1 Operations Management Lesson 4 Capacity Planning and Forecasting
Dec 16, 2015
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Operations Management
Lesson 4Capacity Planning and
Forecasting
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What you will learn in this unit: Capacity Planning Making Capacity Planning Decisions Forecasting Process Types of Forecasting Methods Qualitative Methods Quantitative Methods
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Capacity planning
Capacity is the maximum output rate of a production or service facility
Capacity planning is the process of establishing the output rate that may be needed at a facility. Setting the effective capacity of the operation to meet the required demands
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Measuring Capacity Examples
There is no one best way to measure capacity Output measures like kegs per day are easier to understand With multiple products, inputs measures work better
Type of BusinessInput Measures of
CapacityOutput Measures
of Capacity
Car manufacturer Labor hours Cars per shift
Hospital Available beds Patients per month
Pizza parlor Labor hours Pizzas per day
Retail storeFloor space in square feet
Revenue per foot
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Capacity Information Needed
Design capacity: Maximum output rate under ideal
conditions A bakery can make 30 custom cakes per
day when pushed at holiday time Effective capacity:
Maximum output rate under normal (realistic) conditions
On the average this bakery can make 20 custom cakes per day
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Calculating Capacity Utilization Measures how much of the available
capacity is actually being used:
Measures effectiveness Use either effective or design
capacity in denominator
100%capacity
rateoutput actualnUtilizatio
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Example of Computing Capacity Utilization: In the bakery example the design capacity is 30 custom cakes per day. Currently the bakery is producing 28 cakes per day. What is the bakery’s capacity utilization relative to both design and effective capacity?
93%(100%)30
28(100%)
capacity design
output actual nUtilizatio
140%(100%)20
28(100%)
capacity effective
output actual nUtilizatio
design
effective
The current utilization is only slightly below its design capacity and considerably above its effective capacity
The bakery can only operate at this level for a short period of time
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How Much Capacity Is Best?
The Best Operating Level is the output that results in the lowest average unit cost
Economies of Scale: Where the cost per unit of output drops as volume of output
increases Spread the fixed costs of buildings & equipment over
multiple units, allow bulk purchasing & handling of material Diseconomies of Scale:
Where the cost per unit rises as volume increases Often caused by congestion (overwhelming the process with
too much work-in-process) and scheduling complexity
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Best Operating Level and Size
Alternative 1: Purchase one large facility, requiring one large initial investment Alternative 2: Add capacity incrementally in smaller chunks as needed
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Other Capacity Considerations Focused factories:
Small, specialized facilities with limited objectives
Plant within a plant (PWP): Segmenting larger operations into
smaller operating units with focused objectives
Subcontractor networks: Outsource non-core items to free up
capacity for what you do well Capacity cushions:
Plan to underutilize capacity to provide flexibility
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Making Capacity Planning Decisions
The three-step procedure for making capacity planning decisions is as follows: Step 1: Identify Capacity Requirements Step 2: Develop Capacity Alternatives Step 3: Evaluate Capacity Alternatives
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Good forecasts are essential for effective capacity planning.But so is an understanding of demand uncertainty because it allows you to judge the risks to service level.
When demand uncertainty is high the risks to service level of under provision of capacity are high.
DE
MA
ND
TIME
Distribution of demand
DE
MA
ND
TIME
Only 5% chance of demand being higher than this
Only 5% chance of demand being lower than this
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Forecasting Steps What needs to be forecast?
Level of detail, units of analysis & time horizon required
What data is available to evaluate? Identify needed data & whether it’s
available Select and test the forecasting model
Cost, ease of use & accuracy Generate the forecast Monitor forecast accuracy over time
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Types of Forecasting Models
Qualitative methods: Forecasts generated subjectively by
the forecaster
Quantitative methods: Forecasts generated through
mathematical modeling
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Quantitative Methods Time Series Models:
Assumes the future will follow same patterns as the past
Causal Models: Explores cause-and-effect relationships Uses leading indicators to predict the future E.g. housing starts and appliance sales
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Time Series Data Composition
Data = historic pattern + random variation Historic pattern to be forecasted:
Level (long-term average) Trend Seasonality Cycle
Random Variation cannot be predicted
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Time Series Patterns
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Causal Models Often, leading indicators can help to predict
changes in future demand e.g. housing starts Causal models establish a cause-and-effect
relationship between independent and dependent variables
A common tool of causal modeling is linear regression:
Additional related variables may require multiple regression modeling
bxaY
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Linear Regression
XXX
YXXYb
2
Identify dependent (y) and independent (x) variables
Solve for the slope of the line
Solve for the y intercept
Develop your equation for the trend line
Y=a + bX
XbYa
22 XnX
YXnXYb
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Linear Regression Problem: A maker of golf shirts has been tracking the relationship between sales and advertising dollars. Use linear regression to find out what sales might be if the company invested $53,000 in advertising next year.
22 XnX
YXnXYbSales $
(Y)Adv.$
(X)XY X^
2Y^2
1 130 32 4160 2304
16,900
2 151 52 7852 2704
22,801
3 150 50 7500 2500
22,500
4 158 55 8690 3025
24964
5 153.85
53
Tot 589 189 28202
9253
87165
Avg
147.25
47.25
153.85531.1592.9Y
1.15X92.9bXaY
92.9a
47.251.15147.25XbYa
1.1547.2549253
147.2547.25428202b
2
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How Good is the Fit? Correlation coefficient (r) measures the direction and strength of
the linear relationship between two variables. The closer the r value is to 1.0 the better the regression line fits the data points.
Coefficient of determination ( ) measures the amount of variation in the dependent variable about its mean that is explained by the regression line. Values of ( ) close to 1.0 are desirable.
.964.982r
.98258987,1654*(189)-4(9253)
58918928,2024r
YYn*XXn
YXXYnr
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22
22
22
2r
2r
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How do you cope with fluctuations in demand?
How do you cope with fluctuations in demand?
Absorb Demand
Absorb Demand
Adjust output to
match demand
Adjust output to
match demand
Change demand
Change demand
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Absorb demand
Absorb demand
Keep output level
Keep output level
Make to
stock
Make to
stock
Make customer
wait
Make customer
wait
Part finished,Finished Goods, orCustomer Inventory
QueuesBacklogs
Have excess
capacity
Have excess
capacity
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Types of Aggregate Plans Level Aggregate Plans
Maintains a constant workforce Sets capacity to accommodate average demand Often used for make-to-stock products like appliances Disadvantage- builds inventory and/or uses back orders
Chase Aggregate Plans Produces exactly what is needed each period Sets labor/equipment capacity to satisfy period demands Disadvantage- constantly changing short term capacity
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Absorb Demand Level capacity plan› Anticipation inventory
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Principles of the Chase Method
The chase method helps firms match production and demand by hiring and firing workers as necessary to control output
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Adjust output to match demand
Chase capacity plan
› Adjustment methods Overtime & idle time Workforce size Part-time staff Sub-contracting
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The tasks of capacity planning Some key questions
Calculate Capability of Operations Resources
Calculate Capability of Operations Resources
Allocate Resources Over Time
Allocate Resources Over Time
Design “Capacity Control” Mechanisms
Design “Capacity Control” Mechanisms
Forecast Demand or Revenue Potential
Forecast Demand or Revenue Potential
Can you predict the most likely demand at any point in time?
Can you predict the uncertainty in demand at any point in time?
Can you predict the most likely demand at any point in time?
Can you predict the uncertainty in demand at any point in time?
Do you have realistic work standards??
Do you understand the capacity constraints of all the necessary resources?
Do you have realistic work standards??
Do you understand the capacity constraints of all the necessary resources?
What are the options for capacity allocation?
What are their cost, revenue, work capital and service level implications?
What are their flexibility implications?
What are the options for capacity allocation?
What are their cost, revenue, work capital and service level implications?
What are their flexibility implications?
Do you monitor actual demand against forecast?
Do you adapt forecasts accordingly?Do you replan capacity accordingly?
Do you monitor actual demand against forecast?
Do you adapt forecasts accordingly?Do you replan capacity accordingly?