Strategic Capacity
Management
Dr. Ron Lembke
Operations Management
Maximum Throughput of a
Process
50/hr
20/hr
10/hr
40/hr
What is the capacity of the system?
 Should we add any capacity?
 How should we run the system?
 Where should we keep inventory?

Maximum Throughput of a
Process
6 min

5 min
4 min
5 min
What is the capacity of the system?
 Convert
10/hr
to units / hr
12/hr
15/hr
12/hr
PRODUCTIVITY
MEASUREMENTS
Productivity
Productivity = Outputs / Inputs
 Partial: Output/Labor or Output/Capital
 Multifactor:

Output / (Labor + Capital + Energy )

Total Measure:
Output / Inputs
Automotive Productivity

Book Data:
 Jaguar:
14 cars/employee
 Volvo: 29 cars/employee
 Mini: 39 cars/employee
US Productivity Growth
Source: Bureau of Labor Statistics
Total Factor
Productivity
Increases


Take labor and capital
into account
“percentage increase in
output that is not
accounted for by
changes in the volume
of inputs of capital and
labour.”
Source: Economist, 2009
Growth of Service Economy
80
70
60
50
40
30
20
Services
Industry
Farming
20
00
75
50
25
19
00
75
10
0
18
50
% of
Labor
Force
U.S. Productivity Gains
Services harder to make more productive
 Product Development team structure (Eg:
Chrysler Prowler, Boeing 787)
 Facilities improvements (less WIP, better
quality, flexibility)
 Keiretsu-like supplier cooperation -- tight
cooperation

U. S. Productivity Gains
Increased 1.37% per year 1990-95
 Increased 2.37% per year 1995-98
 Potential sources of productivity gains:

 Capital
investment
(1.13%)
 Labor Quality
(0.25%)
 Technological progress (0.99%)

Computers really are making us more
productive.
Source: WSJ, 8/1/00, “Further Gains in Productivity are Predicted,” A2
Improving Productivity
Develop productivity measurements– you
can’t improve what you can’t measure
 Identify and Improve bottleneck operations
first
 Establish goals, document and publicize
improvements

HOURS WORKED
Netherlands
West Germany
Norway
Germany
Belgium
France
Denmark
Austria
Luxembourg
Sweden
Switzerland
United Kingdom
Spain
Ireland
Australia
Finland
Iceland
Canada
Portugal
Japan
New Zeland
Italy
United States
Slovak Republic
Mexico
Turkey
Estonia
Israel
Poland
Czech Republic
Hungary
Russian Federation
Chile
Greence
Korea
Hours Worked by Country
2500
2000
Average
1500
1000
500
0
Source: OECD, 2012
Hours Worked and Productivity
Source: Eurofund, European Working Conditions Observatory, 2012
What Would Henry Say?




Ford introduced the $5 (per day) wage in 1914
He introduced the 40 hour work week
“so people would have more time to buy”
It also meant more output: 3*8 > 2*10
 “Now
we know from our experience in changing from
six to five days and back again that we can get at
least as great production in five days as we can in six,
and we shall probably get a greater, for the pressure
will bring better methods.
 Crowther, World’s Work, 1926
Forty Hour Week
Ernst Abbe, Karl Zeiss
optics
 1896: as much done in
9 as in 8.

Marginal Output of Time




Value of working n
hrs is Onda
As you work more
hours, your
productivity per
hour goes down
Eventually, it goes
negative.
Better to work b
instead of e hrs
S.J. Chapman, 1909, “Hours of Labour,” The Economic Journal 19(75) 353-373
“Crunch Mode”

Ea_spouse: 12/04
 “Pre-crunch”
 SO
was working 7 * 13: 91 per week!
 Maybe time off at 6pm Saturday
 $5k signing bonus, couldn’t quit
 Class action: April ‘06 $14.9m

Igda.org “Why Crunch Mode Doesn’t
Work: 6 Lessons”
Learning Curves
time/unit goes down consistently
 Down by 10% as output doubles
 We can use Logarithms to approximate this

 What
will our cost per unit be when we’ve
made 10,000 units?

If you ever need this, email me, and we can
talk as much as you want
 Also,
see Appendix B
600
500
Example 1
400
Bottles
Bags
300
200
Demand for each product,
by year.
100
0
1
2
3
4
5
Paul’s
1
2
3
Bottles
60 100 150
Bags
100 200 300
4
200
400
5
250
500
Newman’s
Bottles
75
85 95
Bags
200 400 600
97
650
98
680


Example 1
Totals
1
2
3
4
5
Bottles
135 185 245
297
348
Bags
300 600 900 1,050 1,180
 bottle machines 150k/yr

 Three

currently = 150 * 3 = 450k
bag machines 250k/yr
 Five
currently = 250 * 5 = 1,250k
Example 1
Bottles
135 185 245 297 348
Machines
1
2
2
2
3
Mach. usage
0.9 1.23 1.63 1.98 2.32
Workers
1.8 2.46 3.27 3.96 4.64
(2 workers per machine)

Bags
300 600 900 1,050 1,180
Machines
2
3
4
5
5
Mach Usage
1.2 2.4 3.6 4.2 4.7
Workers
3.6 7.2 10.8 12.6 14.1
(3 workers per machine)

Capacity Tradeoffs
120,000
4-door
cars
150,000
Two-door cars

Can we make combinations in between?
How much do we have?
We can only sustain so much effort.
 “Best Operating Level”

 Output
level process designed for
 Lowest cost per unit
Capacity utilization =
capacity used
best operating level
 Hard to run > 1.0 for long

Time Horizons
Long-Range: over a year – acquiring,
disposing of production resources
 Intermediate Range: Monthly or quarterly
plans, hiring, firing, layoffs
 Short Range – less than a month, daily or
weekly scheduling process, overtime,
worker scheduling, etc.

Service Differences
Arrival Rate very variable
 Can’t store the products - yesterday’s
flight?
 Service times variable
 Serve me “Right Now!”
 Rates change quickly
 Schedule capacity in 10 minute intervals,
not months
 How much capacity do we need?

Capacity Levels in Service
Mean
arrival
rate, 
=100%
Zone of non-service
<
=70%
100
Zone of service
50
100
150
Mean service rate, 
Adding Capacity
Expensive to add capacity
 A few large expansions are cheaper (per
unit) than many small additions
 Large expansions allow of “clean sheet of
paper” thinking, re-design of processes

 Carry
unused overhead for a long time
 May never be needed
Reengineering
“Business Process Reengineering”
(Hammer and Champy)
 Companies grow over time, adding plants,
lines, facilities, etc.
 Growth may not end in optimal form
 Re-design processes from ground up

Capacity Planning





How much capacity should we add?
Conservative
Optimistic
Forecast possible demand scenarios
(Chapter 11)
Determine capacity needed for likely levels
Determine “capacity cushion” desired
Toyota Capacity
1997: Cars and
vans?
That’s crazy talk
First time in North
America
292,000 Camrys
89,000 Siennas
89,000 Avalons
Capacity Sources

In addition to expanding facilities:
 Two
or three shifts
 Outsourcing non-core activities
 Training or acquisition of faster equipment
Decision Trees
Consider different possible decisions, and
different possible outcomes
 Compute expected profits of each decision
 Choose decision with highest expected
profits, work your way back up the tree.

Summary
Having enough capacity is crucial
 Measured productivity (single and multifactor)
 Increasing productivity key to economic
growth and profits
 Computed number of machines and
employees needed
 Making employees more productive is
often cheaper than adding machines
