Strategic CapacityManagement

Capacity

• The throughput, or the number of units a facility can hold, receive, store, or produce in a period of time

• Determines fixed costs

• Determines if demand will be satisfied

• Three time horizons

Modify capacity Use capacity

Planning Over a Time Horizon

Intermediate-range planning

Subcontract Add personnelAdd equipment Build or use inventory Add shifts

Short-range planning

Schedule jobsSchedule personnel Allocate machinery*

Long-range planning

Add facilitiesAdd long lead time equipment *

* Limited options exist

Strategic Capacity Management Definition

• Aligning the production capacity with the forecasted demand over a long time horizon

• Determining the investment strategy into fixed capacities

• Detail level: years, product groups

Strategic Capacity Decisions

• What type of fixed capacity?– Direct human labour– Semi-automated– Automated

• Capacity Expansion: When to increase fixed capacity and by how much?

• What is appropriate fixed capacity location?

Managing Demand

� Demand exceeds capacity� Curtail demand by raising prices,

scheduling longer lead time

� Long term solution is to increase capacity

� Capacity exceeds demand� Stimulate market

� Product changes

� Adjusting to seasonal demands� Produce products with complimentary

demand patterns

Economies and Diseconomies of Scale

Economies of scale

Diseconomies of scale

25 - Room Roadside Motel 50 - Room

Roadside Motel

75 - Room Roadside Motel

Number of Rooms25 50 75

Ave

rag

e u

nit

co

st(d

olla

rs p

er r

oo

m p

er n

igh

t)

Capacity Considerations

� Forecast demand accurately

� Understanding the technology and capacity increments

� Find the optimal operating level (volume)

� Build for change

Approaches to Capacity Expansion

(a) Leading demand with incremental expansion

Dem

and

Expected demand

New capacity

(b) Leading demand with one-step expansion

Dem

and

New capacity

Expected demand

(d) Attempts to have an average capacity with incremental expansion

Dem

and

New capacity Expected

demand

(c) Capacity lags demand with incremental expansion

Dem

and

New capacity

Expected demand

Approaches to Capacity Expansion

(a) Leading demand with incremental expansion

Dem

and

Expected demand

New capacity

(b) Leading demand with one-step expansion

Dem

and

New capacity

Expected demand

(d) Attempts to have an average capacity with incremental expansion

Dem

and

New capacity Expected

demand

(c) Capacity lags demand with incremental expansion

Dem

and

New capacity

Expected demand

Approaches to Capacity ExpansionWhen to expand?

Product-Process Matrix Capacity lead or lag?

Strategy and Issues During a Product’s Life

Capacity Location

• Labour• RM• Market• Transport• Infrastructure• Taxes• Political risks• Environment• ………..