Capacity-Planning Pdf OMTQM midterm notes PDF

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COURSE COURSE DESCRIPTION

OPERATIONS MANAGEMENT AND TOTAL QUALITY MANAGEMENT

This course deals with designing, managing, and controlling business processes, including acquisition and utilization of resources and distribution of its goods/services. Topics include a review of the activities and responsibilities of operations management, the tools and techniques available to assist in running the operation, and the factors considered in the design of the system. The course will discuss common business applications in capacity planning, production scheduling, plant lay-out and location decisions, inventory management, work measurement, quality management, supply chain management concepts, along with the techniques for solving commonly occurring problems for manufacturing systems as well as to service industries. The course will also introduce total quality management, its philosophy, methodology and system of tools aimed to create and maintain mechanism of organization’s continuous improvement. As it relates to operations management by involving all departments and employees into efforts of improvement of processes and products.

COURSE OUTLINE

CHAPTER NO. TITLE I. RATIONALE

1. The Production and Operations Function 2. Forecasting 3. Capacity Planning 4. Plant Layout, Handling and Location Decisions 5. Inventory Management 6. Work Measurement Techniques 7. Total Quality Management 3 Capacity Planning

This module covers the topics on capacity management and capacity planning, emphasizing the topic on capacity measurement, queuing or waiting line management, managing demand and break-even analysis. INSTRUCTION TO THE USERS This module covers Capacity Planning. In its developmental activities section, it provides substantial discussions of the topics. It discusses the concepts, nature, scope and principles of the topics. Ample examples, illustrations with suggested solutions are provided for the application of concepts and practical exercises. To evaluate what the students have learned, this module provides work exercises at the closure activities section. To ensure that learning objectives are attained at the end of the semester, the learner / students are evaluated based on attendance, portfolio journal, formative assessment and summative assessment. See evaluation section for the details. For further readings, see assignment / agreement section.

LEARNING OBJECTIVES 1. Define and explain capacity management and capacity planning 2. Enumerate the objectives of capacity management 3. Solve and compute for the capacity utilization and efficiency of production 4. Match and balance discrepancies between demand and capacity 5. Perform break even analysis to achieve profitability (single product) 6. Explain and evaluate queueing management as part of capacity management 7. Define and explain characteristics of a waiting line system 8. Solve and compute for queueing performance using single- channel queueing method. II. CONTENT A. PREPARATORY ACTIVITIES Please refer to the discussion below B. DEVELOPMENTAL ACTIVITIES

Please refer to the discussion below

CAPACITY PLANNING 1. What Capacity Planning? Capacity planning refers to determining what kind of labor and equipment capacities are required and when they are required. Capacity is usually planned on the basis of labor or machine hours available within the plant. Thus, capacity planning is planning for quantity or scale of output. Capacity planning is the process of determining the production capacity needed by an organization to meet changing demand for its products. 2. What is Capacity? Capacity is defined under 3 categories; design capacity, effective capacity and actual capacity. The operations utilization of resources and the efficiency of its processes can then be calculated using these. •

Design Capacity - This is a theoretical number and not one that is applied to the daily production of an operation. Design capacity is the output that an operation can produce continuously, at maximum rate without stopping for any shift changeovers, maintenance or any other delays. What the process is capable of producing under perfect conditions. In some cases, this might be interpreted as maximum capacity.

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Effective Capacity - This considers how the operation will run on a long-term basis, how it will be staffed and how it will be maintained. All planned stoppages under the normal working time frame are taken into consideration. This can also be known as available capacity. These stoppages may include shift changeovers, lunch breaks, set up times and many other operational factors.

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Actual Capacity - This is the same as effective capacity but contains unplanned losses as well as planned ones. These could include poor work rate, absenteeism or new staff training for example.

3. What is the concept of capacity constraint? A constraint on capacity is a resource that is less capable, of increasing its throughput over the given time period, than other parts of the operation. A number of machines may be in sequence on a manufacturing line yet one may not be able to process as many units per hour as the other machines. The capacity will be constrained by this under producing machine and this may create a ‘bottle neck’ in the process. By increasing the capacity of this machine, the capacity of the overall facility will also increase.

Capacity is always constrained by the lowest producing part of the process. In layman’s terms an operation will ‘always go at the pace of the slowest walker’. Identifying a restrictive part of the process and adding resources that can increase its capacity will improve the overall capacity of the operation. The resource mix that can be potentially constraining to an operation could include; • Staff/Skill levels: Staff can be trained over time to be more flexible in their contribution to the process. The operation can benefit from the learning curve, where a new employee can become more efficient at a given process and therefore be quicker at their job, which can increase the capacity of the operation. • IT facilities/Technology: This can be a small or very significant improvement to a process. The investment in ICT can reduce process time or even completely change the nature of the process itself. Online banking has been a significant improvement in the finance sector by reducing the number of staff required to process a transaction and therefore massively increasing the capacity of the bank to deal with its customers. • Materials availability: A change in the supply of raw materials can increase the capacity potential of an operation. If there is a restriction in availability of materials or a timing problem and this is released, the capacity could be improved. • Product or service mix: Adjustments in the other products or services made by the facility can restrict the capacity of the operation. This is because different products and services may use different quantities of resources per unit; therefore, a change in the product mix may result in a change in capacity. • Storage: This can affect the capacity of an operation if there is a resource constraint that is affected by timing in the process. If the operation has the ability to store work in progress or finished goods it can improve the capacity of the process in the short term. The swings and fluctuations in demand can be mitigated by the ability to store products and allow the full capacity of the operation to flow. • Working schedules and access to facilities: This can also dictate the full availability of capacity. A lecture theatre that can accommodate 100 students at a time could operate beyond a standard working day; however, both staff and students may have an issue regarding 6am lectures! These factors should be considered in a short-term, medium-term and long-term time frame to establish their ability to be changed over time. A short term strategy for expanding capacity in a cafe, would be to put a few extra tables outside or extend the staff working hours to cope with the extra demand, in the medium term the cafe owner would have more options available to increase the capacity, such as hiring more staff of having additional cooking facilities in the kitchen to cope with extra demand. In the longterm the possibilities can be much greater, the premises could be expanded, better equipment, more staff and so on. The options available to an operation are greater the more time it has to plan them. 4. What is the concept of the Theory of Constraints (TOC)? The theory of constraints was first proposed in 1986 by Goldratt. The theory is the practical results of Goldratt’s work on ‘how to think’. TOC is a philosophy that suggests that any system must have at least one constraint otherwise it would generate an infinite amount of output and that constraints generally determine the pace of an organization’s ability to achieve its goal which is profit. Goldratt emphasizes that constraints pose a significant threat to the wellbeing of an organization and must be identified. He suggests that constraints may be labor availability, staff skills, machine availability, and capital or time available. They may however be more difficult to identify such as; organizational policies, guiding principles or rate of innovation. He identifies that there is rarely an equal flow of work within each work center in a process. The constraint should therefore be the control of the pace of the process. This theory reduces the emphasis on maximizing all resources within the process and prioritizes the management of the bottleneck. The theory he advocates is called ‘drum, buffer, rope’ where the bottleneck is the ‘drum’ which marks the time through the process – due to insufficient capacity this should be working the most. The ‘buffer’ principle is required to make sure that the bottleneck is never short of work and therefore the front end of the process should stockpile inventory to maximize output. The ‘rope’ element is the communication device to make sure the front part of the process does not overproduce. Goldratt’s five focusing steps

The theory identified a process to follow in order to free the system from the bottleneck that slowed it down. By following the steps, the operation identifies and clears the blockage, this will then in turn reveal a new bottleneck and the 5 steps can start again. • • • • •

identify the systems constraints exploit the systems constraints subordinate everything else to the above decision elevate the systems constraints (identify the next constraint) if in a previous step, a constraint has been removed, go back to step 1 but do not allow inertia to become the systems constraints.

Goldratt advises that any constraint having been identified is only transitional. As this constraint is exploited, another will appear in its place. Without identifying the real constraints, Goldratt suggests that management may not be able to find the real causes that restrict capacity so will take actions to work around the problem rather than solve the real cause. Constraint analysis is a subject that is larger than the subject of Capacity Management. However, it does offer an important perspective on the question; ‘is all capacity equally important?’ 5. What are the objectives of capacity management? The decisions taken by operations managers in devising their capacity plans will affect several different aspects of performance: •

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Costs will be affected by the balance between capacity and demand (or output level if that is different). Capacity levels in excess of demand could mean under-utilization of capacity and therefore high unit costs. Revenues will also be affected by the balance between capacity and demand, but in the opposite way. Capacity levels equal to or higher than demand at any point in time will ensure that all demand is satisfied and no revenue lost. Working capital will be affected if an operation decides to build up finished goods inventory prior to demand. This might allow demand to be satisfied, but the organization will have to fund the inventory until it can be sold. Quality of goods or services might be affected by a capacity plan which involved large fluctuations in capacity levels, by hiring temporary staff for example. The new staff and the disruption to the routine working of the operation could increase the probability of errors being made. Speed of response to customer demand could be enhanced, either by the build-up of inventories (allowing customers to be satisfied directly from the inventory rather than having to wait for items to be manufactured) or by the deliberate provision of surplus capacity to avoid queuing. Dependability of supply will also be affected by how close demand levels are to capacity. The closer demand gets to the operation’s capacity ceiling, the less able it is to cope with any unexpected disruptions and the less dependable its deliveries of goods and services could be. Flexibility, especially volume flexibility, will be enhanced by surplus capacity. If demand and capacity are in balance, the operation will not be able to respond to any unexpected increase in demand.

6. The steps of capacity management The sequence of capacity management decisions which need to be taken by operations managers is illustrated in the figure below. Typically, operations managers are faced with a forecast of demand which is unlikely to be either certain or constant. They will also have some idea of their own ability to meet this demand. Nevertheless, before any further decisions are taken, they must have quantitative data on both capacity and demand. So, the first step will be to measure the aggregate demand and capacity levels for the planning period. The second step will be to identify the alternative capacity plans

which could be adopted in response to the demand fluctuations. The third step will be to choose the most appropriate capacity plan for their circumstances.

7. How is capacity measured: Forecasting demand fluctuations Although demand forecasting is usually the responsibility of the sales and/or marketing functions, it is a very important input into the capacity management decision, and so is of interest to operations managers. After all, without an estimate of future demand it is not possible to plan effectively for future events, only to react to them. It is therefore important to understand the basis and rationale for these demand forecasts. As far as capacity planning and control is concerned, there are three requirements from a demand forecast: •

It is expressed in terms which are useful for capacity management. If forecasts are expressed only in money terms and give no indication of the demands that will be placed on an operation’s capacity, they will need to be translated into realistic expectations of demand, expressed in the same units as the capacity (for example, machine hours per year, operatives required, space, etc.).

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It is as accurate as possible. In capacity management, the accuracy of a forecast is important because, whereas demand can change instantaneously, there is a lag between deciding to change capacity and the change taking effect. Thus, many operations managers are faced with a dilemma. In order to attempt to meet demand, they must often decide output in advance, based on a forecast which might change before the demand occurs, or worse, prove not to reflect actual demand at all.

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It gives an indication of relative uncertainty. Decisions to operate extra hours and recruit extra staff are usually based on forecast levels of demand, which could in practice differ considerably from actual demand, leading to unnecessary costs or unsatisfactory customer service. For example, a forecast of demand levels in a supermarket may show initially slow business that builds up to a lunchtime rush. After this, demand slows, only to build up again for the early evening rush, and it finally falls again at the end of trading. The supermarket manager can use this forecast to adjust (say) checkout capacity throughout the day. But although this may be an accurate average demand forecast, no single day will exactly conform to this pattern. Of equal importance is an estimate of how much actual demand could differ from the average. This can be found by examining demand statistics to build up a

distribution of demand at each point in the day. The importance of this is that the manager now has an understanding of when it will be important to have reserve staff, perhaps filling shelves, but still on call to staff the checkouts should demand warrant it. Generally, the advantage of probabilistic forecasts such as this is that it allows operations managers to make a judgement between possible plans that would virtually guarantee the operation’s ability to meet actual demand, and plans that minimize costs. Ideally, this judgement should be influenced by the nature of the way the business wins orders: price sensitive markets may require a risk-avoiding cost-minimization plan that does not always satisfy peak demand, whereas markets that value responsiveness and service quality may justify a more generous provision of operational capacity. 8. Seasonality of demand Most markets are influenced by some kind of seasonality – that means that they vary depending on the time of year. Sometimes the causes of seasonality are climatic (holidays), sometimes festive (gift purchases), sometimes financial (tax processing), or social, or political; in fact, there are many factors that affect the volume of activity in everything from construction materials to clothing, from health care to hotels. It may be demand seasonality or supply seasonality, but in many organizations, capacity management is largely about coping with these seasonal fluctuations. These fluctuations in demand or supply may be reasonably forecastable, but some are usually also affected by unexpected variations in the weather and by changing economic conditions. Consider the four different types of operation described previously: a woolen knitwear factory, a city hotel, a supermarket and an aluminum producer. Their demand patterns are shown in the figure below. The woolen knitwear business and the city hotel both have seasonal sales demand patterns, but for different reasons: the woolen knitwear business because of climatic patterns (cold winters, warm summers) and the hotel because of demand from business people, who take vacations from work at Christmas and in the summer. The retail supermarket is a little less seasonal but is affected by prevacation peaks and reduced sales during vacation periods. The aluminum producer shows virtually no seasonality but is showing a steady growth in sales over the forecast period.

9. Weekly and daily demand functions Seasonality of demand occurs over a year, but similar predictable variations in demand can also occur for some products and services on a shorter cycle. The daily and weekly demand patterns of a supermarket will fluctuate, with some degree of predictability. Demand might be low in the morning, higher in the afternoon, with peaks at lunchtime and after work in the evening. Demand might be low

on Monday and Tuesday, build up during the latter part of the week and reach a peak on Friday and Saturday. Banks, public offices, telephone sales organizations and electricity utilities all have weekly and daily, or even hourly, demand patterns which require capacity adjustment. The extent to which an operation will have to cope with very short-term demand fluctuations is partly determined by how long its customers are prepared to wait for their products or services. An operation whose customers are incapable of waiting, or unwilling to wait, will have to plan for very short-term demand fluctuations. Emergency services, for example, will need to understand the hourly variation in the demand for their services and plan capacity accordingly. 10. Measuring capacity When measuri...