Tata McGraw

1. CHAPTER 5 Strategic Capacity Management Tata McGraw

2. Chapter 5 Strategic Capacity Management

3. 5-3 OBJECTIVES • Strategic Capacity Planning Defined • Capacity Utilization & Best Operating Level • Economies & Diseconomies of Scale • The Experience Curve • Capacity Focus, Flexibility & Planning • Determining Capacity Requirements • Capacity Utilization & Service Quality

4. 5-4 Strategic Capacity Planning • Capacity can be defined as the ability to hold, receive, store, or accommodate • Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size

5. 5-5 Capacity Utilization • Where • Capacity used • rate of output actually achieved • Best operating level • capacity for which the process was designed

6. Capacity Planning Concepts • Capacity utilization rate – a measure of how close the firm is to its best possible operating level • Economies of scale – the idea that as a planet gets larger and volume increases, the average cost per unit tends to drop • Diseconomies of scale – at some point, the plant becomes too large and average cost per unit begins to increase

7. Capacity Planning Time Durations

8. 5-8 Average unit cost of output Underutilization Overutilization Best Operating Level Volume Best Operating Level Example: Engineers design engines and assembly lines to operate at an ideal or “best operating level” to maximize output and minimize ware

9. 5-9 Example of Capacity Utilization • During one week of production, a plant produced 83 units of a product. Its historic highest or best utilization recorded was 120 units per week. What is this plant’s capacity utilization rate? • Answer: Capacity utilization rate = Capacity used • Best operating level • = 83/120 • =0.69 or 69%

10. 5-10 Economies of Scale and the Learning Curve working 100-unit plant Average unit cost of output 200-unit plant 400-unit plant 300-unit plant Diseconomies of Scale start working Volume Economies & Diseconomies of Scale

11. 5-11 Yesterday Cost or price per unit Today Tomorrow Total accumulated production of units The Learning Curve As plants produce more products, they gain experience in the best production methods and reduce their costs per unit

12. Capacity Planning Concepts • Capacity focus – the idea that a production facility works best when it is concentrated on a limited set of production objectives • Focused factory or plant within a plant (PWP) concept • Capacity flexibility – the ability to rapidly increase or decrease product levels or the ability to shift rapidly from one product or service to another • Comes from the plant, processes, and workers or from strategies that use the capacity of other organizations

13. 5-13 Stage 1 Stage 1 Stage 2 Stage 2 Stage 3 Stage 3 Capacity Planning: Balance Unbalanced stages of production Units per month Maintaining System Balance: Output of one stage is the exact input requirements for the next stage 6,000 7,000 5,000 Balanced stages of production Units per month 6,000 6,000 6,000

14. 5-14 Determining Capacity Requirements 1. Forecast sales within each individual product line 2. Calculate equipment and labor requirements to meet the forecasts 3. Project equipment and labor availability over the planning horizon

15. 5-15 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.

16. 5-16 Example of Capacity Requirements (Continued): Product from a Capacity Viewpoint • Question: Are we really producing two different types of mustards from the standpoint of capacity requirements? • Answer: No, it’s the same product just packaged differently.

17. 5-17 Example of Capacity Requirements (Continued) : Equipment and Labor Requirements • 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.

18. Planning Service Capacity

19. Capacity Utilization and Service Quality • The relationship between service capacity utilization and service quality is critical. • Utilization is measured by the portion of time servers are busy. • Optimal levels of utilization are context specific. • Low rates are appropriate when the degree of uncertainty (in demand) is high and/or the stakes are high (e.g., emergency rooms, fire departments). • Higher rates are possible for predictable services or those without extensive customer contact (e.g., commuter trains, postal sorting).

20. Service Quality • Rate of service utilization and service quality are directly linked. Service quality declines – disruptions or high arrival levels lead to long wait times Arrivals exceed services – many customers are never served Sufficient capacity to provide quality service

21. 5-21 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?

22. 5-22 End of Chapter 5