StrategicCapacityMgmt

8/3/2019 StrategicCapacityMgmt

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STRATEGIC CAPACITY MANAGEMENT


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ObjectivesObjectives

To understand the strategic capacity planning

To learn some methods that help strategic capacity

planning To understand capacity expansion strategies


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Strategic Capacity PlanningStrategic Capacity Planning

CapacityCapacity is the ability to hold, receive, store, oraccommodate raw materials, finished products,customers, etc.

Strategic capacity planningStrategic capacity planning is an approach fordetermining the overall capacity level of capital intensive

resources, including facilities, equipment, and overalllabour force size.

Capacity usedCapacity used is the rate of output actually achieved.

The best operating levelbest operating level is nominally the capacity for

which the process was designed.Capacity Used

Capacity Utilization RateBest Operating Level

!


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Best Operating LevelBest Operating Level

Example:Example:

Engineers design engines and assembly lines to operate at anideal or best operating level to maximize output and minimizewear.

Under-utilization

Best Operating Level

Averageunit costof output

Volume

Over-utilization


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Capacity UtilizationCapacity Utilization

Example:Example:

During one week of production, a plant produced 83 units of aproduct. Its historic best utilization was 120 units per week. Whatis this plants capacity utilization rate?

Capacity UsedCapacity Utilization RateBest Operating Level

!

83 /

0.69 69%120 /

units week

units week! ! !


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Economies ofScaleEconomies ofScale

100-unit

plant200-unit

plant 300-unitplant

400-unitplant

Volume

Averageunit costof output

Economies of scale and operating level curves

Diseconomies of scale start to take effect


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Experience (Learning) CurvesExperience (Learning) Curves

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

Total accumulated production of units

Cost/priceper unit

Yesterday

Today

Tomorrow


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Other Capacity Planning ConceptsOther Capacity Planning Concepts

The concept of the focused factoryfocused factory (also called capacitycapacityfocusfocus) holds that production facilities work best whenthey focus on a fairly limited set of production objectives.

The plants within plantsplants within plants (PWP) concept extendscapacity focus ideas to an operational level.

Capacity flexibilityCapacity flexibility allows rapid increase or decrease ofproduction levels, and can be achieved in three ways:

Flexible plants

Flexible processes

Flexible workers


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Capacity PlanningCapacity Planning

Three important considerations in capacity planning: Maintaining system balance

In the ideal case, the output of one stage is the exact inputrequirements for the next stage.

Frequency of capacity additions

There are costs in adding capacity too frequently as well as tooinfrequently.

External sources of capacity

It might be cheaper to outsource some production.

Determining capacity requirements Forecast sales (within each individual product line)

Calculate equipment and labour requirements to meet forecasts

Project equipment and labour availability


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Capacity Requirements ExampleCapacity Requirements Example

A manufacturer produces mustard in small and family-sized plastic bottles, with the following demand forecasts.

Three 100,000 units-per-year machines are available for smallbottle production. 2 operators are required per machine.

Two 120,000 units-per-year machines are available for family-

sized bottle production. 3 operators are required per machine.

How much capacity is used and what are the machineand labour requirements?

Year 1 Year 2 Year 3 Year 4

Small (000's) 150 170 200 240Family (000's)

115 140 170 200


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Capacity Requirements Example (2)Capacity Requirements Example (2)

Machine capacity: 300 000 small, 240 000 family size

Labour availability: 6 for small, 6 for family size


Small (000's) 150 170 200 240

Family (000's) 115 140 170 200


Small (000's) 150 170 200 240

Family (000's) 115 140 170 200Small

% capacity used 50.00%machines req'd 1.50

labour req'd 3.00

Family Size

% capacity used

machines req'd

labour req'd

150 0000.50

300 000

! !

150 0001.5

100 000 per machine! !

21.5 3.0

operatorsmachines

machine! v !


Small (000's) 150 170 200 240

Family (000's) 115 140 170 200Small


labour req'd 3.00

Family Size


labour req'd 2.88

115 0000.4792

240 000! !

115 0000.96

120 000 per machine! !

30.96 2.88operatorsmachinesmachine

! v !


Small (000's) 150 170 200 240

Family (000's) 115 140 170 200Small

% capacity used 50.00% 56.67% 66.67% 80.00%machines req'd 1.50 1.70 2.00 2.40

labour req'd 3.00 3.40 4.00 4.80

Family Size

% capacity used 47.92% 58.33% 70.83% 83.33%machines req'd 0.96 1.17 1.42 4.25

labour req'd 2.88 3.50 4.25 5.00


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Decision TreesDecision Trees

A decision treedecision tree is a schematic model of the steps in thecapacity planning problem.

Steps:1. Draw the various decisions

2. Add the possible states of nature, probabilities, and payoffs

3. Determine the expected value of each decision

4. Make decision (the one with maximum expected value)


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Decision Trees ExampleDecision Trees Example

A glass factory specializing in crystal experiences substantial

backlog, and 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 therespective demand probabilities as 0.1, 0.5, and 0.4.

The management also estimates the profits when choosing from thethree alternatives under the differing probable levels of demand.These profits, are as follows:

Low (p=0.1) Medium (p-0.5) High (p=0.4)

A 10 000 50 000 90 000

B -120 000 25 000 200 000

C 20 000 40 000 60 000


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Decision Trees Example (2)Decision Trees Example (2)

Medium demand (0.5) $50k



AA

BB

CC

Decisions:Decisions: States, probabilities, and payoffs:States, probabilities, and payoffs:

High demand (0.4) $90k

Low demand (0.1) $10k


Low demand (0.1) -$120k



StartStart


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Decision Trees Example (3)Decision Trees Example (3)




AA

BB

CC

Expected values ofeach decision:Expected values ofeach decision:




Low demand (0.1) -$120k



! !0.4 90 0.5 50 0.1 10 $62kA

EV

, ,A A i A ii

EV P V

!

! !0.4 200 0.5 25 0.1 120 $80.5kBEV

! !0.4 60 0.5 40 0.1 20 $46kC

EV

Choose decision B

(highest expected value)


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Service Capacity vs. Manufacturing CapacityService Capacity vs. Manufacturing Capacity

Capacity planning in services is different than inmanufacturing in three key ways:

Time

Goods can not be stored for later use

Capacity must be available to provide a service when it is needed

Location

Service goods must be at the customer demand point

Capacity must be located near the customer

Volatility of demand

Much greater in services than in manufacturing


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Service Growth MatrixService Growth Matrix

Chain restaurants

Hotels

Car and truck rentalsAirlines

Specialty stores

Department storesBanks

Dry cleanersRestaurants

Mom and pop stores

HospitalsResorts

Universities

Multisite

Single-site

Single-service Multi-service


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CapacityExpansion Strategies:CapacityExpansion Strategies:

EntrepreneurialStageEntrepreneurialStage

Shift resources to different tasks as needed

Customer co production


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Multisite Rationalization StageMultisite Rationalization Stage

Add services to existing site

Duplicate existing services at additional sites

Do both


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Growth StageGrowth Stage

Bermuda Triangle of operational complexity Management difficulty exceeds management ability

New capacity management challenges Need for fresh ideas

Need to upgrade older facilities


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MaturityStageMaturityStage

Focus on operational efficiencies

Remodeling and replacement

Service modification

Duplication across entire service system


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SummarySummary

Capacity decisions should be made carefully, as they

can commit significant resources to assets that

cannot be changed easily or economically.

Capacity is affected by management decisions

regarding the number ofhours worked, product mix,

staffing levels, machine capabilities, level ofquality,and product yield.

Watch out for the Bermuda Triangle ofoperational

complexity, where management difficulty exceeds

management ability (management bottleneck!).

StrategicCapacityMgmt

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