Session 10 [compatibility mode]
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Session 10Session 10
Strategic Capacity Management
OBJECTIVESOBJECTIVES
• Strategic Capacity Planning Defined• Capacity Utilization & Best Operating Level• Economies & Diseconomies of Scale• The Experience Curve• Capacity Focus, Flexibility & Planning
2Strategic Capacity Pl iPlanning
CapacityCapacity– The maximum level of output
– The amount of resource inputs pavailable relative to output requirements at a particular timeq p
Capacity is the upper limit or ceiling on– Capacity is the upper limit or ceiling on the load that an operating unit can handlehandle.
3
Examples of Capacity MeasuresType of Measures of Capacity
Organi ation Inp ts O tp tsOrganization Inputs OutputsManufacturer Machine hours Number of units
per shift per shiftHospital Number of beds Number ofHospital Number of beds Number of
patients treatedAirline Number of planes Number ofAirline Number of planes
or seatsNumber ofseat-miles flown
Restaurant Number of seats Customers/timeRetailer Area of store Sales dollarsTheater Number of seats Customers/time
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Measurements of CapacityMeasurements of Capacityyy
Output Rate CapacityOutput Rate Capacity– For a facility having a single product or a few
homogeneous products the unit of measurehomogeneous products, the unit of measure is straightforward (barrels of beer per month)F f ilit h i di i f d t– For a facility having a diverse mix of products, an aggregate unit of capacity must be
t bli h d i it f t testablished using a common unit of output (sales dollars per week)
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Measurements of CapacityMeasurements of Capacityyy
Input Rate CapacityInput Rate Capacity – Commonly used for service operations
where output measures are particularly difficult
Hospitals use available beds per monthAirlines use available seat-miles per monthAirlines use available seat-miles per monthMovie theatres use available seats per monthmonth
6TerminologyDesign capacity– The maximum output rate or service capacity an p p y
operation, process or facility is designed for.
Effective capacityDesign Capacity minus allowances such as– Design Capacity minus allowances such as personal time, maintenance or scrap.
Actual output– rate of output actually achieved--cannot exceed
effective capacity.
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Capacity Utilizationp y
Capacity usedrate of output actually achieved– rate of output actually achieved
Best operating level– capacity for which the process was designed
(effective or maximum capacity)( p y)
Utilization = _______________Capacity Used
Best Operating LevelBest Operating Level
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Utilization--Examplep
Best operating level = 120 units/week
Actual output = 83 units/week
692units/wk83=usedCapacity nUtilizatio ==Utilization = ? .692
units/wk120leveloperatingBest nUtilizatio
9
Two Measures of System yEffectiveness
1. Efficiency == Actual Output-----------------------Effective capacity
2 Utilization == Actual Output2. Utilization == Actual Output-----------------------Design capacity
10Factors – To determine Eff ti C itEffective Capacity
A Facilities DesignA. Facilities – DesignLocationlayoutEEnv.
B. Product/Services - DesigngProd or Service Mix
C P Q tit bilitiC. Process - Quantity capabilitiesQuality CapabilitiesQ y p
11Factors – To determine Eff ti C itEffective Capacity
D Human factor – Job ContentD. Human factor – Job ContentJob DesignTraining & expMotivation CompensationMotivation, CompensationAbsenteeism & labour turn over rates
E Policy – running for O/T IInd or IIIrd shiftE. Policy running for O/T, IInd or IIIrd shift
12Factors – To determine Eff ti C itEffective Capacity
F. Operational – Schedulingp gMaterial Magmt.QAQAMaint. PoliciesEquipment Breakdowns
G. External factors –Pdt stdsSafety regulationsSafety regulationsUnionsPollution control stds
13
Capacity Planning p y g
The basic questions in capacity planning are:– What type of capacity is needed?
How much is needed?– How much is needed?– When is it needed?– How does productivity relate to capacity?
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Key Decisions of Cap. Plnng1. The amount of Cap needed –
consideration of exp demand & cap costsconsideration of exp demand & cap costs.2. The timing of changes --Availability of capital, lead time needed to
make changes & exp demanda e c a ges & e p de a d3. Need to maintain bal throughout the
s stem proportionate changes in allsystem – proportionate changes in all areas of the system.
4. Extent of flexibility of facilities and the workforce – Uncertainty about theworkforce Uncertainty about the demand & variety of work requirement.
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M i D dM i D dManaging DemandManaging DemandDemand exceeds capacityDemand exceeds capacity
Curtail demand by raising prices schedulingCurtail demand by raising prices schedulingCurtail demand by raising prices, scheduling Curtail demand by raising prices, scheduling longer lead timelonger lead timeLong term solution is to increase capacityLong term solution is to increase capacityg p yg p y
Capacity exceeds demandCapacity exceeds demandSti l t k tSti l t k tStimulate marketStimulate marketProduct changesProduct changes
Adjusting to seasonal demandsAdjusting to seasonal demandsProduce products with complementary demand Produce products with complementary demand p p yp p ypatternspatterns
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C l t D d C l t D d Complementary Demand Complementary Demand PatternsPatternsPatternsPatterns
4,000 4,000 –
3,000 3,000 –
2,0002,000 –s in
units
s in
units
2,000 2,000
1,000 1,000 –
Sale
sSa
les
Jet ski Jet ski engine engine
ll
J F M A M J J A S O N D J F M A M J J A S O N D JJ F M A M J J A S O N D J F M A M J J A S O N D J
salessales
Time (months)Time (months)Figure S7.3Figure S7.3
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C l t D d C l t D d Complementary Demand Complementary Demand PatternsPatternsPatternsPatterns
4,000 4,000 –
S bilS bil3,000 3,000 –
2,0002,000 –s in
units
s in
units Snowmobile Snowmobile
motor salesmotor sales
2,000 2,000
1,000 1,000 –
Sale
sSa
les
Jet ski Jet ski engine engine
ll
J F M A M J J A S O N D J F M A M J J A S O N D JJ F M A M J J A S O N D J F M A M J J A S O N D J
salessales
Time (months)Time (months)Figure S7.3Figure S7.3
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C l t D d C l t D d Complementary Demand Complementary Demand PatternsPatternsPatternsPatterns
Combining both Combining both demand patterns demand patterns
4,000 4,000 –
ppreduces the reduces the variationvariation
S bilS bil3,000 3,000 –
2,0002,000 –s in
units
s in
units Snowmobile Snowmobile
motor salesmotor sales
2,000 2,000
1,000 1,000 –
Sale
sSa
les
Jet ski Jet ski engine engine
ll
J F M A M J J A S O N D J F M A M J J A S O N D JJ F M A M J J A S O N D J F M A M J J A S O N D J
salessales
Time (months)Time (months)Figure S7.3Figure S7.3
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Forecasting Cap requirementsCap planng decision involves two main
considerationsconsiderations1. Long term – Overall level of capacity2. Short term – variations in cap.
RequirementsRequirementsCreated by – Seasonal – can be easily found
b i d f i h fl dout by using std forecasting tech, reflected in monthly, weekly and daily basis.y y y
Randomi l fl t ti iirregular fluctuations in
demand
20Forecasting Cap requirements
Link Between Marketing & Operations, determination of capacity requirements isdetermination of capacity requirements is based on the inf supplied from mktg
1. Through customer contacts2 Demographic analyses2. Demographic analyses3. ForecastsThen, Operations calculate the exact cap
requirementsrequirements.
21
Approaches to Capacity Approaches to Capacity pp p ypp p yExpansionExpansion
(a)(a) Leading demand with incremental Leading demand with incremental expansionexpansion
New New capacitycapacity
Expected Expected demanddemandm
and
man
d
demanddemand
Dem
Dem
11 22 33Time (years)Time (years)
11 22 33
22
Approaches to Capacity Approaches to Capacity pp p ypp p yExpansionExpansion
(b)(b) Leading demand with oneLeading demand with one--step expansionstep expansion
New New capacitycapacityp yp y
Expected Expected demanddemand
man
dm
and
Dem
Dem
11 22 33Time (years)Time (years)
11 22 33
23
Approaches to Capacity Approaches to Capacity pp p ypp p yExpansionExpansion
(c)(c) Capacity lags demand with incremental Capacity lags demand with incremental expansionexpansion
New New capacitycapacity
Expected Expected demanddemand
man
dm
and
Dem
Dem
11 22 33Time (years)Time (years)
11 22 33
24
Approaches to Capacity Approaches to Capacity pp p ypp p yExpansionExpansion
(d)(d) Attempts to have an average capacity with Attempts to have an average capacity with incremental expansionincremental expansion
New New capacitycapacity
Expected Expected demanddemand
man
dm
and
Dem
Dem
11 22 33Time (years)Time (years)
11 22 33
25
Economies & Diseconomies of Scale
f S CEconomies of Scale and the Experience Curve working
100-unitl tAverage plant
200-unitplant 300-unit 400-unit
Averageunit costof output plant 300 unit
plant plant
Diseconomies of Scale start working
Volume
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Achieving Superior Efficiencyg p yEconomies of scaleUnit cost reductions associated with a large scale of outputUnit cost reductions associated with a large scale of output
• Ability to spread fixed costs over a large production volume
• Ability of companies producing in large volumes to achieve a greater division of labor and specializationS i li ti h f bl i t d ti it b• Specialization has favorable impact on productivity by enabling employees to become very skilled at performing a particular taskp g p
Diseconomies of scaleUnit cost increases associated with a large scale of output
• Increased bureaucracy associated with large-scale y genterprises
• Resulting managerial inefficiencies
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Economies and Diseconomies of Scale
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Economies of ScaleEconomies of ScaleDeclining costs result from:– Fixed costs being spread over more and
more units– Longer production runs result in a
smaller proportion of labor beingsmaller proportion of labor being allocated to setups
– Proportionally less material scrapand other economies– … and other economies
29
Diseconomies of ScaleDiseconomies of ScaleIncreasing costs result from increased
ti f k d t i lcongestion of workers and material, which contributes to:which contributes to:– Increasing inefficiency– Difficulty in scheduling– Damaged goodsDamaged goods– Reduced morale– Increased use of overtime– and other diseconomies– … and other diseconomies
30
The As plants produce more products, they
Experience Curve
p p p , ygain experience in the best production methods and reduce their costs per unitCurve
Cost orYesterday
Todaypriceper unit
yTomorrow
Total accumulated production of unitsTotal accumulated production of units
31
When the Economies of scale meet the experience curve
There must be two conditions to be met for thisThere must be two conditions to be met for this strategy to succeed:
1 The product must fit customer’s need;1. The product must fit customer s need;2. The demand must be sufficiently large to
t th lsupport the volume.
32
Economies of ScopeEconomies of Scope
The ability to produce many productThe ability to produce many product models in one flexible facility more cheaply than in separate facilitiesthan in separate facilitiesHighly flexible and programmable automation allows quick, inexpensive product-to-product changesp p gEconomies are created by spreading the automation cost over many productsautomation cost over many products
33
Sharing Resources Sharing resources and capabilities across two or
Sharing Resources S a g esou ces a d capab es ac oss o omore business units in different industries to realize economies of scope.
– Economies of scope arise when business units are able to effectively able to pool, share, andare able to effectively able to pool, share, and utilize expensive resources or capabilities:
Economies of scope are possible only when there are significant commonalities between onethere are significant commonalities between one
or more value-chain functions.
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Sharing Resources gat Procter & Gamble
35
Capacity FocusTh t f th f d f tThe concept of the focused factoryholds that production facilities workholds that production facilities work best Plants Within Plants (PWP)
Each of which may have separate suborgz– Each of which may have separate suborgz, equip, & process & workforce mgmt policies for diff pdts.Extend focus concept to operating level– Extend focus concept to operating level
36
Capacity Flexibilityp y y• Flexible plants – zero changeover time Using moveable equip, easily accessible
& reroutable utilities.• Flexible processes – flexible mfg
systems on one side & easily set upsystems on one side & easily set up equip on the other side(as defined in
i f )economies of scope)• Flexible workers - having multiple skills.g p
37
Considerations in adding capg p1. Maintaining System Balance
--Cap. Addition at bottleneck stagef b ff i I f t f b ttl k--use of buffer inv. In front of bottlenecks
--duplicating the facilities of the deptt--duplicating the facilities of the deptt.1. Frequency of Cap additions – depends y
on the direct costs involved.E t l f C it2. External sources of Capacity –Outsourcing or sharing capacityg g p y
38
Capacity Planning: Balance
UnitsUnbalanced stages of production
Stage 1 Stage 2 Stage 3Unitsper
monthmonth6,000 7,000 5,000
Maintaining System Balance: Output of one stage is
Balanced stages of production
g y p gthe exact input requirements for the next stage
Stage 1 Stage 2 Stage 3Unitsper
Balanced stages of production
g g gpermonth
6,000 6,000 6,0006,000 6,000 6,000
39
Outsourcing Service Outsourcing Service FunctionsFunctions
B ildi i t– Building maintenance– Data processing– Delivery– Payrolly– Bookkeeping– Customer serviceCustomer service– Mailroom– Benefits administration– Benefits administration– … and more
40
Break Even AnalysisyBE Analysis is a critical tool for determiningBE Analysis is a critical tool for determining
the capacity, a facility must have to achieve fit bilitprofitability.
Decisions can be made about the type and cap of equipment needed and a bettercap of equipment needed and a better judgment about success of the enterprise
b dcan be made.
41
B kB k E E lE E lBreakBreak--Even ExampleEven Example
Multiproduct CaseMultiproduct Case
BEPBEP$$ == FF
∑∑ 11 (W(W ))VVii∑∑ 1 1 -- x (Wx (Wii))
ii
PPii
wherewhere VV = variable cost per unit= variable cost per unitPP = price per unit= price per unitFF fi d tfi d tFF = fixed costs= fixed costs
WW = percent each product is of total dollar sales= percent each product is of total dollar salesii = each product= each product
42
M lti d t E lM lti d t E lMultiproduct ExampleMultiproduct Example
Annual ForecastedAnnual Forecastedii l il i
Fixed costs = $3,500 per monthFixed costs = $3,500 per month
ItemItem PricePrice CostCost Sales UnitsSales UnitsSandwichSandwich $2.95$2.95 $1.25$1.25 7,0007,000Soft drinkSoft drink .80.80 .30.30 7,0007,000,,Baked potatoBaked potato 1.551.55 .47.47 5,0005,000TeaTea .75.75 .25.25 5,0005,000Salad barSalad bar 2 852 85 1 001 00 3 0003 000Salad barSalad bar 2.852.85 1.001.00 3,0003,000
43
M lti d t E lM lti d t E lMultiproduct ExampleMultiproduct Example
Annual ForecastedAnnual Forecastedii l il i
Fixed costs = $3,500 per monthFixed costs = $3,500 per month
ItemItem PricePrice CostCost Sales UnitsSales UnitsSandwichSandwich $2.95$2.95 $1.25$1.25 7,0007,000Soft drinkSoft drink .80.80 .30.30 7,0007,000,,Baked potatoBaked potato 1.551.55 .47.47 5,0005,000TeaTea .75.75 .25.25 5,0005,000Salad barSalad bar 2 852 85 1 001 00 3 0003 000
Annual WeightedSelling Variable Forecasted % of Contribution
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)Salad barSalad bar 2.852.85 1.001.00 3,0003,000
Sandwich $2.95 $1.25 .42 .58 $20,650 .446 .259Soft drink .80 .30 .38 .62 5,600 .121 .075Baked 1.55 .47 .30 .70 7,750 .167 .117
potatoTea .75 .25 .33 .67 3,750 .081 .054Salad bar 2.85 1.00 .35 .65 8,550 .185 .120
$46,300 1.000 .625
44
M lti d t E lM lti d t E lFMultiproduct ExampleMultiproduct ExampleBEP$ =F
∑ 1 - x (Wi)Vi
P
Annual ForecastedAnnual Forecastedii l il i
Fixed costs = $3,500 per monthFixed costs = $3,500 per month
∑ Pi
= = $67 200$3,500 x 1262ItemItem PricePrice CostCost Sales UnitsSales Units
SandwichSandwich $2.95$2.95 $1.25$1.25 7,0007,000Soft drinkSoft drink .80.80 .30.30 7,0007,000
$67,200.625
Daily = = $215 38$67,200,,
Baked potatoBaked potato 1.551.55 .47.47 5,0005,000TeaTea .75.75 .25.25 5,0005,000Salad barSalad bar 2 852 85 1 001 00 3 0003 000
Annual WeightedSelling Variable Forecasted % of Contribution
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)
sales = = $215.38312 days
446 x $215 38Salad barSalad bar 2.852.85 1.001.00 3,0003,000Sandwich $2.95 $1.25 .42 .58 $20,650 .446 .259Soft drink .80 .30 .38 .62 5,600 .121 .075Baked 1.55 .47 .30 .70 7,750 .167 .117
.446 x $215.38$2.95 = 32.6 ≈ 33
sandwichesper day
potatoTea .75 .25 .33 .67 3,750 .081 .054Salad bar 2.85 1.00 .35 .65 8,550 .185 .120
$46,300 1.000 .625
45
Question BowlThe objective of Strategic Capacity
Planning is to provide anPlanning is to provide an approach for determining the overall capacity level of which ofoverall capacity level of which of the following?F ili ia. Facilities
b. Equipmentc. Labor force sized. All of the aboved. All of the abovee. None of the above
46
Question BowlTo improve the Capacity Utilization Rate we
can do which of the following?can do which of the following?a. Reduce “capacity used”
Increase “capacity used”b. Increase “capacity used”c. Increase “best operating level”d All of the aboved. All of the abovee. None of the above
47
Question BowlWhen we talk about Capacity
Flexibility which of the followingFlexibility which of the following types of flexibility are included?Pl ta. Plants
b. Processesc. Workersd. All of the abovee. None of the above
48
Question Bowl
When adding capacity to existing operations which of the following are considerations that should be included in the planning effort?
a Maintaining system balancea. Maintaining system balanceb. Frequency of additions
E t lc. External sources d. All of the abovee. None of the above
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End of Session 10End of Session 10