Operations Management (OMMP19-3)

Sessions 07 & 08 → Capacity Management

(Continued) + APP + MPS
Ways to Develop Capacity Alternatives

◼ Design flexibility into system

◼ Take stage of life cycle into account
◼ Take “System Approach” to capacity planning
◼ Prepare to deal with capacity “chunks”
◼ Attempt to smooth out capacity requirements
◼ Identify the optimal operating level
◼ Choose a strategy (Lead/Lag) if expansion is involved

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Develop Alternatives – Breakeven
Analysis
◼ Assumptions of Cost-Volume Analysis
◼ One product is involved
◼ Everything produced can be sold
◼ Variable cost per unit is the same regardless of volume
◼ Fixed costs do not change with volume
◼ Revenue per unit constant with volume
◼ Revenue per unit exceeds variable cost per unit

◼ Important
◼ Cost-Volume Relationships
◼ Break-Even Problem with Step Fixed Costs

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Breakeven Analysis – Example

◼ At Breakeven Quantity (Q)

◼ Total Price = Total Cost
◼ PQ = F + VQ → Q = F/ (P – V)
◼ ABC Manufacturing intends to increase capacity by adding
of new equipment. Product Price = 20. Two vendors have
presented proposals as follows:
Proposal Fixed cost Variable cost
A 50,000 12
B 70,000 10

◼ What is the breakeven quantity for each proposal?

◼ At what capacity would both plans incur the same cost?
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Breakeven Analysis – Solution

◼ Breakeven for Proposal A

= 50000/(20 – 12) = 6250
◼ If Q < 6250 → Do not consider Proposal A
◼ Breakeven for Proposal B
= 70000/(20 – 10) = 7000
◼ If Q < 7000 → Do not consider Proposal B

◼ Both proposals will be equal at Q

◼ Then 50000 + 12Q = 70000 + 10 Q → Q = 10000

◼ When Q > 10000 → Proposal B is better

◼ When Q < 10000 → Proposal A is better
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Breakeven Analysis – Step Fixed Cost

◼ A manager has options to purchase 1-3 machines. The

details are as follows:
No of Machines Annual fixed cost (total) Range of Output
1 9,600 0 to 300
2 15,000 301 to 600
3 20,000 601 to 900
◼ Variable cost = 10/unit, Revenue = 40/unit

◼ Determine BEP at each stage.

◼ If demand is between 580-660 units, how many machines
should be purchased?
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Develop Alternatives – Decision Tree
Analysis

◼ Planning horizon → 5 Years

◼ Cash flows for different alternatives (Discount rate = 16%)
Return/Year
Options Cost
Strong Growth (55%) Weak Growth (45%)
Expand car-rent store 87,000 190,000 100,000
Locate at a new site 210,000 195,000 115,000
Wait and do nothing 0 170,000 105,000

◼ If nothing is done during first year

◼ Strong growth → Expansion will be done on Year 2

◼ What will you suggest?

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Decision Tree Analysis – Without
Discount Rate
Strong, 55%
863,000
660,500 Weak, 45%
Expand 413,000
Strong, 55%
New Site 765,000
585,000 Weak, 45%
703,750
365,000
Expand
Strong, 55% 843,000
850,000
Do Nothing 850,000
703,750 Do Nothing

525,000
Weak, 45%
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Decision Tree Analysis – With
Discount Rate 16% (use NPV in Excel)
Strong, 55%
535,116
402,507 Weak, 45%
Expand 240,429
Strong, 55%
New Site 428,487
310,613 Weak, 45%
460,857
166,544
Expand
Strong, 55% 540,219
556,630
Do Nothing 556,630
460,857 Do Nothing

343,801
Weak, 45%
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Evaluating Capacity Requirements –
Bread Making on Two Lines
CTL = Cycle Time/ 100 loaves

Mix Proof Bake

Raw CTL = CTL = CTL =

Materials ¾ hrs ¾ hrs 1 hr Work in Finished
Process Goods
Pack

CTL =
Mix Proof Bake ¾ hrs

CTL = CTL = CTL =

¾ hrs ¾ hrs 1 hr

Q. What is bakery’s overall daily capacity?

Q. Where should the investment be done to increase overall capacity?
Q. What happens if two lines are used for two different types?
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 Evaluating Capacity Requirements –
Croissant Manufacturing
CTC = Cycle Time/ 50 croissants

Raw Work in
Materials: Process:
Dough Mix Proof Bake
Dough

CTC = CTC = CTC =

5 min 15 min 5 min Finished
Goods
Fill & Fold Bake Pack

Raw Work in
CTC = CTC = CTL =
Materials: Process:
Mix Filling 5 min 20 min 10 min
Fillings Filling

CTC =
10 min

Q. What is bakery’s overall daily capacity of croissants?

Q. What is “Manufacturing Lead Time” of the process?
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OMMP19-3 – Quiz 1 – Syllabus and
other Details

◼ Date → 14.03.2020
◼ Time (tentative) → 07:00 PM to 07:45 PM (45 minutes)
◼ Venue → Will be informed
◼ Laptop → Allowed
◼ Exchange of items e.g. notes, calculator → NOT allowed
◼ Syllabus → Session 03 to Session 07
◼ Theory of Constraints/Project Management & Critical
Chain Project Management/Capacity Management
◼ Pattern
◼ Numerical (10 marks) – Step marking based on process
◼ MCQ (5 marks) – No negative marking
◼ Wi-Fi will remain switched OFF → Download all required
items before coming to exam hall Dipankar Bose - XLRI
Remaining slides are not part of
Quiz 1 syllabus

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Evaluating Capacity Requirements –
Automobile Component Assembly
Raw Molded Parts
Materials Inventory
Mold Parts
Finished
Components
Final Assembly

Purchased Parts
Inventory
Purchase Parts from Vendors

Molding Shop:
11 machines – On average 1 m/c is at maintenance/repair
Machine rate – 25 parts/hour
One worker/per m/c – Earns $15/hr – Overtime 50% premium
Idle time – 10 min/hr
6 dedicated workers – Additional 4 are in pool
Final Assembly Shop:
15 workers – Earns $10/hr – Additional 15 workers can be hired
Idle time – 12.5 min/hr
150 components/hr Dipankar Bose - XLRI
Automobile Component Assembly –
Questions – Homework
◼ What is the capacity of the entire process?
◼ What is total direct labor requirement per component?
◼ What is total direct labor cost per component?
◼ What is total direct labor utilization?
◼ Discuss various processes to increase capacity.

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Steps for Capacity Planning

1. Estimate future capacity requirements

2. Evaluate existing capacity
3. Identify alternatives
4. Evaluate alternatives
5. Select one alternative
6. Implement alternative chosen
7. Monitor results

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Some Short-Term Capacity Options

◼ Lease extra space temporarily

◼ Authorize overtime
◼ Staff second or third shift with temporary workers
◼ Add weekend shifts
◼ Alternate routings, using different work stations that may
have excess capacity
◼ Schedule longer runs to minimize capacity losses
◼ Level output by building up inventory in slack season
◼ Postpone preventive maintenance (risky)
◼ Use multi-skilled workers to alleviate bottlenecks
◼ Allow backorders to increase, extend due date promises, or
have stock-outs
◼ Subcontract work Dipankar Bose - XLRI
Topics: Aggregate Production Planning (APP)
and Master Production Schedule (MPS)

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Purpose of Aggregate Production
Planning (APP)
◼ Long range forecast – Capacity planning
◼ Medium range forecast – Aggregate production planning

◼ Pure strategies (Refer APP Examples in Excel file shared)

◼ Changing inventory level
◼ Introducing overtime
◼ Changing workforce level (Hiring and Laying off)
◼ Subcontracting
◼ Influencing demand
◼ Mixed strategies

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Aggregate Planning Inputs

◼ Resources
◼ Workforce/Facilities
◼ Demand forecast
◼ Policies
◼ Overtime/ Inventory levels/ Back orders/
Subcontracting
◼ Costs
◼ Inventory carrying/Back orders/Shortage penalty
◼ Hiring/firing/Overtime
◼ Subcontracting

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Aggregate Planning in Services –
Sasser (1976)
Labor skill level required Low High
Job description Low High
Compensation rate Low High
Training required/employee Low High
If above → Preferred planning Chase Level
If considered → Following happens Chase Level
Labor turnover High Low
Hire-fire costs High Low
Error rate High Low
Amount of supervision required High Low
Type of budget/forecasting required Short-run Long-run
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From APP to MPS

Aggregate Production
Planning (APP)

Disaggregation

Master Production
Schedule (MPS)

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What is Disaggregation?

◼ Output of Aggregate Production Planning

◼ Production Schedule for “family” of products

◼ Breaking down the APP in detail

◼ Disaggregation

◼ Need to know → For each “type” of product

◼ What quantities
◼ When

◼ Disaggregation results in Master Production Schedule

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Master Production Scheduling

◼ MPS is a “Statement of Production”

◼ Not a Forecast
◼ Link between production planning and what
manufacturing will actually build

◼ Forms the basis for calculating the capacity and resources

needed

◼ It is a priority plan for manufacturing

◼ An agreed upon plan between marketing and
manufacturing

◼ Drives the Material Requirements Planning (MRP)

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MPS – Structure

◼ MPS starts with forecast, committed orders and beginning

inventory balance
Product Code
Period 1 2 3 4 5 6 7
Forecast
Customer Orders (committed)
Projected On-hand Inventory
MPS
ATP (uncommitted)
ATP = Available To Promise

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MPS – Example

Product Code
Period 1 2 3 4 5 6 7 8
Forecast 30 30 30 30 40 40 40 40
Customer Orders
33 20 10 4 2
(committed)
Projected On-hand
64
Inventory
MPS
Available-to-promise
(uncommitted)
Lot size decided = 70

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MPS with Order Promise – Formulas

◼ Projected on hand
= Previous period Projected on hand + MPS –
Max(Forecast, Orders)

◼ 1st period ATP

= Previous period Projected on hand + Any 1st period MPS
– SUM(All committed orders until next MPS)

◼ Other period ATP

= MPS in that period – SUM(All committed order in that
and subsequent periods until next MPS)

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MPS – Example – Solution

Product Code
Period 1 2 3 4 5 6 7 8
Forecast 30 30 30 30 40 40 40 40
Customer Orders
33 20 10 4 2
(committed)
Projected On-hand
64 31 1 41 11 41 1 31 61
Inventory
MPS 70 70 70 70
64 – 33
Available-to-promise 70 – 14 70 – 2
– 20 = 70 70
(uncommitted) = 56 = 68
11
Lot size decided = 70
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