Strategic Capacity Management
Dr. Ron LembkeOperations Management
Ideal Capacity of a Process
What is the capacity of the system? Should we add any capacity? How should we run the system? Where should we keep inventory?
50/hr 20/hr 10/hr 40/hr
Ideal Capacity of a Process
What is the capacity of the system?
6 min 5 min 4 min 5 min
Productivity
Productivity = Outputs / Inputs Partial: Output/Labor or Output/Capital Multifactor:
Output / (Labor + Capital + Energy ) Total Measure:
Output / Inputs
Automotive Productivity
Book Data:Jaguar: 14 cars/employeeVolvo: 29 cars/employeeMini: 39 cars/employee
Growth of Service Economy
01020304050607080
ServicesIndustryFarming
US Productivity Growth
Improving Productivity
Develop productivity measurements– you can’t improve what you can’t measure
Identify and Improve bottleneck operations first
Establish goals, document and publicize improvements
U.S. Work and Productivity
0
500
1000
1500
2000
2500
US Japan France Germany Norway0%
5%
10%
15%
20%
25%
30%
35%
40%
Hours
Prod Growth
Source: International Labor Organization, 1999
What Would Henry Say? Ford introduced the $5 (per day) wage in 1914 He introduced the 40 hour work week “so people would have more time to buy” It also meant more output: 3*8 > 2*10
“Now we know from our experience in changing from six to five days and back again that we can get at least as great production in five days as we can in six, and we shall probably get a greater, for the pressure will bring better methods.
Crowther, World’s Work, 1926
Forty Hour Week
Ernst Abbe, Karl Zeiss optics
1896: as much done in 9 as in 8.
Marginal Output of Time
As you work more hours, your productivity per hour goes down
Eventually, it goes negative.
Chapman, 1909
“Crunch Mode”
Ea_spouse: 12/04 “Pre-crunch”SO was working 7 * 13: 91 per week!Maybe time off at 6pm Saturday$5k signing bonus, couldn’t quitClass action: April ‘06 $14.9m
Igda.org “Why Crunch Mode Doesn’t Work: 6 Lessons”
Learning Curves
time/unit goes down consistently Down by 10% as output doubles We can use Logarithms to approximate
this If you ever need this, email me, and we
can talk as much as you want
Ex 3.1, p. 50
Paul’s 1 2 3 4 5Bottles 60 100 150 200 250Bags 100 200 300 400 500
Newman’sBottles 75 85 95 97 98Bags 200 400 600 650 680
0
100
200
300
400
500
600
1 2 3 4 5
BottlesBags
Demand for each product,by year.
Example 3.1
Totals 1 2 3 4 5Bottles 135 185 245 297 348Bags 300 600 900 1,050 1,180 bottle machines 150k/yr
Three currently = 150 * 3 = 450k bag machines 250k/yr
Five currently = 250 * 5 = 1,250k
Example 3.1 Bottles 135 185 245 297 348Machines 1 2 2 2 3Mach. usage 0.9 1.23 1.63 1.98 2.32Workers 1.8 2.46 3.27 3.96 4.64(2 workers per machine)
Bags 300 600 900 1,050 1,180Machines 2 3 4 5 5Mach Usage 1.2 2.4 3.6 4.2 4.7Workers 3.6 7.2 10.8 12.6 14.1(3 workers per machine)
Capacity Tradeoffs
Can we make combinations in between?
150,000Two-door cars
120,0004-doorcars
How much do we have?
We can only sustain so much effort. “Best Operating Level”
Output level process designed forLowest cost per unit
Capacity utilization = capacity used best operating level Hard to run > 1.0 for long
Time Horizons
Long-Range: over a year – acquiring, disposing of production resources
Intermediate Range: Monthly or quarterly plans, hiring, firing, layoffs
Short Range – less than a month, daily or weekly scheduling process, overtime, worker scheduling, etc.
Service Differences
Arrival Rate very variable Can’t store the products - yesterday’s
flight? Service times variable Serve me “Right Now!” Rates change quickly Schedule capacity in 10 minute intervals,
not months How much capacity do we need?
Capacity Levels in Service
Zone of non-service<
Zone of service
Critical Zone
Mean service rate,
Mean arrival rate,
=100%
=70%
Adding Capacity
Expensive to add capacity A few large expansions are cheaper (per
unit) than many small additions Large expansions allow of “clean sheet of
paper” thinking, re-design of processesCarry unused overhead for a long timeMay never be needed
Small expansions may “pave the cow path”
Capacity Planning How much capacity should we add? Conservative Optimistic
Forecast possible demand scenarios (Chapter 10)
Determine capacity needed for likely levels Determine “capacity cushion” desired
Reengineering “Business Process Reengineering”
(Hammer and Champy) Companies grow over time, adding plants,
lines, facilities, etc. Growth may not end in optimal form Re-design processes from ground up
Capacity Sources
In addition to expanding facilities:Two or three shiftsOutsourcing non-core activitiesTraining or acquisition of faster equipment
Decision Trees
Consider different possible decisions, and different possible outcomes
Compute expected profits of each decision Choose decision with highest expected
profits, work your way back up the tree.
Decision Trees Example 3.2, p.51
Computer store thinks demand may grow. Expansion costs $87k, new site $210k, and would cost same if
wait a year New site:
55% chance of profits of $195k. 45% chance of $115k profits.
Expand Current 55% chance of $190k profits 45% chance of $100k profits
Wait and see- enlarge store next year if demand grows If high demand, $190k with expanded store If high demand, $170 with current store If weak demand, $105k with current store
Find the expected profits over 5 years, choose best one.
Decision Trees
Decision point Chance events Outcomes Calculate expected value of each chance
event, starting at far right Working our way back toward the
beginning, choosing highest expected outcome at each decision
Decision TreesRevenue - Move Cost
Revenue - Move Cost
Revenue – Expand Cost
Revenue – Expand CostWeak Growth
Weak Growth
Strong Growth
Strong Growth
Move
Expand
Revenue
Rev – Expand Cost
Rev - Expand Cost
0.45
0.55
0.55
0.45
WaitandSee
Weak Growth
Strong Growth0.55
0.45
Expand
Do nothing
Hackers’ComputerStore
Possible 5 year Revenues
New, growth: 195*5 – 210 = 765 New, low: 115*5 – 210 = 365 Expand, growth: 190*5 – 87 = 863 Expand, low: 100*5 – 87 = 413 Wait, strong, expand: 170+190*4-87=843 Wait, strong, do nothing: 170*5 = 850 Wait, low, do nothing: 105*5 = 525
Decision Trees765
365
863
413Weak Growth
Weak Growth
Strong Growth
Strong Growth
Move
Expand
525
843
850
0.45
0.55
0.55
0.45
WaitandSee
Weak Growth
Strong Growth0.55
0.45
Expand
Do nothing
Hackers’ComputerStore
Making the Decision
Starting at the far right, look at the “Wait and See” option. If demand is strong, we would obviously not expand.
$850k is better than $843. Eliminate the “Expand option”
Decision Trees765
365
863
413Weak Growth
Weak Growth
Strong Growth
Strong Growth
Move
Expand
525
843
850
0.45
0.55
0.55
0.45
WaitandSee
Weak Growth
Strong Growth0.55
0.45
Expand
Do nothing
Hackers’ComputerStore
Expected Values
Move:0.55* 765 + 0.45*365 = $585,000
Wait and See: 0.55*850 + 0.45*525 = $703,750
Expand:0.55 * 863 + 0.45 * 413 = $660,500
Highest expected value is to Wait and see, and either way, do nothing!
Decision Trees765
365
863
413Weak Growth
Weak Growth
Strong Growth
Strong Growth
Move
Expand
525
843
850
0.45
0.55
0.55
0.45
WaitandSee
Weak Growth
Strong Growth0.55
0.45
Expand
Do nothing
Hackers’ComputerStore
$585,000
660,500
703,750
Other considerations
Another criteria to use is to pick the one with the highest down side.Under this, do nothing still wins.
We could also consider the expected value of the future cash streams.
PV = $100/(1+r) = $100/(1.16)=$86.27
Present Values – Table D.1 p.496
At 16%, Next year is worth 0.862=(1+rate)^(-years)Year 2: 0.743Year 3: 0.641Year 4: 0.552Year 5: 0.476
195 per year for 5 years: 195 * (3.274)
Decision Tree-NPV428,487
166,544
535,116
240,429Weak Growth
Weak Growth
Strong Growth
Strong Growth
Move
Expand
343,801
529,874
556,630
0.45
0.55
0.55
0.45
WaitandSee
Weak Growth
Strong Growth0.55
0.45
Expand
Do nothing
Hackers’ComputerStore
$310,613
402,507
460,857
Real Options
Assess the value to me of being able to change my mind in the future
Changed problem slightly -Reduced benefit doing nothing, high demand
Decision Trees765
365
863
413
Weak
StrongMove
Expand
525
843
820
0.25
0.75
Wait and See
Expand
Do nothing
Hackers’ComputerStore
Weak
Strong0.25
0.75
Weak
Strong0.25
0.75
$465,000
533,000
604,500
820
525Weak
Strong0.25
0.75Do Nothing
598,750
Real Options
If we didn’t have the wait and see option, we would Do Nothing.
Option to wait and see is worth $5,750
Move
Expand
Wait and See
465,000533,000
604,500Do Nothing 598,750
$5,750
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