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Strategic Capacity Management

Chapter 5

Strategic Capacity Management

Capacity

The maximum level of output The amount of resource inputs available relative to output requirements at a particular time Capacity is the upper limit or ceiling on the load that an operating unit can handle. (often, this is characterized as output)

Examples of Capacity Measures
Type of Organization Manufacturer Hospital Airline Restaurant Retailer Theater Measures of Capacity Inputs Outputs Machine hours Number of units per shift per shift Number of beds Number of patients treated Number of planes Number of or seats seat-miles flown Number of seats Customers/time Area of store Sales dollars Number of seats Customers/time

Capacity Planning  The basic questions in capacity planning are:  What type of capacity is needed? [5Ms/5Ps]  How much is needed? [opportunity cost]  When is it needed? [opportunity cost]  How does productivity relate to capacity? What is the basic Capacity Strategy? .

Two Capacity Strategies Planned unused capacity Forecast of capacity needed Capacity Forecast of Planned use of short-term options capacity needed Capacity Time between increments Expansionist Strategy Wait-and-See Strategy .

extend due date promises.  subcontract work . or have stock-outs.Some Short-Term Capacity Options  lease extra space temporarily  authorize overtime  staff second or third shift with temporary workers  add weekend shifts  schedule longer runs to minimize capacity losses  postpone preventive maintenance (risky)  allow backorders to increase.

Advantages/Disadvantages of each strategy Advantages Expansionist • ahead of competition • no lost sales Disadvantages • risky if demand changes • Idle Capacity • rely on shortterm options • lost opportunity Wait-and-See • no unused capacity • easier to adapt to new technologies .

Capacity Utilization  Capacity  rate used [1350] [40x16x3=1920] of output actually achieved  Best operating level  capacity for which the process was designed (effective or ‘maximum’ capacity) Capacity Used _______________ Best Operating Level 1350/1920=70%  1100/1920=57%  1100/1680=65% Utilization = .

what do you think happens to service quality? Why?  From .Capacity Utilization & Service Quality  Best operating point is near 70% of capacity 70% to 100% of service capacity.

Utilization--Example  Best operating level = 120 units/week  Actual Scheduled output = 83 units/week Capacity used 83 units/wk = .692 =  Utilization = operating level 120 units/wk Best ? Utilization = Hair Salon .

Best Operating Level Average unit cost of output Underutilization Overutilization Best Operating Level (120 ‘Hairdos’) Volume .

Economies & Diseconomies of Scale Long Run Average Cost Curve Average unit cost of output 100-unit plant 200-unit plant 300-unit plant 400-unit plant Volume .

Capacity Cushion Capacity Cushion = level of capacity in excess of the average utilization rate or level of capacity in excess of the expected demand. Cushion = Best Operating Level Capacity Used .1 .

holidays.Large capacity cushion Required to handle uncertainty in demand     service industries high level of uncertainty in demand (in terms of both volume and product-mix) …Fashion/Fads/Electronics to permit allowances for vacations. overtime. if subcontracting.e. penalty cost) …Construction of Retail Space . or the cost of missed demand is very high (i. etc. equipment breakdowns. supply of materials delays.

Small capacity cushion Given that: Unused capacity still incurs the fixed costs  highly  time capital intensive businesses (Utilities requesting customers to conserve during peak) perishable capacity (Airline. movie theater) (Conversion of large theaters to multi-cinema) .

The baking operation takes 2.Capacity Cushion Example An automobile equipment supplier wishes to install a sufficient number of ovens to produce 400.000 good castings per year. and management requires a capacity cushion of 5%. How many ovens will be required if each one is available for 1800 hours (of capacity) per year? .0 minutes per casting.

7/1800=.047611 .3/1800 = .3 .9524 85.7/1714.049991 85.1 1.05 = (1800/x) .05x = 1800 x = 1714.1 1714.3=.05 = (1800/x) 1.Example: Target 5% Cushion cushion = Best Operating Level Capacity Used .

Solution Required system capacity = 400.859 mins per oven = 7.8 or 8 ovens .000 x 2 min/unit = 800.859 minutes/oven Number of ovens required = 800.000 min /102.000 Number of oven minutes available/oven = (1800 hrs/oven) x(60 minutes/hour) (.9524) = 102.000 good units per year Number of oven minutes required = 400.

A Way to Gain Capacity…buy resource 3 machines 2 machines 1 machine Quantity Step fixed costs and variable costs. .

Cost or price per unit Total accumulated production of units .Other Ways to Gain Capacity……… The Experience Curve As plants produce more products. or services deliver more of a service. they gain experience in the best production methods and ‘inherently’ or ‘naturally’ reduce their costs per unit.

 Flexible  Share plants processes  Flexible  Group processes equipment around product families Cell Manuf.  Flexible workers  Cross-train .Other Ways to Gain Capacity……… Capacity Flexibility: Having the ability to respond rapidly to demand volume changes and product mix changes.

Other Ways to Gain Capacity……… Capacity Bottlenecks Operation 1 Raw material 200/hour Operation 2 75/hour Operation 3 200/hour Bottleneck Operation .

000 7.000 4.500  Maintaining System Balance .Capacity Planning Stage 1 Units per month Stage 2 Stage 3 6.

Determining Capacity Requirements  [1] 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  [2]  [3] .

Each is sold in small and family-size plastic bottles. Year: FancyFine Small (000s) Family (000s) Generic Small (000s) Family (000s) 1 50 35 100 80 2 60 50 110 90 3 80 70 120 100 4 100 90 140 110 . The following table shows forecast demand for the next four years.Example--Capacity Requirements A manufacturer produces two lines of ketchup. FancyFine and a generic line.

it’s the same product just packaged differently (and water added) .Example of Capacity Requirements: The Product from a Capacity Viewpoint  Question: Are we really producing two different types of ketchup from the standpoint of capacity requirements? Answer: No.

000 units-per-year machines are available for small-bottle production.Example of Capacity Requirements: Equipment and Labor Requirements Year: Small (000s) Family (000s) 1 150 115 2 170 140 3 200 170 4 240 200 Three 100. Two 120.000 units-per-year machines are available for family-sized-bottle production. Three operators required per machine. . Two operators required per machine.

000 Labor 150.000=50% At 1 machine for 100.39 Question: Identify the Year 1 values for capacity.92% operators for 150.88 ©The McGraw-Hill Companies.000 Labor Family-size Mach. 300.000 Small Percent capacity used 50.00% Machine requirement 1.5 machines for 150. 240. Cap.000.000/300. it takes 1.000.50 Labor requirement 3. 2001 .96 Labor requirement 2. Inc.00 At 2 operators for Family-size 100. Cap..000 Machine requirement 0. and labor? Year: Small (000s) Family (000s) 1 150 115 2 170 140 3 200 170 4 240 200 6 6 Small Mach. it takes 3 Percent capacity used 47. machine.

000 240.40 Question: What are the values for columns 2..17 2.83% 1.00% 56.00 ©The McGraw-Hill Companies.67 5.50 66.92% 58.25 80. 2 170 140 300.80 83.88 3. Mach.67% 2.00 4.33% 1.000 3 200 170 Labor Labor 4 240 200 6 6 50.00 3.00% 2. Cap. 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.67% 1. 2001 .70 3.40 47.00 70. Cap.42 4.50 1.96 1.40 4. Inc.33% 0.

and 3 are .01. then what is the required capacity for this operation? [i. and if the demand is 200 units.How does Quality affect capacity? Suppose a three operation process is followed by an inspection. 2.e. . If the average proportion of defectives produced at operations 1.04. and .02 respectively. material inputs] .

number of units at the start of the production process B = M [(1-d1)(1-d2)….Capacity requirements with Yield Loss Notation: di = avg.(1-dn)] . proportion of defective units at operation i n = number of operations in the production process M = order quantity (good units only or desired yield) B = avg.

04 2 .Solution Desired yield = 200 Operation Defective rate 1 .02) = 215 .04)(1-.01)(1-.02 (1) What is the capacity required? B= 200 (1-.01 3 .

Each process produces only 1% defects. How is capacity affected? 1000 Capacity required = = (.Capacity and Quality Suppose we have a 6 process assembly line that must produce 1000 good products.99)6 1062 units .

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

5 Medium 50 25 40 0.Payoff Table 0.4 High 90 200 60 A B C .1 Low 10 -120 20 0.

We start with our decisions.. Subcontracting A B C Construct new facilities Do nothing ..

5) Low demand (.1) High demand (.4) Medium demand (.1) $60k $40k $20k .1) $90k $50k $10k $200k $25k -$120k A B C High demand (.5) Low demand (. probabilities.Then add our possible states of nature.4) Medium demand (.5) Low demand (.4) Medium demand (. and payoffs High demand (.

1) $90k $50k $10k EVA=.5) $62k A Low demand (.5(50)+.4) Medium demand (.Determine the expected value of each decision High demand (.4(90)+.1(10)=$62k .

1) High demand (.4) Medium demand (.5) Low demand (.Solution High demand (.5) $90k $50k $10k $200k $25k -$120k $80.1) $60k $40k $20k .4) Medium demand (.4) $46k Medium demand (.1) High demand (.5) $62k A B C Low demand (.5k Low demand (.