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Strategic Capacity Planning
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Capacity can be defined as the ability to
hold, receive, store, or accommodate
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Strategic capacity planning is an approach
for determining the overall capacity level of
capital intensive resources, including
facilities, equipment, and overall labor force
size
Chapter 11
Strategic Capacity Management
November 19, 2008
Ref: Capacity at American President's Line: LO3.avi
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Discussion
What are some major capacity considerations
in manufacturing / service?
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Capacity Utilization
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Capacity utilization rate reveals how close a firm is
to its best operating point (i.e. design capacity).
Capacity utilization rate =
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Capacity used
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rate of output actually achieved
Best operating level
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Capacity used
Best operating level
capacity for which the process was designed
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Best Operating Level
Example of Capacity Utilization
`
Average
g
unit cost
of output
During one week of production, a plant produced 83 units of
a product. Its historic highest or best utilization recorded
was 120 units
i per week.
k What
Wh is
i this
hi plant’s
l ’ capacity
i
utilization rate?
Overutilization
Underutilization
Best Operating
Level
•
Answer:
Capacity utilization rate =
Volume
= 83/120
=0.69 or 69%
Example: Engineers design engines and assembly lines to operate
at an ideal or “best operating level” to maximize output and
minimize ware
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Economies & Diseconomies of
Scale
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The Experience Curve
Economies of Scale and the Experience Curve working
Average
unit cost
of output
Capacity used
.
Best operating level
As plants produce more products, they gain experience in the
best production methods and reduce their costs per unit
100-unit
plant
Yesterday
200-unit
plant
300-unit
plant
Cost or
price
per unit
400-unit
plant
Today
Tomorrow
Diseconomies of Scale start working
Total accumulated production of units
Volume
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Capacity Focus
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Capacity Flexibility
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The concept of the focused factory holds that
production facilities work best when they focus
on a fairly
f i l limited
li it d sett off production
d ti objectives
bj ti
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Plants Within Plants (PWP)
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The ability to rapidly increase/decrease production levels,
or to shift production capacity quickly from one
product/service to another.
another
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Flexible plants
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Extend focus concept to operating level
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Flexible processes
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Epitomized by flexible manufacturing systems on the one hand and
simple easily set up equipment on the other
simple,
Flexible workers
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Ref: Hospital Within Hospital: St. Alexius Hospital (DVD)
Ultimate: zero-changeover-time; quickly adapt to change
Ex: Circus in the old tent
Multiple skills and the ability to switch easily from one kind of task to
another
Ref: Louisville Slugger Manufacturing: AB6.avi
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Capacity Planning:
Consideration in adding capacity
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Capacity Planning:
Consideration in adding capacity
Unbalanced stages of production
Units
per
month
`
Stage 1
Stage 2
Stage 3
`
`
6,000
7,000
5,000
Maintaining System Balance: Output of one stage is
the exact input requirements for the next stage
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Balanced stages of production
Units
per
month
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Frequency of Capacity Additions
Stage 1
Stage 2
6,000
6,000
Stage 3
6,000
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Cost of upgrading too frequently
Cost of upgrading too infrequently
External Sources of Capacity
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Determining Capacity Requirements
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Example of Capacity Requirements
1.
Forecast sales within each individual product
line
A manufacturer produces two lines of mustard,
FancyFine and Generic line. Each is sold in small
and family
family-size
size plastic bottles.
2.
Calculate equipment and labor
requirements to meet the forecasts
The following table shows forecast demand for the
next four years.
3.
Project equipment and labor availability over
planning
g horizon
the p
Year:
FancyFine
Small (000s)
Family (000s)
Generic
Small (000s)
Family (000s)
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1
2
3
4
50
35
60
50
80
70
100
90
100
80
110
90
120
100
140
110
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Example of Capacity Requirements (Continued):
Product from a Capacity Viewpoint
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Question: Are we really producing two
different types of mustards from the
standpoint of capacity requirements?
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Answer: No, it’s the same product just packaged
differently.
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Example of Capacity Requirements (Continued) :
Equipment and Labor Requirements
Year:
Small
S
ll (000s)
(000 )
Family (000s)
1
150
115
2
170
140
3
200
170
4
240
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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Question: What are the Year 1 values for capacity, machine,
and labor?
Year:
1
150
115
2
170
140
3
200
170
4
240
200
Small
Mach. Cap.
Family-size
Mach. Cap.
150,000/300,000=50%
300,000
240,000
Labor
Labor
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6
Small (000s)
Family (000s)
Small
Percent capacity used
Machine requirement
Labor requirement
Family-size
Percent capacity used
Machine requirement
17 requirement
Labor
At 1 machine for 100,000, it
takes 1.5 machines for 150,000
50.00%
1 50
1.50
3.00
47.92%
0.96
2.88
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Question: What are the values for columns 2, 3 and 4 in the table below?
Year:
Small
Family-size
Small
Percent capacity used
Machine requirement
q
Labor requirement
Family-size
Percent capacity used
Machine requirement
Labor
18 requirement
At 2 operators for
100,000, it takes 3
operators for 150,000
1
150
115
2
170
140
3
200
170
4
240
200
Mach. Cap.
Mach. Cap.
300,000
240,000
Labor
Labor
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6
Small (000s)
Family (000s)
50.00% 56.67%
1.50 1.70
3.00 3.40
66.67%
2.00
4.00
80.00%
2.40
4.80
47.92% 58.33%
0.96 1.17
2.88 3.50
70.83%
1.42
4.25
83.33%
1.67
5.00
©The McGraw-Hill Companies, Inc., 2004
©The McGraw-Hill Companies, Inc., 2004
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Example of a Decision Tree Problem
A glass factory specializing in crystal is experiencing a
substantial backlog, and the firm's management is
considering three courses of action:
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Example of a Decision Tree Problem
(Continued): The Payoff Table
The management also estimates the profits when choosing
from the three alternatives (A, B, and C) under the differing
probable levels
le els of demand.
demand These profits,
profits in tho
thousands
sands of
dollars are presented in the table below:
A) Arrange for subcontracting
B) Construct new facilities
C) Do nothing (no change)
The correct choice depends largely upon demand,
demand which
may be low, medium, or high. By consensus, management
estimates the respective demand probabilities as 0.1, 0.5,
and 0.4.
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A
B
C
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0.1
Low
10
-120
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0.5
Medium
50
25
40
0.4
High
g
90
200
60
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Example of a Decision Tree Problem (Continued):
Step 1. We start by drawing the three decisions
Example of Decision Tree Problem (Continued):
Step 2. Add our possible states of nature,
probabilities, and payoffs
$90k
$50k
$10k
High demand (0.4)
Medium demand (0.5)
(0 5)
Low demand (0.1)
A
A
B
High demand (0.4)
B
Medium demand (0.5)
Low demand (0.1)
C
$200k
$25k
-$120k
C
$60k
$40k
$20k
High demand (0.4)
Medium demand (0.5)
Low demand (0.1)
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Example of Decision Tree Problem (Continued):
Step 3. Determine the expected value of each decision
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Example of Decision Tree Problem
(Continued): Step 4. Make decision
High demand (0.4)
Medium demand (0.5)
High demand (0.4)
(0 4)
Medium demand (0.5)
$62k
Low demand (0.1)
$90k
$50k
$10k
$62k
A
B
$80.5k
Low demand (0.1)
(0 1)
High demand (0.4)
Medium demand (0.5)
Low demand (0.1)
A
EVA=0.4(90)+0.5(50)+0.1(10)=$62k
$90k
$50k
$10k
$200k
$25k
-$120k
C
High demand (0.4)
$46k
Medium demand (0.5)
Low demand (0.1)
$60k
$40k
$20k
Alternative B generates the greatest expected profit, so
our choice is B or to construct a new facility
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Planning Service Capacity vs.
Manufacturing Capacity
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Capacity Utilization &
Service Quality
Best operating point is near 70% of capacity
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Time: Goods can not be stored for later use and
capacity
p y must be available to pprovide a service when
it is needed
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Location: Service goods must be at the customer
demand point and capacity must be located near the
customer
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Enough to keep servers busy but allows enough time to
serve customers individually and keep enough capacity in
reserve so as not to create too many managerial
headaches
From 70% to 100% of service capacity, what do
you think happens to service quality?
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Volatility of Demand: Much greater than in
manufacturing
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In the critical zone
zone, service quality declines
Above the critical zone, many customers may never be
served
Ref: NAR-Information Central: QAP3.avi
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Question Bowl
The objective of Strategic Capacity Planning is to
provide an approach for determining the
overall
ll capacity
it llevell off which
hi h off the
th following?
f ll i ?
a. Facilities
b. Equipment
c. Labor force size
d. All of the above
e. None of the above
Answer: d. All of the above
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Question Bowl
To improve the Capacity Utilization Rate
we can do which of the following?
a. Reduce
R d
“capacity
“
it used”
d”
b. Increase “capacity used”
c. Increase “best operating level”
d. All of the above
e. None of the above
Answer: b
A
b. IIncrease ““capacity
it used”
d”
(This increases the numerator in the
Capacity Utilization Rate ratio, which is
desirable.)
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Question Bowl
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Question Bowl
When we talk about Capacity Flexibility which
of the following types of flexibility are
i l d d?
included?
a. Plants
b. Processes
c. Workers
d. All of the above
e. None of the above
When adding capacity to existing operations
which of the following are considerations
that should be included in the planning
effort?
a. Maintaining system balance
b. Frequency of additions
c. External sources
d. All of the above
e. None of the above
Answer: d. All of the above
Answer: d. All of the above
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Question Bowl
Which of the following is a term used to
describe the difference between
projected
j t d capacity
it requirements
i
t and
d
the actual capacity requirements?
a. Capacity cushion
b. Capacity utilization
c. Capacity utilization rate
d. All of the above
e. None of the above
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Question Bowl
In determining capacity requirements, we
must do which of the following?
a. Address the demands for individual
product lines
b. Address the demands for individual plants
c. Allocate production throughout the plant
network
d All of the above
d.
e. None of the above
Answer: d. All of the above
Answer: a. Capacity cushion
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Question Bowl
In a Decision Tree problem used to evaluate
capacity alternatives, we need which of
th ffollowing
the
ll i as prerequisite
i it information?
i f
ti ?
a. Expect values of payoffs
b. Payoff values
c. A tree
d. All of the above
Answer: b. Payoff
e. None of the above
values (Expected
values are what is
computed, not
prerequisite to the
analysis.)
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