STRATEGIC

CAPACITY
MANAGEMENT
Tesla—Manufacturing Capacity for the Model 3

• Tesla received more than 350,000 preorders for its Model 3 sedan.

• Maximum past production: 50,000 cars per year

• Tesla will need to raise its capacity to 500,000 per year to meet demand.

• Has already raised lot of funds (from stocks, bonds, founder, etc.).

• The company is dependent on the successful capacity expansion for its long-term success.

• Tesla builds cars in the Fremont, California and Shanghai, China.

• Is also building a plant in Berlin, Germany.

• The Shanghai plant began producing cars in 2020 and mainly produces for the China market but also
ships to Singapore.
 The prices for the vehicles will start from 2 million rupees
($24,400.66), the report added.
 The billionaire Elon Musk-led company is also looking at
using India as an export base as it plans to ship cars to
countries in the Indo-Pacific region, the report said, citing
government sources.
 The discussions with the Indian government show a shift in
strategy for the U.S. electric car maker.
 Last year, talks stalled after the Indian government refused to
agree to a request from Tesla seeking lower import taxes on
cars, which can be as much as 100%.
 India was keen for Tesla to manufacture vehicles locally, but
the company said it wanted to export its cars first so that it
could test the strength of demand.
Capacity Management in Operations and Supply
Chain Management

• Capacity: is a relative term; in an operations management context, it may

be defined as the amount of resource inputs available relative to output
requirements over a particular period of time.

• In particular it is an ability to hold, receive, store, or accommodate.

• In business, viewed as the amount of output that a system is capable of

achieving over a specific period of time.
Capacity Management in Operations and Supply
Chain Management

• Capacity management needs to consider both inputs and outputs.

• For planning purpose, real (or effective) capacity depends on what is to be

produced.

• For example, a firm that makes multiple products inevitably can produce
more of one kind than of another with a given level of resource inputs.
Capacity Management in Operations and Supply
Chain Management
• It highlights that the kind of product being made can influence the volume of output the
company can achieve with a set amount of input. It might be due to differences in the
complexity of production, resource requirements, or other factors specific to each product
type.

• Thus, while the managers of an automobile factory may state that their facility has 6000
production hours available per year, they are also thinking that these hours can be used
to make either 1,50,000 two-door models or 1,20,000 four door models (or some mix of
the two and four-door models).

• This reflects their knowledge of what their current technology and lobour force inputs can
produce and the product mix that is to be demanded from these resources.
Capacity Management in Operations and Supply
Chain Management

• Many industries measure and report capacity in terms of output.

• Industries whose product mix is very uncertain, like hospitals, often

express capacity in terms of inputs (number of beds).

• It is because the number of patients served and the types of services

provided will depend on patient needs.
Capacity Planning Time Durations
An operations and supply chain management view also emphasizes the time dimension of capacity.
That is, capacity must also be stated relative to some period of time. Therefore, the capacity planning
is generally viewed in three time durations:
Long range
• Greater than one year. [required top management participation and approval] [i.e., building,
equipment or facilities]. In general the resources those require ling time to acquire or dispose of.
Intermediate range
• Monthly or quarterly plans covering the next 6 to 18 months. [i.e., Hiring, layoff,
new tools, minor equipment purchase and subcontracting]
Short range
• •Less than one month. This is tiled into the daily or weakly scheduling
process and making adjustments to eliminate the variance between
planned and actual output. Int include i.e., overtime, personal transfers and alternative
production routing etc.]
Strategic Capacity Planning

• The objective of strategic capacity planning is to provide an approach for

determining the overall level of capacity-intensive resources that best
supports the company’s long-range competitive strategy
• Facilities.
• Equipment.
• Labor force size.
• Capacity level selected has a critical impact on response rate, its cost
structure, its inventory policies, and its management and staff support
requirements.
• Too low and the firm will lose customers and encourage competitors.
• Too high and firm may have to cut costs or underutilize its workforce.
Capacity planning concept & Best operating level

• The term capacity planning implies an attainable rate of output.

• For example, 480 cars per day, but says nothing about how
long that rate can be sustained.
• Thus, we do not know if this 480 cars per day is a one-day peak
or a six-month average.
• To avoid this problem, the concept of best operating level is
used.
• This is the level of capacity for which the process was designed
and thus is the volume of output at which average unit cost is
minimized.
 Capacity utilization rate

• Determining this minimum (cost) is difficult because it involves a

complex trade-off between the allocation of fixed overhead
costs and the cost of overtime, equipment wear, defect rates
and other costs.
• An important measure is the capacity utilization rate, which
reveals how close a firm is to its best operating level:

• Capacity utilization rate= Capacity used/best operating level

• Capacity utilization rate = 480/500 = 0.96 or 96%
Capacity Planning Concepts
The output that a system is capable of achieving over a period
Capacity
of time
The level of capacity for which the process was designed and the
Best operating level
volume of output at which average unit cost is minimized

Measure of how close the firm’s current output rate is to its best
Capacity utilization rate operating level
Capacity Utilization rate = Capacity used ÷ Best operating level

The idea that as a plant gets larger and volume increases, the
Economies of scale
average cost per unit tends to drop
At some point, the plant becomes too large and average cost per
Diseconomies of scale
unit begins to increase
 Capacity Planning Concepts

The idea that a production facility works best when it is

concentrated on a limited set of production objectives. That
Capacity focus mean a firm should not expect to excel in every aspect of
manufacturing performance: cost, quality, delivery, speed
and reliability.
An area in a larger facility that is dedicated to a specific
Plant within a plant (P W P)
production objective.
• A facility designed around a limited set of production
objectives.
• A focused factor may have several PWPs, each of which may have separate
suborganizations, equipment and process policies, workforce even if they are
Focused factory made under the same roof.
• This, in effect, permits finding the best operating level for each department of
the ogranization and thereby carries the focus concept down to the operating
level.
 Capacity Planning Concepts
• The ability to rapidly increase or decrease production
levels or the ability to shift rapidly from one product or
service to another.
• Such flexibility is achieved through flexible plants,
processes, and workers, as well as through strategies that
Capacity flexibility use the capacity of other organizations.
• Increasingly, companies are taking the idea of flexibility
into account as they design their supply chain.
• Working with suppliers, they can build capacity into their
whole system.
Flexibility Plant
• A "flexibility plant" could refer to a manufacturing or production
facility that is designed to quickly adapt to changes in product
demand, material supply, or production technologies.
• The ultimate flexible plant is on which has zero-changeover-
time.
• It employs movable equipment, knockdown walls, and easily
accessible and reroutable utilities.
• Equipment that are easy to install and teardown and move
Capacity Flexibility

Flexible Plants
•Ability to quickly adapt to change.
•Zero-changeover time.
Flexible Processes
•Flexible manufacturing systems.
•Simple, easily set up equipment.
Flexible Workers
•Ability to switch from one kind of task to another quickly.
•Multiple skills (cross training).
Considerations in Changing Capacity

 Many issues must be considered when adding or decreasing capacity. Three important
ones are

1) Maintaining system balance

2) Frequency of capacity additions

3) External sources of capacity

Maintaining system balance

 Similar capacities desired at each operation.

o Maintain input and output level between different stages (1, 2, 3.. etc.) of process.
o It is difficult and impossible
• because different stages may have different best operating level
• Variation in process themselves
• There are various ways of dealing with imbalance.
• Manage bottleneck operations
o Add capacity to stages that are bottlenecks
 This can be done by scheduling overtime
 Leasing equipment
 Subcontracting
 Use buffer inventory
o Increase the capacity of department on which other is dependent
Frequency of capacity additions
• There are two types of costs to consider when adding capacity:
1) Cost of upgrading too frequently
2) Cost of upgrading too infrequently
 Frequent versus Infrequent Capacity Expansions
• Upgrading capacity too frequently is expensive
o Removal and replacing old equipment
o Purchasing cost is more than old equipment selling price
o Training to employees on the new equipment
o Idling cost during changeover time period

• Upgrading capacity too infrequently is also

o Have to purchase in large chunks
o Any excess capacity that is purchased must be carried as
overhead until it is utilized
External sources of operations and
supply chain
• In some cases it is cheaper not to add capacity at all, but rather
to use some existing source of capacity.
• It can be achieved by:
a) Outsourcing and;

b) Sharing capacity
Determining Capacity Requirements

1) Use forecasting to predict sales for individual products.

2) Calculate labor and equipment requirements to meet forecasts.

3) Project labor and equipment availability over the planning horizon.

Capacity Cushion
• A capacity cushion is an amount of capacity in excess of
expected demand.
• For example, if the expected annual demand on a facility is $10
million in product per year and the designed capacity is $12
million per year, it has a 20 % capacity cushion.
• When a firm's design capacity is less than the capacity required
to meet its demand, it is said to have a negative capacity
cushion.
Example 5.1: Determining Capacity Requirements

Stewart Company produces two brands of salad dressing:

a. Paul’s and b. Newman’s.
Each is available in bottles and single-serving bags.
Have three machines that can package 150,000 bottles each year.
• Each machine requires two operators.
Have five machines that can package 250,000 plastic bags per year.
• Each machine requires three operators.

What are the capacity and labor requirements for the next five years?
Step 1: Use Forecast to Predict Sales for Individual
Products
Year 1 Year 2 Year 3 Year 4 Year 5
Paul’s Choice
Bottles (,000s) 60 100 150 200 250
Plastic bags (,000s) 100 200 300 400 400
Newman’s Select
Bottles (,000s) 75 85 95 97 98
Plastic bags (,000s) 200 400 600 650 680
Step 2: Calculate Equipment and Labor Requirements to
Meet Product Line Forecasts 1

Year 1 Year 2 Year 3 Year 4 Year 5

Bottles (,000s) 135 185 245 297 348
Plastic bags (,000s) 300 600 900 1,050 1,180
Machine requirement
Labour requirement
Step 3: Project Equipment and Labor Availabilities
over the Planning Horizon
Year 1 Year 2 Year 3 Year 4 Year 5
Paul’s Choice
Percent machine capacity utilized 30% 41% 54.4% 66% 73%
Machine requirement 0.9 1.23 1.63 1.98 2.32
Labor requirement 1.8 2.46 3.26 3.96 4.64
Newman’s Select
Percent machine capacity utilized 24% 48% 72% 84% 94%
Machine requirement 1.2 2.4 3.6 4.2 4.7
Labor requirement 3.6 7.2 10.8 12.6 14.1
Using Decision Trees to Evaluate Capacity Alternatives

o A decision tree is a schematic model of the sequence of steps in a problem—including the

conditions and consequences of each step.
o Decision trees help analysts understand the problem and assist in identifying the best solution.
Decision tree components include the following:
• Decision nodes—represented with squares.
• Chance nodes—represented with circles.
• Paths—links between nodes.
• Work from the end of the tree backwards to the start of the tree.
• Calculate expected values at each step.
Example 5.2: Decision Trees

The owner of Hackers Computer Store is evaluating three options — expand at

current site, expand to a new site, or do nothing.
The decision process includes the following assumptions and conditions:
Strong growth has a 55 percent probability.
New site cost is $210,000.
 Payoffs: strong growth = $195,000; weak growth = $115,000.
Expanding current site cost is $87,000 (in either year 1 or 2).
• Payoffs: strong growth = $190,000; weak growth = $100,000.
Do nothing.
• Payoffs: strong growth = $170,000; weak growth = $105,000.
Calculate the Value of Each Alternative

Alternative Revenue (A) Cost (B) Value (A-B)

Move to new location, strong growth $195,000 × 5 yrs $210,000 $765,000
Move to new location, weak growth $115,000 × 5 yrs $210,000 $365,000
Expand store, strong growth $190,000 × 5 yrs $87,000 $863,000
Expand store, weak growth $100,000 × 5 yrs $87,000 $413,000
Do nothing now, strong growth, expand
$170,000 × 1 yr + $190,000 × 4 yrs $87,000 $843,000
next year
Do nothing now, strong growth, do not $850,000
$170,000 × 5 yrs $0
expand next
Do nothing now, weak growth
$105,000 × 5 yrs $0 $525,000
year
Diagram the Problem Chronologically
Calculate Value of Each Branch
Explanation
Calculate Value of Each Branch

The analysis indicates that our best decision is to do nothing.

Capacity Planning in Service Versus
Manufacturing
• Although capacity planning in services is subjected to many of the
same issue as manufacturing capacity planning, and facility sizing
can be done in much the same way, there are several important
differences.
• Service capacity is more time and location dependent. It is
subjected to more volatile demand fluctuations and utilization
directly impacts service quality.
Capacity Planning in Service Versus
Manufacturing
• Manufacturing Capacity
• Goods can be stored for later use.
• Goods can be shipped to other locations.
• Volatility of demand is relatively low.
• Service Capacity
• Capacity must be available when service is needed—cannot be stored.
• Service must be available at customer demand point.
• Much higher volatility is typical.
Capacity Utilization and Service Quality

Planning capacity levels for services must consider the day-to-day relationship between
service utilization and service quality.

The relationship between service capacity utilization and service quality is critical.
• Arrival rate: the average number of customers that come to a facility during a specific period of time.

• Service rate: the average number of customers that can be processed over the same period of time.

• Best operating point is near 70 percent.

Relationship Between the Rate of Service Utilization and Service
Quality
• The best operating point is near 70% of
the maximum capacity.
• [The rate of service utilization is equal
to the mean arrival rate divided by the
mean service rate.]
• In the critical zone. Customers are
processed through the system, but
service quality declines.
• Above the critical zone, customers
arrive at a rate faster than they can be
served, the line builds up and it is likely
that many customers may never be
served.