Lecture 6: Strategic Capacity Management
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Time range of capacity planning

Strategic capacity planning

Capacity utilization & service quality
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R di
Readings:
Ch
Chapter
t 4
Why do We Need to Plan for Capacity?
If you plan to open a restaurant on campus
campus, you must
decide how many customers it should be able to serve.
•
•
•
•
Kitchen
Tables
Employees
…
Capacity is the amount of output that a system is
capable of achieving over a specific period of time.
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Dr. Shenghao ZHANG
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Long term range
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Capacity can be more generally defined as the ability
to hold, receive, store, or accommodate.
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Strategic capacity planning is to determine the
overall capacity level of capital intensive resources,
including facilities
facilities, equipment
equipment, and overall labor force
size, in a long term range.
– Greater than one year. Productive resources such as
buildings, equipment, or facilities. Involves top management.

2
Intermediate term range
– Monthly or quarterly plans
plans. Hiring
Hiring, layoffs
layoffs, new tools
tools, minor
equipment purchases and subcontracting. Involves middle
g
management.
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Dr. Shenghao ZHANG
Strategic Capacity Planning
Time Range

Operations Management - Note06
Short term range
– Less than on month.
month Over time
time, personnel transfers and
alternative production routings. Involves lower level
g
management.
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Economies & Diseconomies of Scale
The Experience Curve
Economies of Scale and the Experience
p
Curve working
g
As plants produce more products, they
gain experience in the best production
methods and reduce their costs per unit.
Average
unitit costt
of output
Cost or
price
per unit
100-unit
plant
p
200-unit
plant
300-unit
plant
l t
400-unit
plant
Diseconomies of Scale start working
Total accumulated production of units
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Best Operating Level
Volume
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Capacity Planning Factors/Considerations
Average
unit cost
of output
Over-utilization
Under-utilization
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Best Operating
Level
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Experience curve and economies of scale
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System balance

Frequency of capacity additions
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External sources of capacity: subcontracting
and capacity sharing
Volume
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M ki Capacity
Making
C
it Decision
D ii

D t
Determining
i i Capacity
C
it Requirements
R i
t
Please read Note07 – Decision Analysis
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
Forecast sales within each individual product
line.

Calculate
C
l l t equipment
i
t and
d llabor
b requirements
i
t tto
meet the forecasts.
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Capacity Flexibility
C
Capacity
i Cushion
C hi

Fl ibl plants
Flexible
l t
A capacity cushion is the difference between the
capacity and the expected demand.

Flexible processes
Can the capacity cushion be negative?

Flexible workers
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11
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C
Capacity
it Utilization
Utili ti & Service
S i Quality
Q lit
Pl i Service
Planning
S i Capacity
C
i

Time dependent

Location dependent

M
More
volatile
l til d
demand
d

Utili ti iimpacts
Utilization
t service
i quality
lit di
directly
tl
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
Rule of thumb: best operating point is near 70%
of capacity.
capacity

From 70% to 100% of service capacity,
p
y, what do
you think happens to service quality?
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