Strategic Capacity

Management
Strategic Capacity Management
• Capacity is the ability to hold, receive, store, or
accommodate. In a business sense, it is viewed as
the amount of output that a system is capable of
achieving over a specific period of time.

• Strategic capacity planning has as its objective, to

determine the overall capacity level of capital-
intensive resources - facilities, equipment, and
overall labor force size - that best supports the
company's long-range competitive strategy.
 Capacity Planning
Concepts
Best operating level
The best operating level of a plant is the production
volume at which average cost is the lowest.
Companies try to operate close to this point. If
demand is consistently higher than the best
operating level, then they increase the capacity to
lower the cost close to the best operating level cost.
 Capacity Planning
Concepts
Economies of scale
• This concept signifies that as
production volumes increase, the
average cost per unit decreases.
Higher capacity plants have a lower
production cost compared to lesser
capacity plants.
 Capacity Planning
Concepts
The experience curve
• As plants produce more units, they
gain experience in their production
methods, which in turn, results in
reducing the per unit costs of
production in a predictable manner.
 Capacity Planning
Concepts
Capacity focus
• The concept of focused factory
states that it is more effective to
have different plants for products
with significant difference in
specifications especially in terms of
performance specifications.
 Capacity Planning
Concepts
Capacity flexibility
• Capacity flexibility means having the ability to
rapidly increase or decrease production levels or
to shift production capacity quickly from one
product or service to another. Such flexibility is
achieved through flexible plants, processes, and
workers, as well as through strategies that use
the capacity of other operations.
• Issues to be considered in adding capacity
include maintaining system balance, frequency of
capacity additions, and the use of external
capacity
 Determining Capacity
Requirements
Capacity planning decisions are based on forecasts for
product demand, labor requirements, and equipment
requirements.

Typical Steps:
1. Predict sales for individual products within each
product line using forecasting techniques.
2. Calculate equipment and labor requirements to meet
product line forecasts.
3. Project labor and equipment availabilities over the
planning horizon.
 HOW TO MANAGE
CAPACITY
The Zone
Managing capacity involves:
•monitoring the supply of, and demand on, adaptation capacity, and,
when necessary,
•making adjustments in order to operate in “The Zone” (a space for
pursuing as much change as possible while minimizing the negative
effects of future shock).
 FUTURE SHOCK
• Future shock occurs when the
demands of change exceed a
person’s or group’s capacity to
properly deal with its
implications. (This is reflected
in their inability to maintain
productivity, quality, and
safety standards).
• This is where people and
organizations have both the
greatest likelihood of
becoming overwhelmed with
instability, and the greatest
possibility of adapting to
uncertainty.
  
Measuring Demand and
Capacity
• Strategic assets are vital to an enterprise’s
future, highly sought after, protected once
secured, and not easily replaced. The ability of
people to operate under turbulent conditions
without becoming overly dysfunctional (i.e.,
unable to maintain productivity, quality, and
safety standards) unquestionably creates a
competitive advantage.
• As such, it should be treated as a strategic
asset.
 DEMAND
• The demand change imposes (the amount of energy it
will consume) are determined by many factors, but
they can be grouped into five categories:
• Timing: Is the change coming at people quickly? Is
there time pressure to effect the change? Was the
initiative a surprise, leaving little time to plan?
• Scale: Are a significant number of people affected by
the change? Does it require shifts beyond the primary
location where it is being implemented? Does the
initiative have a major impact on the business
performance?
 DEMAND
• Resources: How many people are needed to execute this
change? Does the funding represent a sizeable
investment? Will new or upgraded technology be
required?
• Complexity: Does the initiative require balancing
multiple variables at the same time? Is it dependent on
others’ initiatives falling into place? Is it difficult to
explain? Does it involve challenging activities with which
people have had little or no prior experience?

• Culture: Does the initiative require significant shifts in

established routines or how people generally operate on
a daily basis? Does it require any fundamental changes in
how people think about their work, their customers, or
their roles?
 To measure available capacity,
focus on five factors:
• Performance: Are productivity and effectiveness
levels dropping? Is preventable overtime
increasing? Is less being done (or costing more or
taking more time)?
• Quality: Are quality-related concerns increasing?
Is more time being spent on fixing mistakes? Are
customers complaining about service?
• Safety: Are incidences of physical injuries
increasing? Do people report feeling more at risk
of danger?
 To measure available capacity,
focus on five factors:
• People: Are the people in the organization, and
their relationships with each other, healthy
(effective, honest, supportive, etc.)? Are there
accelerated absences or stress-related
symptoms? Are there signs of communication or
decision-making problems?
• Progress: Are projects behind schedule? Running
over budget? Consuming more resources (or
returning worse results) than planned?
 Capacity planning
• Capacity planning is the process of determining
the production capacity needed by an
organization to meet changing demands for its
products.
• In the context of capacity planning, design
capacity is the maximum amount of work that an
organization is capable of completing in a given
period.
• Effective capacity is the maximum amount of
work that an organization is capable of
completing in a given period due to constraints
such as quality problems, delays, material
handling, etc.
• Capacity is calculated as (number
of machines or workers) × (number
of shifts) × (utilization) ×
(efficiency).
 Strategies

• The broad classes of capacity

planning are:
• Lead strategy
• Lag strategy
• Match strategy, and
• Adjustment strategy.
• Lead strategy is adding capacity in
anticipation of an increase in demand.
Lead strategy is an aggressive
strategy with the goal of luring
customers away from the company's
competitors by improving the service
level and reducing lead time
• Lag strategy refers to adding
capacity only after the organization
is running at full capacity or beyond
due to increase in demand.
• This is a more conservative strategy
and opposite of a lead capacity
strategy. It decreases the risk of
waste, but it may result in the loss of
possible customers either by stock-
out or low service levels.
• Match strategy is adding capacity in
small amounts in response to changing
demand in the market. This is a more
moderate strategy.
• Adjustment strategy is adding or
reducing capacity in small or large
amounts due to consumer's demand,
or, due to major changes to product
or system architecture.
Capacity is needed in formulation and
execution of strategy as this refers to
how capable are the resources in the
organization. Without effective
resources it could be very difficult to
formulate and implement the Strategy.