Chapter 11
Strategic Capacity Management







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
Slides used in class may be different from slides in student pack
1
Strategic Capacity Planning
Defined

Capacity:

Strategic capacity planning is an approach
for determining the
Slides used in class may be different from slides in student pack
2
Capacity Utilization
Capacity utilizatio n rate 


Where
Capacity used
–

rate of output actually achieved
Best operating level
–
capacity for which the process was designed
Slides used in class may be different from slides in student pack
3
Best Operating Level
Average
unit cost
of output
Underutilization
Overutilization
Best Operating
Level
Volume
Slides used in class may be different from slides in student pack
4
Example of Capacity Utilization

During one week of production, a plant
produced 83 units of a product. Its design
capacity (best operating level) is 120 units
per week. What is this plant’s capacity
utilization rate?

Answer:
Capacity utilization rate =
Capacity used
Design Capacity
=
=
Slides used in class may be different from slides in student pack
5
Economies & Diseconomies of Scale
Economies of Scale and the Experience Curve working
Average
unit cost
of output
100-unit
plant
200-unit
plant
300-unit
plant
400-unit
plant
Diseconomies of Scale start working
Volume
Slides used in class may be different from slides in student pack
6
The Experience Curve
As plants produce more products, they
gain experience in the best production
methods and reduce their costs per unit.
Cost or
price
per unit
Total accumulated production of units
Slides used in class may be different from slides in student pack
7
Capacity Focus

The concept of the focused factory holds
that production facilities work best

Plants Within Plants (PWP) (from Skinner)
–
Extend focus concept to operating level
Slides used in class may be different from slides in student pack
8
Capacity Flexibility

Flexible plants -

Flexible processes -

Flexible workers -
Slides used in class may be different from slides in student pack
9
Capacity Planning: Balance
Units
per
month
Stage 1
Stage 2
6,000
7,000
Stage 3
5,000
Maintaining System Balance: Output of one stage is
the exact input requirements for the next stage
Units
per
month
Stage 1
Stage 2
6,000
6,000
Slides used in class may be different from slides in student pack
Stage 3
6,000
10
Capacity Planning

Frequency of Capacity Additions -

External Sources of Capacity -
Slides used in class may be different from slides in student pack
11
Determining Capacity Requirements
Typical steps:

Forecast sales within each individual product
line.

Calculate equipment and labor requirements
to meet the forecasts.

Project equipment and labor availability over
the planning horizon.
Slides used in class may be different from slides in student pack
12
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.
Year:
FancyFine
Small (000s)
Family (000s)
Generic
Small (000s)
Family (000s)
1
2
3
4
50
35
60
50
80
70
100
90
100
80
110
90
120
100
140
110
Slides used in class may be different from slides in student pack
13
Example of Capacity Requirements:
The Product from a Capacity Viewpoint


Question: Are we really producing two
different types of mustards from the
standpoint of capacity requirements?
Answer:
Slides used in class may be different from slides in student pack
14
Example of Capacity Requirements:
Equipment and Labor Requirements
Year:
Small (000s)
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.
Slides used in class may be different from slides in student pack
15
16
Question: What are the Year 1 values for capacity, machine, and labor?
Year:
1
2
3
4
Small (000s)
150
170
200
240
Family (000s)
115
140
170
200
Small
Family-size
Mach. Cap.
Mach. Cap.
300,000
240,000
Labor
Labor
6
6
Small
Percent capacity used
Machine requirement
Labor requirement
Family-size
Percent capacity used
Machine requirement
Labor requirement
Slides used in class may be different from slides in student pack
16
Capacity Planning Process
Forecast
Demand
Develop
Alternative
Plans
Quantitative
Factors
(e.g., Cost)
Compute
Rated
Capacity
Evaluate
Capacity
Plans
Qualitative
Factors
(e.g., Skills)
Compute
Needed
Capacity
Select Best
Capacity
Plan
Slides used in class may be different from slides in student pack
Implement
Best Plan
17
Managing
Existing Capacity
Demand Management
Capacity Management

Vary prices


Vary promotion

Change lead times
(e.g., backorders)



Offer complementary
products
Slides used in class may be different from slides in student pack

Vary staffing
Change equipment
& processes
Change methods
Redesign the product
for faster processing
18
Planning Service vs. Manufacturing Capacity

Time:

Location:

Volatility of Demand:
Slides used in class may be different from slides in student pack
19
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?
-
Slides used in class may be different from slides in student pack
20