Operations Management

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For Competitive Advantage

AQUILANO JACOBS

ninth edition

Operations Management
For Competitive Advantage
Chapter 9

Strategic Capacity
CHASE AQUILANO JACOBS
ninth edition

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Operations Management Chapter 9

For Competitive Advantage

ninth edition

Strategic Capacity Planning

Strategic Capacity Planning Defined Capacity Utilization & Best Operating Level Economies & Diseconomies of Scale The Experience Curve Capacity Focus, Flexibility & Planning Determining Capacity Requirements Decision Trees Capacity Utilization & Service Quality
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Operations Management

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Strategic Capacity Planning Defined

Capacity can be defined as the ability to hold, receive, store, or accommodate. Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size.
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Operations Management

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Capacity Utilization

Capacity utilization rate = Capacity used

Best operating level

Capacity used

rate of output actually achieved capacity for which the process was designed

Best operating level

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Operations Management

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Best Operating Level

Average unit cost of output Underutilization Overutilization Best Operating Level

Volume
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Operations Management

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Example of Capacity Utilization

During one week of production, a plant produced 83 units of a product. Its historic highest or best utilization recorded was 120 units per week. What is this plants capacity utilization rate? Answer:
Capacity utilization rate = Capacity used . Best operating level

= 83/120 =0.69 or 69%

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Economies & Diseconomies of Scale

Economies of Scale and the Experience Curve working

Average unit cost of output

100-unit plant 200-unit plant 300-unit plant 400-unit plant

Diseconomies of Scale start working Volume

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Operations Management

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The Experience Curve

As plants produce more products, they gain experience in the best production methods and reduce their costs per unit.

Cost or price per unit

Total accumulated production of units

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Operations Management

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Capacity Focus

The concept of the focused factory holds that production facilities work best when they focus on a fairly limited set of production objectives. Plants Within Plants (PWP) (from Skinner)

Extend focus concept to operating level

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Capacity Flexibility

Flexible plants

Flexible processes

Flexible workers

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Capacity Planning: Balance

Stage 1 Units per month 6,000 Stage 2 7,000 Stage 3 4,500

Maintaining System Balance

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Capacity Planning

Frequency of Capacity Additions

External Sources of Capacity

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Determining Capacity Requirements

Forecast sales within each individual product line. Calculate equipment and labor requirements to meet the forecasts. Project equipment and labor availability over the planning horizon.
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Example of Capacity Requirements

A manufacturer produces two lines of mustard, FancyFine and Generic line. Each is sold in small and family-size plastic bottles. The following table shows forecast demand for the next four years.
Year: FancyFine Small (111 s) Family (111 s) Generic Small (111 s) Family (111 s) 1 1 1 1 1 11 1 1 1
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1 1 1 1 1 11 1 1 1
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1 1 1 1 1 11 1 11 1

1 11 1 1 1 11 1 11 1

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Example of Capacity Requirements: The Product from a Capacity Viewpoint

Question: Are we really producing two different types of mustards from the standpoint of capacity requirements? Answer: No, its the same product just packaged differently.

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Example of Capacity Requirements: Equipment and Labor Requirements

Year: Small (111 s) Family (111 s) 1 11 1 11 1 1 11 1 11 1 1 11 1 11 1 1 11 1 11 1

Three 100,000 units-per-year machines are available for small-bottle production. Two operators required per machine. Two 120,000 units-per-year machines are available for family-sized-bottle production. Three operators required per machine.
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Question: What are the Year 1 values for capacity, machine, and labor?

Year: Small (000s) Family (000s)

1 150 115

2 170 140

3 200 170

4 240 200

Small Mach. Cap. 300,000 Labor 6 Family-size Mach. Cap. 240,000 Labor 6 150,000/300,000=50% At 1 machine for 100,000, it takes 1.5 machines for 150,000 Small Percent capacity used 50.00% Machine requirement 1.50 Labor requirement 3.00 At 2 operators for Family-size 100,000, it takes 3 Percent capacity used 47.92% operators for 150,000 Machine requirement 0.96 Labor requirement 2.88
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Question: What are the values for columns 2, 3 and 4 in the table below?

Year: Small (000s) Family (000s) Small Family-size Small Percent capacity used Machine requirement Labor requirement Family-size Percent capacity used Machine requirement Labor requirement

1 150 115 Mach. Cap. Mach. Cap.

2 170 140 300,000 240,000

3 200 170 Labor Labor

4 240 200 6 6

50.00% 56.67% 1.50 1.70 3.00 3.40 47.92% 58.33% 0.96 1.17 2.88 3.50

66.67% 2.00 4.00 70.83% 1.42 4.25

80.00% 2.40 4.80 83.33% 1.67 5.00

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Example of a Decision Tree Problem

A glass factory specializing in crystal is experiencing a substantial backlog, and the firm's management is considering three courses of action: A) Arrange for subcontracting, B) Construct new facilities. C) Do nothing (no change) The correct choice depends largely upon demand, which may be low, medium, or high. By consensus, management estimates the respective demand probabilities as .10, .50, and . 40.

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Example of a Decision Tree Problem: The Payoff Table

The management also estimates the profits when choosing from the three alternatives (A, B, and C) under the differing probable levels of demand. These costs, in thousands of dollars are presented in the table below:

A B C

11 . 11 . Low Medium 1 1 1 1 -111 1 1 1 1 1 1

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11 . High 1 1 11 1 1 1

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Example of a Decision Tree Problem: Step 1. We start by drawing the three decisions
A B C

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Example of Decision Tree Problem: Step 2. Add our possible states of nature, probabilities, and payoffs
High demand (.4) Medium demand (.5) Low demand (.1)

$90k $50k $10k $200k $25k -$120k $60k $40k $20k

A B C

High demand (.4) Medium demand (.5) Low demand (.1) High demand (.4) Medium demand (.5) Low demand (.1)
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Example of Decision Tree Problem: Step 3. Determine the expected value of each decision
High demand (.4)

$62k
A

Medium demand (.5) Low demand (.1)

$90k $50k $10k

EVA=.4(90)+.5(50)+.1(10)=$62k

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Example of Decision Tree Problem: Step 4. Make decision

High demand (.4)

$62k
A B C

Medium demand (.5) Low demand (.1) High demand (.4) Medium demand (.5) Low demand (.1) High demand (.4)

$90k $50k $10k $200k $25k -$120k $60k $40k $20k

$80.5k

$46k

Medium demand (.5) Low demand (.1)

Alternative B generates the greatest expected profit, so our choice is B or to construct a new facility.
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Planning Service Capacity

Time

Location

Volatility of Demand

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Capacity Utilization & Service Quality

Best operating point is near 70% of capacity

From 70% to 100% of service capacity, what do you think happens to service quality?

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