5–1 Chapter Five McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. 5–2 • LO5–2: Exemplify how to plan capacity. • LO5–3: Evaluate capacity alternatives using decision trees. Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. • LO5–1: Explain what capacity management is and why it is strategically important. • LO5–4: Compare capacity planning in services to capacity planning in manufacturing 5–3 – Allows a T-shirt made in China to be sent to the Netherlands for just 2.5 cents. – The Eleonora Maersk and the other seven ships in her class are among the largest ever built: – Almost 400 m long, or the length of four soccer fields, and another half-field across. – The ships can carry 7,500 or so 40-foot containers, each of which can hold 70,000 T-shirts. Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. • The Economics of Very Big Ships • Economy of Container Ships • On this voyage, the Eleonora was carrying supplies for Europe’s New Year celebrations: 1,850 tons of fireworks, including 30 tons of gunpowder. 5–4 • In business, viewed as the amount of output that a system is capable of achieving over a specific period of time Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. • Capacity – the ability to hold, receive, store, or accommodate • Capacity management needs to consider both inputs and outputs 5–5 • Greater than one year Intermediate range • Monthly or quarterly plans covering the next 6 to 18 months Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Long range Short range • Less than one month 5–6 – Facilities – Equipment – Labor force size Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. • Determining the overall level of capacity-intensive resources that best supports the company’s long-range competitive strategy 5–7 • 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 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. • Capacity utilization rate – a measure of how close the firm is to its best possible operating level 5–8 – 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 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. • Capacity focus – the idea that a production facility works best when it is concentrated on a limited set of production objectives – Comes from the plant, processes, and workers or from strategies that use the capacity of other organizations 5–9 • Ability to quickly adapt to change • Zero-changeover time Flexible Processes • Flexible manufacturing systems • Simple, easily set up equipment Flexible Workers • Ability to switch from one kind of task to another quickly • Multiple skills (cross training) Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Flexible Plants 5–10 •Similar capacities desired at each operation •Manage bottleneck operations Frequency of Capacity Additions •Cost of upgrading too frequently •Cost of upgrading too infrequently External Sources of Capacity •Outsourcing •Sharing capacity Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Maintaining System Balance Decreasing Capacity •Temporary reductions •Permanent reductions 5–11 5–12 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Calculate labor and equipment requirements to meet forecasts Project labor and equipment availability over the planning horizon Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Use forecasting to predict sales for individual products 5–13 – Paul’s and Newman’s • Each is available in bottles and singleserving bags. Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. • Stewart Company produces two flavors of salad dressing. • What are the capacity and labor requirements for the next five years? 5–14 Paul’s Newman’s Bottles (000s) Plastic bags (000s) Bottles (000s) Plastic bags (000s) Year 1 2 3 4 5 60 100 150 200 250 100 200 300 400 500 75 85 95 97 98 200 400 600 650 680 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Step 1: Use forecasting to predict sales for individual products 5–15 1 2 3 4 5 Bottles (000s) 135 185 245 297 348 Plastic bags (000s) 300 600 900 1050 1180 Bottling Operation Year Bagging Operation Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Step 2: Calculate equipment and labor requirements 5–16 1 2 3 4 5 Percentage capacity utilized 24 48 72 84 94 Machine requirement 1.2 2.4 3.6 4.2 4.7 Labor requirement 3.6 7.2 10.8 12.6 14.1 Percentage capacity utilized 30 41 54 66 77 Machine requirement 0.9 1.23 1.62 1.98 2.31 Labor requirement 1.8 2.46 3.24 3.96 4.62 Plastic Bag Operation Bottle Operation For the Excel template visit www.mhhe.com/sie-chase14e Excel: Capacity Requirements Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Year Step 3: Project equipment and labor availabilities 5–17 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. • A decision tree is a schematic model of the sequence of steps in a problem – including the conditions and consequences of each step. • Decision trees help analysts understand the problem and assist in identifying the best solution. • Decision tree components include the following: – Decision nodes – represented with squares – Chance nodes – represented with circles – Paths – links between nodes 5–18 – Strong growth has a 55% probability – New site cost is $210,000 Payoffs: strong growth = $195,000; weak growth = $115,000 – Expanding current site cost is $87,000 (in either year 1 or 2) Payoffs: strong growth = $190,000; weak growth = $100,000 – Do nothing Payoffs: strong growth = $170,000; weak growth = $105,000 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. • The owner of Hackers Computer Store is evaluating three options – expand at current site, expand to a new site, do nothing. • The decision process includes the following assumptions and conditions. 5–19 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. • Calculate the value of each alternative 5–20 Events Decision Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. • Diagram the problem chronologically Decision 5–21 $765,000 $365,000 $863,000 $413,000 $843,000 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. • Calculate value of each branch $850,000 $525,000 5–22 $765,000 $660,500 $365,000 Do nothing has higher value than expand, so $863,000 choose to do nothing $413,000 Do nothing = $703,750 Do nothing has higher value than expand or move, so choose to do nothing $703,750 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. • Work backwards to calculate the value of each decision/event $843,000 Do nothing = $850,000 $850,000 $525,000 5–23 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. • Decision tree analysis with net present value calculations Excel: Decision Trees For the Excel template visit www.mhhe.com/sie-chase14e 5–24 Service Capacity Goods can be stored for later use. Capacity must be available when service is needed – cannot be stored. Goods can be shipped to other locations. Service must be available at customer demand point. Volatility of demand is relatively low. Much higher volatility is typical. Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Manufacturing Capacity 5–25 – 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). Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. • The relationship between service capacity utilization and service quality is critical. 5–26 Arrivals exceed services – many customers are never served declines – disruptions or high arrival levels lead to long wait times Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. • Rate of service utilization and service quality are directly linked. Service quality Sufficient capacity to provide quality service 5–27