Strategic Capacity Mgmt

8/2/2019 Strategic Capacity Mgmt

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Strategic Capacity Management


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Capacity Planning Capacity can be defined as the ability to hold,

receive, store, or accommodate.

It can also be defined as output attainedwithin the normal operatingschedule/conditions


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Time Horizon for Capacity PlanningLong Range - Building, Equipments and Facilities(Greater than one year)

Intermediate Range - Hiring, layoffs, new tools,minor equipment purchase and subcontracting.

(Quarterly or monthly)

Short Range Daily and weekly scheduling,overtime, personnel transfer.


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Strategic Capacity Planning Strategic capacity planning is an approach for determining

the overall capacity level of capital intensive resources,including facilities, equipment, and overall labor force sizethat best supports companies long term competitive strategy.

Planning for capacity for a long run

How much should a plant be able to produce?

How many customers should a service facility be able toserve?

What kind of issues arise as the production systemexpands?


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Strategic Capacity PlanningCapacity strategies are formulated keeping in mine;

The growth rate and variability in demand

Cost of building and operating facilities of various

sizes

The rate and direction of technological innovation

The likely behavior of competitors

Availability of capital and other resources


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Steps involved in Capacity Planning Process

Estimate future capacity requirements Evaluate existing capacity and facilities and

identify gaps

Identify alternatives for meeting requirements.

Conduct financial analyses of each alternative

Assess key qualitative issues for each alternative.

Select one alternative to pursue.

Implement the selected alternative.

Monitor results


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Capacity Utilization

Where

Capacity used

rate of output actually achieved

Best operating level

capacity for which the process was designed

Volume of output at which average unit cost is

minimum

leveloperatingBest

usedCapacityratenutilizatioCapacity


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Best Operating LevelExample: Engineers design engines and assembly lines to

operate at an ideal or best operating level to maximizeoutput and minimize ware

Underutilization

Best OperatingLevel

Averageunit costof output

Volume

Overutilization


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Example of Capacity Utilization

During one week of production, a plantproduced 83 units of a product. Itshistoric highest or best utilization

recorded was 120 units per week. Whatis this plants capacity utilization rate?

Answer:

Capacity utilization rate = Capacity used .Best operating level

= 83/120=0.69 or 69%


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Economies & Diseconomies of Scale

100-unitplant

200-unitplant 300-unit

plant

400-unitplant

Volume

Averageunit costof output

Economies of Scale and the Experience Curve working

Diseconomies of Scale start working


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The ExperienceCurve

As plants produce more products, theygain experience in the best productionmethods and reduce their costs per unit

Total accumulated production of units

Cost orpriceper unit

Yesterday

Today

Tomorrow


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Underlying Principles of Learning Curves

1. Each time you perform a task ittakes less time than the last timeyou performed the same task

2. The extent of task time decreasesover time

3. The reduction in time will follow apredictable pattern


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Example of a Learning Curve

Suppose you start aterm paper typingbusiness. You timeyourself on the first

paper, then the second,and so on.

Termpaper

1

2

3

4

5

6

Time (inMinutes)

100

90

84.62

81.00

78.30

76.16

Note that only 90 of100 minutes are used

in the secondrepetition. This is anexample of a 90%learning curve.


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Plotting theLearning Curve

All learning curves have thisdownward sloping curve.

90 % Learning Curve

020

40

60

80

100

120

0 1000 2000 3000 4000 5000

Unit

Production

T

ime(Minutes)


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Capacity Planning

Considerations in adding capacity;

Maintaining System Balance

Frequency of Capacity Additions

External Sources of Capacity


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Capacity Planning: Balance

Stage 1 Stage 2 Stage 3Unitsper

month6,000 7,000 5,000

Unbalanced stages of production

Stage 1 Stage 2 Stage 3Unitsper

month6,000 6,000 6,000

Balanced stages of production

Maintaining System Balance: Output of one stage isthe exact input requirements for the next stage


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Determining Capacity Requirements

1. Forecast sales within each individualproduct line

2. Calculate equipment and laborrequirements to meet the forecasts

3. Project equipment and labor availability

over the planning horizon


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Example of Capacity Requirements

A manufacturer produces two lines of mustard,FancyFine and Generic line. Each is sold insmall and family-size plastic bottles.

The following table shows forecast demand for

the next four years.

Year: 1 2 3 4

FancyFine

Small (000s) 50 60 80 100

Family (000s) 35 50 70 90Generic

Small (000s) 100 110 120 140

Family (000s) 80 90 100 110


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Example of Capacity Requirements (Continued):Product from a Capacity Viewpoint

Question: Are we really producing twodifferent types of mustards from thestandpoint of capacity requirements?

Answer: No, its the same product justpackaged differently.


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

Year: 1 2 3 4

Small (000s) 150 170 200 240

Family (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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Year: 1 2 3 4

Small (000s) 150 170 200 240Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6

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

Small

Percent capacity used 50.00%

Machine requirement 1.50

Labor requirement 3.00

Family-size




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


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Year: 1 2 3 4

Small (000s) 150 170 200 240

Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6

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

Small



Labor requirement 3.00Family-size




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

56.67%

1.70

3.40

58.33%

1.17

3.50

66.67%

2.00

4.00

70.83%

1.42

4.25

80.00%

2.40

4.80

83.33%

1.67

5.00


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Example of a Decision Tree Problem

A glass factory specializing in crystal is experiencing asubstantial backlog, and the firm's management isconsidering 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, managementestimates the respective demand probabilities as 0.1, 0.5,and 0.4.


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

0.1 0.5 0.4

Low Medium HighA 10 50 90

B -120 25 200

C 20 40 60

The management also estimates the profitswhen choosing from the three alternatives (A,B, and C) under the differing probable levels of

demand. These profits, in thousands of dollarsare presented in the table below:


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

AB

C


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

decision

High demand (0.4)

Medium demand (0.5)

Low demand (0.1)

A

$90k

$50k

$10k

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

$62k


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Example of Decision Tree Problem (Continued):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)

$90k$50k

$10k

$200k

$25k

-$120k

$60k

$40k

$20k

$62k

$80.5k

$46k

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


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Planning Service Capacity vs.Manufacturing Capacity

Time: Goods can not be stored for lateruse and capacity must be available toprovide a service when it is needed

Location: Service goods must be at thecustomer demand point and capacitymust be located near the customer

Volatility of Demand: Much greater thanin manufacturing


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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 servicequality?

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Strategic Capacity Mgmt

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