CAPACITY MANAGEMENT

1. CAPACITY MANAGEMENT CHAPTER 10 DAVID A. COLLIER AND JAMES R. EVANS

2. 10-1Explain the concept of capacity. 10-2Describe how to compute and use capacity measures. 10-3Describe long-term capacity expansion strategies. 10-4Describe short-term capacity adjustment strategies. 10-5 Explain the principles and logic of the Theory of Constraints.

3. In 2011, Fortune magazine interviewed Jeff Smisek, CEO of United Continental Holdings, Inc., the holding company created by the merger between United Airlines and Continental Airlines. In response to a question of what the recent recession taught him and the company, Mr. Smisekresponded: • What we learned is the importance of capacity discipline. Ours has been an industry where it’s very easy to add seats, through increased frequencies, flying the aircraft longer, or taking delivery of additional aircraft. In the recession we were very disciplined in getting our capacity down, and as we saw the recovery with high fuel prices, we’ve been very disciplined at United and across the industry in making sure we’ve got the right level of capacity and not supplying overcapacity, driving down pricing.1

4. What do you think? Have you ever experienced problems with a service because of inadequate labor or equipment capacity?

5. Understanding Capacity Capacityis the capability of a manufacturing or service resource such as a facility, process, workstation, or piece of equipment to accomplish its purpose over a specified time period.

6. Chapter 10 Capacity Management • Key Capacity Issues • Capacity is determined by the resources available to the organization—facilities, equipment, and labor—how they are organized, and their efficiency as determined by specific work methods. • Capacity can be viewed in one of two ways: • As the maximum rate of output per unit of time, or • As units of resource availability.

7. Can the facility, process, or equipment accommodate new goods and services and adapt to changing demand for existing goods and services? How large should facility, process, or equipment capacity be? When should capacity changes take place? Key Capacity Issues • Can the facility, process, or equipment accommodate new goods and services and adapt to changing demand for existing goods and services? • How large should facility, process, or equipment capacity be? • When should capacity changes take place?

8. Exhibit 10.1 Examples of Short- and Long-Term Capacity Decisions

10. Solved Problem An automobile transmission-assembly factory normally operates two shifts per day, five days per week. During each shift, 400 transmissions can be completed under ideal conditions. What is the capacity of this factory? Capacity = (2 shifts/day)(5 days/week) (400 tranmissions/shift)(4 weeks/month) = 16,000 transmissions/month

11. Understanding Capacity Economies of scaleare achieved when the average unit cost of a good or service decreases as the capacity and/or volume of throughput increases. Diseconomies of scaleoccur when the average unit cost of the good or service begins to increase as the capacity and/or volume of throughput increases.

12. Chapter 10 Capacity Management Understanding Capacity Afocused factoryisa way to achieve economies of scale without extensive investments in facilities and capacity by focusing on a narrow range of goods or services, target market segments, and/or dedicated processes to maximize efficiency and effectiveness.

13. Capacity Measurement in Operations Safety capacity(often called the capacity cushion) is an amount of capacity reserved for unanticipated events, such as demand surges, materials shortages, and equipment breakdowns. Average safety capacity (%) = 100% − Average resource utilization % [10.1]

14. Exhibit 10.2 The Demand Versus Capacity Problem Structure

15. Chapter 10 Capacity Management • Capacity Measurement in Job Shops • In a job shop, setup time can be a substantial part of total system capacity. • Capacity Required (Ci) = Setup Time (Si) + [Processing Time (Pi) x Order Size (Qi)] • = Si + [(Pi)(Qi)] [10.2]

16. Setup Time in Job Shops Manufacturing work orders normally assume that one setup is necessary for each work order, and therefore, the setup time is spread over the single work order quantity. That is, setup time is independent of order size. Some services such as hospital surgeries may require a new setup (changeover) time for each single surgery (i.e., the order size is one), and therefore, every patient surgery requires a setup time. This service setup time might include sterilizing equipment, cleaning and disinfecting the surgical suite, and the doctors resting, cleaning up, and studying the next patients medical files. It is important to understand this assumption regarding setup (changeover) time in goods-producing and service-providing applications so workload is correctly computed.

17. Solved Problem

18. Exhibit 10.4 Dental Office Demand-Capacity Analysis Using the Excel Capacity Template *Example computation: C= å(Si+ Pi × Qi) = 15 + 15 + (90 × 2) = 210 minutes, assuming a setup for each patient.

19. Long-Term Capacity Strategies • Complementary goods and servicescan be produced or delivered using the same resources available to the firm, but whose seasonal demand patterns are out of phase with each other. • Complementary goods or services balance seasonal demand cycles and therefore use the excess capacity available (see Exhibit 10.5).

20. Exhibit 10.5 Seasonal Demand and Complementary Goods or Services

22. Chapter 10 Capacity Management • Long Term Capacity Strategies • Capacity expansion strategies require determining • Amount • Timing • Form • of capacity changes

23. Chapter 10 Capacity Expansion Options Long-Term Capacity Strategies Four basic strategies: • One large capacity increase (Exhibit 10.6a). • Small capacity increases that match average demand (Exhibit 10.6b). • Small capacity increases that lead demand (Exhibit 10.6c). • Small capacity increases that lag demand (Exhibit 10.6d).

24. Exhibit 10.6 Capacity Expansion Options

25. ShortTerm Capacity Management • Adjust Short-Term Capacity Levels • Add or share equipment: lease equipment as needed or set up a partnership arrangement with capacity sharing. Examples: mainframe computers, CAT scanner, farm equipment. • Sell unused capacity: sell idle capacity to outside buyers and even competitors. Examples: computing capacity, perishable hotel rooms. • Change labor capacity and schedules: short term changes in work force levels. Examples: overtime, extra shifts, temporary employees, outsourcing. • Change labor skill mix: hire the right people, cross-training. • Shift work to slack periods: Example: build up inventory during slack times and hold for peak demand times.

26. Short Term Capacity Management • Shift and Stimulate Demand • Vary the price of goods or services: Examples: cheaper hotel rates on weekends; sales of overstocks • Provide customers with information: Example: automated messages with best times to call or visit • Advertising and promotion: Examples: after-holiday sales, manufacturer or service coupons • Add peripheral goods and/or services: Examples: movie theater rentals at off-peak times, extended service hours. • Providereservations:a promise to provide a good or service at some future time and place. Examples: hotels, airlines, surgeries

28. Short Term Capacity Management • Revenue Management Systems • Arevenue management system (RMS)consists of dynamic methods to forecast demand, allocate perishable assets across market segments, decide when to overbook and by how much, and determine what price to charge different customer (price) classes. • Examples: Managing overbooking in airlines, hotels, and cruise lines (yield management).

30. Theory of Constraints • TheTheory of Constraints (TOC)is a set of principles that focuses on increasing total process throughput by maximizing the utilization of all bottleneck work activities and workstations. • Throughput: amount of money generated per time period through actual sales. • Constraint: anything that limits an organization from moving toward or achieving its goal.

31. Theory of Constraints • Aphysical constraintis associated with the capacity of a resource (e.g., machine, employee). • A bottleneck work activityis one that effectively limits capacity of the entire process. • Anonbottleneck work activityis one in which idle capacity exists. • A nonphysical constraintisenvironmental or organizational (e.g., low product demand or an inefficient management policy or procedure).

32. Exhibit 10.7 Basic Principles of the Theory of Constraints

33. David Christopher, Orthopedic Surgeon, Case Study What is the clinic’s current weekly workload? Should the clinic hire more surgeons, and if so, how many? What other options and changes could be made to maximize patient throughput and surgeries, and therefore revenue, yet not compromise the quality of medical care? What are your final recommendations? Explain your reasoning.