time (hour/copy)Standard processing time (hour/copy) 0.50 0.50 0.70 0.70Average lot size (copies per report)Average lot size (copies per report) 20.00 20.00 30.00 30.00Standard setup time (hours)Standard setup time (hours) 0.25 0.25 0.40 0.40






[[DpDp + ( + (DD//QQ))ss]]product 1 product 1 + ... + [+ ... + [DpDp + ( + (DD//QQ))ss]]product product nn

NN[1 – ([1 – (CC/100)]/100)]MM = =






[2000(0.5) + (2000/20)(0.25)][2000(0.5) + (2000/20)(0.25)]client X client X + [6000(0.7) + (6000/30)(0.4)]+ [6000(0.7) + (6000/30)(0.4)]client Yclient Y

(250 days/year)(1 shift/day)(8 hours/shift)(1.0 – 15/100)(250 days/year)(1 shift/day)(8 hours/shift)(1.0 – 15/100)MM = =






MM = = [2000(0.5) + (2000/20)(0.25)][2000(0.5) + (2000/20)(0.25)]client X client X + [6000(0.7) + (6000/30)(0.4)]+ [6000(0.7) + (6000/30)(0.4)]client Yclient Y

(250 days/year)(1 shift/day)(8 hours/shift)(1.0 – 15/100)(250 days/year)(1 shift/day)(8 hours/shift)(1.0 – 15/100)






MM = = 3.12 = = 3.12 4 machines 4 machines53055305

17001700



Capacity DecisionsCapacity DecisionsEvaluate AlternativesEvaluate Alternatives

Expand capacity to meet expected Expand capacity to meet expected demand through Year 5demand through Year 5

YearYear DemandDemand Cash Flow Cash Flow






11 90,00090,000 (90,000 – 80,000)2 = $20,000(90,000 – 80,000)2 = $20,000






11 90,00090,000 (90,000 – 80,000)2 = $20,000(90,000 – 80,000)2 = $20,00022 100,000100,000 (100,000 – 80,000)2 = $40,000(100,000 – 80,000)2 = $40,00033 110,000110,000 (110,000 – 80,000)2 = $60,000(110,000 – 80,000)2 = $60,00044 120,000120,000 (120,000 – 80,000)2 = $80,000(120,000 – 80,000)2 = $80,00055 130,000130,000 (130,000 – 80,000)2 = $100,000(130,000 – 80,000)2 = $100,000



Capacity DecisionsCapacity DecisionsSimulationSimulation Figure 6.5Figure 6.5


Capacity DecisionsCapacity DecisionsSimulationSimulation Figure 6.6(a)Figure 6.6(a)


Capacity DecisionsCapacity DecisionsSimulationSimulation Figure 6.6(b)Figure 6.6(b)


Capacity DecisionsCapacity DecisionsDecision TreesDecision Trees

Don’t expandDon’t expand

ExpandExpand22

Low demand Low demand

Low demand Low demand

High demand High demand

High demand High demand

11Small expansion

Small expansion

Large expansion

Large expansion





ExpandExpand11

22

Low demand [0.40]Low demand [0.40]


High demand [0.60]High demand [0.60]


Small expansion

Small expansion

Large expansion

Large expansion


$70$70

$220$220

$40$40

$135$135

$90$90





$70$70

$220$220

$40$40




ExpandExpand$135$135

$90$90

11

22Small expansion

Small expansion

Large expansion

Large expansion






$70$70

$220$220

$40$40



$135$135



$90$90

11

22Small expansion

Small expansion

Large expansion

Large expansion






$70$70

$220$220

$40$40



$135$135



$90$90

11

22Small expansion

Small expansion

Large expansion

Large expansion






$70$70

$220$220

$40$40



$135$135



$90$90

11

22Small expansion

Small expansion

Large expansion

Large expansion

Expected Payoff = Event * Event Probability






$70$70

$220$220

$40$40



$135$135



$90$90

11

22Small expansion

Small expansion

Large expansion

Large expansion


Small/Low = $70 (0.40)






$70$70

$220$220

$40$40



$135$135



$90$90

11

22Small expansion

Small expansion

Large expansion

Large expansion


Small/Low = $70 (0.40) = $28






$70$70

$220$220

$40$40



$135$135



$90$90

11

22Small expansion

Small expansion

Large expansion

Large expansion


Small/Low = $70 (0.40) = $28Small/High = $135 (0.60)






$70$70

$220$220

$40$40



$135$135



$90$90

11

22Small expansion

Small expansion

Large expansion

Large expansion


Small/Low = $70 (0.40) = $28Small/High = $135 (0.60) = $81






$70$70

$220$220

$40$40



$135$135



$90$90

11

22Small expansion

Small expansion

Large expansion

Large expansion



Small = $28 + $81 = $109






$70$70

$220$220

$40$40



$135$135



$90$90

11

22Small expansion

Small expansion

Large expansion

Large expansion



Small = $28 + $81 = $109

$109$109






$70$70

$220$220

$40$40



$135$135



$90$90

11

22Small expansion

Small expansion

Large expansion

Large expansion



Small = $28 + $81 = $109

$109$109






$70$70

$220$220

$40$40



$135$135



$90$90

11

22Small expansion

Small expansion

Large expansion

Large expansion


Large/Low = $40 (0.40) = $16Large/High = $220 (0.60) = $132

Large = $16 + $132 = $148

$109$109






$70$70

$220$220

$40$40



$135$135



$90$90

11

22Small expansion

Small expansion

Large expansion

Large expansion


Large/Low = $40 (0.40) = $16Large/High = $220 (0.60) = $132

Large = $16 + $132 = $148

$109$109

$148$148






$70$70

$220$220

$40$40

$148$148

$109$109



$135$135



$90$90

11

22Small expansion

Small expansion

Large expansion

Large expansion






$70$70

$220$220

$40$40

$148$148

$109$109



$135$135



$90$90

11

22Small expansion

Small expansion

Large expansion

Large expansion






$70$70

$220$220

$40$40

$148$148

$109$109

$148$148



$135$135



$90$90

11

22Small expansion

Small expansion

Large expansion

Large expansion






$70$70

$220$220

$40$40

$148$148

$109$109

$148$148



$135$135



$90$90

11

22Small expansion

Small expansion

Large expansion

Large expansion



Capacity DecisionsCapacity DecisionsSolved Problem 1Solved Problem 1 Figure 6.8(a)Figure 6.8(a)


Capacity DecisionsCapacity DecisionsSolved Problem 1Solved Problem 1 Figure 6.8(b)Figure 6.8(b)


Capacity DecisionsCapacity DecisionsSolved Problem 2Solved Problem 2

TABLE 6.1

CASH FLOWS FOR TWO-STAGE EXPANSION OF GRANDMOTHER’S CHICKEN RESTAURANT

ProjectedProjected ProjectedProjected Calculation of Incremental CashCalculation of Incremental CashDemandDemand CapacityCapacity Flow Compared to Base CaseFlow Compared to Base Case Cash InflowCash Inflow

YearYear (meals/yr)(meals/yr) (meals/yr)(meals/yr) (80,000 meals/yr)(80,000 meals/yr) (outflow)(outflow)

00 80,00080,000 80,00080,000 Increase kitchen capacity to 105,000 meals =Increase kitchen capacity to 105,000 meals = ($80,000)($80,000)

11 90,00090,000 105,000105,000 90,000 90,000 – 80,000 = (10,000 meals)($2/meal) =– 80,000 = (10,000 meals)($2/meal) = $20,000$20,000



Increase total capacity to 130,000 =Increase total capacity to 130,000 = ($170,000)($170,000)

($120,000)($120,000)



Documents

To Accompany Krajewski & Ritzman Operations Management: Strategy and Analysis, Seventh Edition © 2004 Prentice Hall, Inc. All rights reserved. Process