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# Operations Management MD 021

BC

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This 35 page Class Notes was uploaded by Mr. Warren Lang on Saturday October 3, 2015. The Class Notes belongs to MD 021 at Boston College taught by Staff in Fall. Since its upload, it has received 49 views. For similar materials see /class/218048/md-021-boston-college in Operations,Information & Strategic Mgmt at Boston College.

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Date Created: 10/03/15

MD 021 Operations Management Capacity Planning and Decision Theory Measures of capacity Bottlenecks Capacity strategies A systematic approach to capacity decisions Make or Buy problem Decision making under uncertainty and risk Capacity Planning Capacity is the maximum rate of output for a facility Capacity planning considers questions such as Should we have one large facility or several small ones Should we expand capacity before the demand is there or wait until demand is more certain Should we invest in exible or non exible capacity Measuring Capacity Measurement Type 0 Output measure for product focus 0 Input measure for process focus Utilization Design Capacity Actual Output Ef CienCy E ectz ve Capacity Effective Capacity Design Capacity maximum output rate Allowances e g personal time maintenance and scrap Sizing Capacity Cushion Cushion the amount of the reserved capacity that a rm maintains to handle sudden increase in demand or temporary losses of production capacity Capacity cushion 1 Utilization Pressures for Large Cushion Uneven demand Uncertain demand Changing product mix Capacity comes in large increments Uncertain supply Pressure for Small Cushion Capital costs Links with Other Areas Other Choice Cushion Faster delivery times 0 Larger Smaller yield losses 0 Smaller Higher capital intensity 0 Smaller Less worker exibility 0 Larger Lower inventories 0 Larger More stable schedules 0 Smaller Average cost per unit Optimal Capacity Level Optimal rate Rate of output Capacity Two Capacity Strategies Forecast of capacity required Forecast of Planned unused capacity required capacity Flamed use of shortterm options Capacity Capacity increment Capacity increment Ir T1me between 1ncrements I 7 T1me between 1ncrements a Expansionist Strategy Most capital intensive businesses shy away from expansionist strategy Time Time b Waitandsee Strategy Large economies of scale 39 Shortterm options available Cost of lost sales is high 39 Customers accept backorders Increases in demand are fairly 39 Cost of overcapacity is high certain I Technology becomes obsolete quickly Bottleneck A mortgage review process 20hr 5hr lOhr Step 1 Step 2 Step 3 Accept mortgage ReV1eyV appllcatlons De01s1ons and fund appllcatlons and verlfy 1nformat10n transfer 1f approved What is the capacity of this process Bottleneck operation An operation in a sequence of operations Whose capacity is lower than that of the other operations The capacity of a process is the capacity of the bottleneck operation A Systematic Approach to Capacity Decisions 1 Estimate capacity requirements 2 Identify gaps 3 Develop alternatives 4 Evaluate the alternatives Estimate Capacity Requirements 1 One type of product Numbers of machines required Processing hours required for year39s demand hours available from one machine per year after the desired cushion deducted M 2 DP Nl C where D number of units customers forecast per year p processing time in hours per unit or customer N total number of hours per year during which the process operates C desired capacity cushion rate 2 More than one type of product n types of products Numbers of machines required Processing and setup hours required for year39s demand sumed over all products hours available from one machine per year after the desired cushion deducted M D19 D Qspmdm1 D19 D Qsmdm2 D19 D Qspmdm N1 C Q number of units in each lot s setup time in hours per lot Note Always round up the fractional part for the number of machines required Capacity Planning Problem You have been asked to put together a capacity plan for a critical bottleneck operation at the Surefoot Sandal Company Your capacity measure is number of machines Three products men s women s and kid s sandals are manufactured The time standards processing and setup lot sizes and demand forecasts are given in the following table The firm operates two 8hour shifts 5 days per week 50 weeks per year Experience shows that a capacity cushion of 5 percent is suf cient Time Standards Demand Processing Setup Lot Size Forecast Product hrpair hrlot pairslot pairsyr Men s sandals 005 05 240 80000 Women s sandals 010 22 180 60000 Kid s sandals 002 38 360 120000 a How many machines are needed at the bottleneck b If the operation currently has two machines what is the capacity gap c If the operation can not buy any more machines which products can be made d If the operation currently has ve machines what is the utilization Capacity Planning Problem Solution Total time available per machine per year 2 shiftsday8 hoursshift5 daysweek50 weeksyear 4000 hoursmachineyear With a 5 capacity cushion the hoursmachineyear that are available are 40001005 3800 hoursmachineyear Total time to produce the yearly demand of each product This is equal to the processing time plus the setup time Men s 005800008000024005 4167 hrs Women s 0106000060700018022 6733 hrs Kid s 00212000012000036038 3667 hrs Total time for all products 416767333667 14567 hrs 9 6 O P Machines needed 145673 800 383 4 machines Capacity gap is 4 2 2 machines With two machines we have 3 8002 7600 hours of machine capacity We can make all of the women s sandals 6733 hours and some of the men s sandals for example With ve machines 54000 20000 machinehoursyr are available The total number of machinehoursyr needed for production is 14567 Utilization 1456720000100 73 Thus the capacity cushion is 100 73 27 Vertical Integration Problem Make or Buy Hahn Manufacturing has been purchasing a key component of one of its products from a local supplier The current purchase price is 1500 per unit Efforts to standardize parts have succeeded to the point that this same component can now be used in ve different products Annual component usage should increase from 150 to 750 units Management wonders whether it is time to make the component inhouse rather than to continue buying it from the supplier Fixed costs would increase by about 40000 per year for the new equipment and tooling needed The cost of raw materials and variable overhead would be about 1100 per unit and labor costs would go up by another 300 per unit produced a Should Hahn make rather than buy b What is the breakeven quantity c What other considerations might be important Decision Making Under Uncertainty Decision Rules Maximin Choose the alternative that is the best of the worst Maximax Choose the alternative that is the best of the best Laplace Choose the alternative with the best weighted payoff Minimax regret Choose the alternative with the best worst regret ie opportunity losses Decision Making Under Uncertainty Pro ts Event 1 Low demand Event 2 High demand Alternative 1 Small facility 300 200 Alternative 2 Large facility 50 400 Decision rules Maximin Maximax Laplace Minimax regret Decision Making Under Risk Pro ts Event 1 Low demand Event 2 High demand Probability 03 Probability 07 Alternative 1 Small facility 300 200 Alternative 2 Large facility 50 400 Use the expected value decision rule MD 021 Management and Operations Capacity Planning and Decision Theory 39 Measures of capacity I Bottlenecks 39 Capacity strategies 39 A systematic approach to capacity decisions 39 Make or Buy Problem I Decision Making Under Uncertainty and Risk Decision Trees Capacity Planning Capacity is the maximum rate of output for a facility Capacity planning considers questions such as o Should we have one large facility or several small ones o Should we expand capacity before the demand is there or wait until demand is more certain o Should we invest in exible or non exible capacity Measuring Capacity Measurement Type 0 Output measure for product focus 0 Input measure for process focus Actual Output Utilization Design Capacity Eff Actual Output 1016ch E ecttve Capacity Effective Capacity Design Capacity maximum output rate Allowances eg personal time maintenance and scrap Sizing Capacity Cushion Cushion the amount of the reserved capacity that a rm maintains to handle sudden increase in demand or temporary losses of production capacity Capacity cushion l Utilization Pressures for Large Cushion 0 Uneven demand 0 Uncertain demand 0 Changing product mix 0 Capacity comes in large increments 0 Uncertain supply Pressure for Small Cushion 0 Capital costs Links with Other Areas Other Choice Cushion Faster delivery times 0 Larger Smaller yield losses 0 Smaller Higher capital intensity 0 Smaller Less worker exibility 0 Larger Lower inventories 0 Larger More stable schedules 0 Smaller Bottleneck 20hr 5hr 10hr Step 1 Step 2 Step 3 Accept mortgage gt Review applications gt Decisions and fund applications and verify information transfer if approved What is the capacity of this process Bottleneck operation An operation in a sequence of operations Whose capacity is lower than that of the other operations The capacity of a process is the capacity of the bottleneck operation A Systematic Approach to Capacity Decisions 1 Estimate capacity requirements 2 Identify gaps 3 Develop alternatives 4 Evaluate the alternatives Estimate Capacity Requirements 1 One type of product Numbers of machines required Processing hours required for year39s demand hours available from one machine per year after the desired cushion deducted i N1 C Where D number of units customers forecast per year p processing time in hours per unit or customer N total number of hours per year during Which the process operates C desired capacity cushion rate 2 More than one type of product n types of products Numbers of machines required 2 Processing and setup hours required for year39 s demand sumed over all products hours available from one machine per year after the desired cushion deducted D19 DQspmdm1 D19 DQspmdm2 D19 DQspmdm 39 N1 C M Q number of units in each lot s setup time in hours per lot Note Always round up the fractional part for the number of machines required Capacity Planning Problem You haVe been asked to put together a capacity plan for a critical bottleneck operation at the Surefoot Sandal Company Your capacity measure is number of machines Three products men s women s and kid s sandals are manufactured The time standards processing and setup lot sizes and demand forecasts are given in the following table The rm operates two 8hour shifts 5 days per week 50 weeks per year Experience shows that a capacity cushion of 5 percent is suf cient Time Standards Demand Processing Setup Lot Size Forecast Product hrpair hrlot pairslot pairsyr Men s sandals 005 05 240 80000 Women s 010 22 180 60000 sandals Kid s sandals 002 38 360 120000 a How many machines are needed at the bottleneck If the operation currently has two machines what is the capacity gap If the operation can not buy any more machines which products can be made If the operation currently has ve machines what is the utilization 6 O P Capacity Planning Problem Solution Total time available per machine per year 2 shiftsday8 hoursshift5 daysweek50 weeksyear 4000 hoursmachineyear With a 5 capacity cushion the hoursmachineyear that are available are 40001005 3800 hoursmachineyear Total time to produce the yearly demand of each product This is equal to the processing time plus the setup time Men s 005800008000024005 4167 hrs Women s 010600006000018022 6733 hrs Kid s 00212000012000036038 3667 hrs Total time for all products 416767333667 14567 hrs a Machines needed 145673 800 383 4 machines CT Capacity gap is 4 2 2 machines c With two machines we have 3 8002 7600 hours of machine capacity We can make all of the women s sandals 6733 hours and some of the men s sandals for example 9 With five machines 54000 20000 machinehoursyr are available The total number of machinehoursyr needed for production are 14567 Utilization 1456720000100 73 Thus the capacity cushion is 100 73 27 Vertical Integration Problem Make or Buy Hahn Manufacturing has been purchasing a key component of one of its products from a local supplier The current purchase price is 1500 per unit Efforts to standardize parts have succeeded to the point that this same component can now be used in ve different products Annual component usage should increase from 150 to 750 units Management wonders whether it is time to make the component inhouse rather than to continue buying it from the supplier Fixed costs would increase by about 40000 per year for the new equipment and tooling needed The cost of raw materials and variable overhead would be about 1100 per unit and labor costs would go up by another 300 per unit produced a Should Hahn make rather than buy b What is the breakeven quantity c What other considerations might be important Decision Making Under Uncertainty Decision Rules Maximin Choose the alternative that is the best of the worst Maximax Choose the alternative that is the best of the best Laplace Choose the alternative with the best weighted payoff Minirnax regret Choose the alternative with the best worst regret ie opportunity losses Decision Making Under Uncertainty Pro ts Event 1 Low demand Event 2 High demand Alternative 1 Small facility 300 200 Alternative 2 Large facility 50 400 Decision rules Maximin Maximax Laplace Minimax regret Decision Making Under Risk Pro ts Event 1 Low demand Event 2 High demand Probability 03 Probability 07 Alternative 1 Small facility 300 200 Alternative 2 Large facility 50 400 Use the expected value decision rule

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