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EMBA-2, BUP

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Strategic Capacity Planning

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M. AsadEMBA-2

Strategic Capacity Planning

• What is Capacity refers to an upper limit or ceiling on the load that an operating unit (plant, department, machine, stores and etc) can handle.

• Goal of Strategic capacity planning is to achieve a match between long term supply capabilities and predicted level of long term demand to supports the firm’s long term competitive strategy.

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M. AsadEMBA-2

Basic questions in capacity handling

1. What kind of capacity is needed?– Depends on product/services that management

intend to provide.2. How much is needed?

– The volume and certainty of anticipated demand– Strategic objectives in terms of growth, customer

service and competitions– The cost of expansion and operation– Time Dimension of Capacity:

• Long Range • Intermediate Range• Short Range

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M. AsadEMBA-2

Basic questions in capacity handling

3. When is it needed?– Capacity lead strategy– Capacity lag strategy– Average capacity strategy

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Capacity Panning Concept

• Capacity used -rate of output actually achieved • Best operating level -capacity for which the process was

designed and thus is the volume at which average unit cost is minimized.

level operating Best

usedCapacity rate nutilizatioCapacity

• Capacity Utilization Ratio revels how close a firm to its best operating point :

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M. AsadEMBA-2

Design capacity = 50 trucks/dayEffective capacity = 40 trucks/dayActual output = 36 units/day

Actual output = 36 units/day Efficiency = = 90%

Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day

= 72%

Design capacity 50 units/day

Designing Measuring Capacity

Effective capacity-affected by periodic maintenance, lunch break, problem in scheduling and operation, imbalance line etcActual capacity affected by breakdown, absenteeism, shortage and poor quality of raw material etc

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M. AsadEMBA-2

Capacity Panning Concept

• Economies of Scale : as a plant gets larger and volume increases the average cost per unit of output drops. Reasons for economies of scale are:– Reducing the fix cost per unit– Construction costs increases at a decreasing rate – Processing costs decrease as output rate increases because

operations become more standard.• Diseconomies of Scale : when higher level of output cost

more per unit to produce. Reasons for diseconomies of scale are:– Distribution costs increases due to traffic congestion and

shipping from one large facility to several smaller ones.– Complexity increases costs, command and communication

become more problem.– Inflexibility can be issue – Increased bureaucracy, slowing decision making and late

approval

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M. AsadEMBA-2

Capacity Panning Concept

• The Experience Curve -As plants produce more products, they gain experience in the best production methods and reduce their costs per unit

• 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) extend focus concept to find

best operating level • Capacity Flexibility – Ability to increase or decrease

production levels, or to shift production capacity from one product or service to another.– Flexible plants, Flexible process, Flexible workers

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M. AsadEMBA-2

Determining Capacity Requirements

1. Forecast sales within each individual product line2. Calculate equipment and labor requirements to meet

the forecasts3. Project equipment and labor availability over the

planning horizon

• Capacity Cushion – is an amount of capacity in excess of expected demand. This may be positive or negative.– Positive Capacity Cushion - when a firm’s design

capacity is more than capacity required to meet its demand

– Negative Capacity Cushion - when a firm’s design capacity is less than capacity required to meet its demand

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M. AsadEMBA-2

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: 1 2 3 4FancyFine

Small (000s) 50 60 80 100Family (000s) 35 50 70 90Generic

Small (000s) 100 110 120 140Family (000s) 80 90 100 110

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Example of Capacity Requirements (Continued) : Equipment and Labor Requirements

Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200

•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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M. AsadEMBA-2

Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6Family-size Mach. Cap. 240,000 Labor 6

Small

Percent capacity used 50.00%Machine requirement 1.50Labor requirement 3.00Family-size

Percent capacity used 47.92%Machine requirement 0.96Labor requirement 2.88

Question: What are the Year 1 values for capacity, machine, and labor?

Question: What are the Year 1 values for capacity, machine, and labor?

150,000/300,000=50%

At 2 operators for 100,000, it takes 3 operators for 150,000

At 1 machine for 100,000, it takes 1.5 machines for 150,000

©The McGraw-Hill Companies, Inc., 2004

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M. AsadEMBA-2

Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6Family-size Mach. Cap. 240,000 Labor 6

Small

Percent capacity used 50.00%Machine requirement 1.50Labor requirement 3.00Family-size

Percent capacity used 47.92%Machine requirement 0.96Labor requirement 2.88

Question: What are the values for columns 2, 3 and 4 in the table below?Question: What are the values for columns 2, 3 and 4 in the table below?

56.67%1.703.40

58.33%1.173.50

66.67%2.004.00

70.83%1.424.25

80.00%2.404.80

83.33%1.675.00

©The McGraw-Hill Companies, Inc., 2004

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M. AsadEMBA-2

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 subcontractingB) Construct new facilitiesC) 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 0.1, 0.5, and 0.4.

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 subcontractingB) Construct new facilitiesC) 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 0.1, 0.5, and 0.4.

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M. AsadEMBA-2

Example of a Decision Tree Problem (Continued): The Payoff Table

0.1 0.5 0.4Low Medium High

A 10 50 90B -120 25 200C 20 40 60

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

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

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M. AsadEMBA-2

Example of a Decision Tree Problem (Continued): Step 1. We start by drawing the three decisions

A

B

C

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Example of Decision Tree Problem (Continued): Step 2. Add our possible states of nature,

probabilities, and payoffs

A

B

C

High demand (0.4)

Medium demand (0.5)

Low demand (0.1)

Tk 90Tk 50

Tk 10

High demand (0.4)

Medium demand (0.5)

Low demand (0.1)

Tk 200Tk 25

- Tk 120

High demand (0.4)

Medium demand (0.5)

Low demand (0.1)

Tk 60Tk 40

Tk 20

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Example of Decision Tree Problem (Continued): Step 3. Determine the expected value of each

decision

High demand (0.4)High demand (0.4)

Medium demand (0.5)Medium demand (0.5)

Low demand (0.1)Low demand (0.1)

AA

$90$90

$50$50

$10$10

EVA=0.4(90)+0.5(50)+0.1(10)=$62EVA=0.4(90)+0.5(50)+0.1(10)=$62

$62$62

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M. AsadEMBA-2

Example of Decision Tree Problem Step 4. Make decision

High demand (0.4)

Medium demand (0.5)

Low demand (0.1)

High demand (0.4)

Medium demand (0.5)

Low demand (0.1)

A

B

CHigh demand (0.4)

Medium demand (0.5)

Low demand (0.1)

$90$50

$10

$200$25

-$120

$60$40

$20

Tk 62

$80.5

Tk 46

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

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

Tk 82

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M. AsadEMBA-2

Planning Service Capacity vs. Manufacturing Capacity

• Time: Goods can not be stored for later use and capacity must be available to provide a service when it is needed

• Location: Service goods must be at the customer demand point and capacity must be located near the customer

• Volatility of Demand: Much greater than in manufacturing

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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M. AsadEMBA-2

Facility Location

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M. AsadEMBA-2

Facility Location

Competitive Imperatives Impacting Location Issues in Facility Location

General Issues• Proximity to Customers • Business Climate • Total Costs • Infrastructure• Quality of Labor• Suppliers• Other Facilities

Global Issues• Free Trade Zones• Political Risk• Government Barriers• Trading Blocs• Environmental Regulation• Host Community • Competitive Advantage

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M. AsadEMBA-2

Location Decision Factors

Macro Analysis

Regional / Sub Regional Factors• Location of Market• Raw materials• Labor factors• Climate and taxes• Foreign Govt

Community Considerations• Access to market • Material costs• Labor cost and availability• Community services, attitude• Taxes• Environmental regulations• Infrastructure support

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M. AsadEMBA-2

Location Decision Factors

Micro Analysis - Site Related Factors

• Land• Transportation• Environmental• Legal bindings and tax

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Plant Location Methodology

• Factor Rating -Decision based on quantitative and qualitative inputs.Problems: – Do not account for wide range of cost associated with

each factor.– May be provided with few points but potentially

show a real difference in the value of locations.Solution: Factor rating based on weighted scale

• Centroid / Center of Gravity Method-Decision based on minimum distribution costs

• Transportation Model -Decision based on movement costs of raw material or finished goods

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M. AsadEMBA-2

Plant Location Methodology: Factor Rating Method

Fuels in region 0 to 330Power availability and reliability 0 to 200Labor climate 0 to 100Living conditions 0 to 100Transportation 0 to 50Water supply 0 to 10Climate 0 to 50Supplies 0 to 60Tax policies and laws 0 to 20

Two refineries sites (A and B) are assigned the following range of point values and respective points, where the more points the better for the site location.

Major factors for site location Pt. Range

SitesA B

Total pts. 500 540

129100

507445

8344020

15670909655

41450

5

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Plant Location Methodology: Center of Gravity Method

• The center of gravity method is used for locating single facilities that considers existing facilities, the distances between them, and the volumes of goods to be shipped between them. Formulas used are:

C = d V

V x

ix i

i

Cx = X coordinate of center of gravity

Cy = X coordinate of center of gravity

dix = X coordinate of the ith location

diy = Y coordinate of the ith location

Vi = volume of goods moved to or from ith location

C = d V

Vy

iy i

i

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M. AsadEMBA-2

Plant Location Methodology: Example of Center of Gravity Method

Question: What is the best location for a new Z-Mobile warehouse/temporary storage facility considering only distances and quantities sold per month?

• Center of gravity method example– Several automobile showrooms are located according to

the following grid which represents coordinate locations for each showroom.

S howroom No o f Z-Mo b ile s s o ld p e r mo nth

A 1250

D 1900

Q 2300X

Y

A(100,200)

D(250,580)

Q(790,900)

(0,0)

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M. AsadEMBA-2

Example of Center of Gravity Method: Determining Existing Facility Coordinates

S ho wro o m No o f Z-Mo b ile s s o ld p e r mo nth

A 1250

D 1900

Q 2300

X

Y

A(100,200)

D(250,580)

Q(790,900)

(0,0)

To begin, you must identify the existing facilities on a two-dimensional plane or grid and determine their coordinates.

You must also have the volume information on the business activity at the existing facilities.

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M. AsadEMBA-2

Example of Center of Gravity Method: Determining the Coordinates of the New Facility

C = 100(1250) + 250(1900) + 790(2300)

1250 + 1900 + 2300 =

2,417,000

5,450 = x 443.49

C = 200(1250) + 580(1900) + 900(2300)

1250 + 1900 + 2300 =

3,422,000

5,450 = y 627.89

S ho wro o m No o f Z-Mo b ile s s o ld p e r mo nth

A 1250

D 1900

Q 2300X

Y

A(100,200)

D(250,580)

Q(790,900)

(0,0)

You then compute the new coordinates using the formulas:

Z New location