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1Session 10Strategic Capacity Management OBJECTIVES• Strategic Capacity Planning Defined• Capacity Utilization & Best Operating Level• Economies & Diseconomies of Scale• The Experience Curve• Capacity Focus, Flexibility & Planning
Strategic Capacity 2 Planning Pl iCapacity– The maximum level of output– The amount of resource inputsp available relative to output requirements at a p q particular time– Capacity is the upper limit or ceiling on the load that an operating unit can handle. handle
3 Examples of Capacity Measures Type of Measures of Capacity Organization Organi ation Inputs Inp ts Outputs O tp tsManufacturer Machine hours Number of units per shift per shiftHospital Number of beds Number of patients treatedAirline Number of planes Number of or seats seat-miles flownRestaurant Number of seats Customers/timeRetailer Area of store Sales dollarsTheater Number of seats Customers/time
4Measurements of Capacity yOutput Rate Capacity – For a facility having a single product or a few homogeneous products the unit of measure products, is straightforward (barrels of beer per month) – F a facility having a di For f ilit h i diverse mix of products, i f d t an aggregate unit of capacity must be established using a common unit of output t bli h d i it f t t (sales dollars per week)
5Measurements of Capacity yInput Rate Capacity – Commonly used for service operations where output measures are particularly difficult Hospitals use available beds per month Airlines use available seat-miles per month Movie theatres use available seats per month
Terminology 6Design capacity– The maximum output rate or service capacity an p p y operation, process or facility is designed for.Effective capacity– Design Capacity minus allowances such as personal time, maintenance or scrap.Actual output– rate of output actually achieved--cannot exceed effective capacity.
7 Capacity Utilization p yCapacity used– rate of output actually achievedBest operating level– capacity for which the process was designed ( (effective or maximum capacity) p y) Capacity Used Utilization = _______________ Best Operating Level
8 Utilization--Example p Best operating level = 120 units/week Actual output = 83 units/week Capacity used 83 units/wkUtilization = = = .692 692 Utilization = operating level 120 units/wk Best ?
9 Two Measures of System y Effectiveness1. Efficiency == Actual Output ----------------------- Effective capacity2.2 Utilization == Actual Output ----------------------- Design capacity
Factors – To determine 10 Effective C Eff ti Capacity itA.A Facilities – Design Location layout Env.B. Product/Services - Design g Prod or Service MixC. Process - QC P Quantity capabilities tit biliti Q Quality Capabilities y p
Factors – To determine 11 Effective C Eff ti Capacity itD.D Human factor – Job Content Job Design Training & exp Motivation, Motivation Compensation Absenteeism & labour turn over ratesE.E Policy – running for O/T, IInd or IIIrd shift O/T
Factors – To determine 12 Effective C Eff ti Capacity itF. Operational – Scheduling p g Material Magmt. QA Maint. Policies Equipment BreakdownsG. External factors –Pdt stds Safety regulations Unions Pollution control stds
13 Capacity Planning p y gThe basic questions in capacity planningare:– What type of capacity is needed?– How much is needed?– When is it needed?– How does productivity relate to capacity?
14 Key Decisions of Cap. Plnng1. The amount of Cap needed – consideration of exp demand & cap costs costs.2. The timing of changes --Availability of capital, lead time needed to make c a ges & e p de a d a e changes exp demand3. Need to maintain bal throughout the system s stem – proportionate changes in all areas of the system.4. Extent of flexibility of facilities and the workforce – Uncertainty about the demand & variety of work requirement.
15 Managing Demand M i D dDemand exceeds capacity Curtail demand by raising prices, scheduling prices longer lead time Long term solution is to increase capacity g p yCapacity exceeds demand Stimulate market Sti l t k t Product changesAdjusting to seasonal demands Produce products with complementary demand p p y patterns
16 Complementary Demand C l t D d Patterns 4,000 –Sales in units 3,000 – 2,000 – s 1,000 – Jet ski engine sales l JFMAMJJASONDJFMAMJJASONDJ Time (months) Figure S7.3
17 Complementary Demand C l t D d Patterns 4,000 – Snowmobile S bilSales in units 3,000 – motor sales 2,000 – s 1,000 – Jet ski engine sales l JFMAMJJASONDJFMAMJJASONDJ Time (months) Figure S7.3
18 Complementary Demand C l t D d Patterns Combining both demand patterns p reduces the variation 4,000 – Snowmobile S bilSales in units 3,000 – motor sales 2,000 – s 1,000 – Jet ski engine sales l JFMAMJJASONDJFMAMJJASONDJ Time (months) Figure S7.3
19 Forecasting Cap requirementsCap planng decision involves two main considerations1. Long term – Overall level of capacity2. Short term – variations in cap. RequirementsCreated by – Seasonal – can be easily found out b using std f by i d forecasting tech, reflected i h fl d in monthly, weekly and daily basis. y y y Random irregular fl t ti i l fluctuations in i demand
Forecasting Cap requirements 20Link Between Marketing & Operations, determination of capacity requirements is based on the inf supplied from mktg1. Through customer contacts2 Demographic analyses2.3. ForecastsThen, Operations calculate the exact cap requirements. requirements
21Approaches to Capacity pp p y Expansion (a) Leading demand with incremental expansion New capacity mand Expected demand Dem 1 2 3 Time (years)
22Approaches to Capacity pp p y Expansion (b) Leading demand with one-step expansion one- New capacity p y Expected mand demand Dem 1 2 3 Time (years)
23Approaches to Capacity pp p y Expansion (c) Capacity lags demand with incremental expansion New capacity Expected mand demand Dem 1 2 3 Time (years)
24Approaches to Capacity pp p y Expansion (d) Attempts to have an average capacity with incremental expansion New capacity Expected mand demand Dem 1 2 3 Time (years)
25 Economies & Diseconomies of Scale Economies of Scale and the Experience Curve working fS C 100-unitAverage plant l tunit cost 200-unitof output plant 400-unit 300 unit 300-unit plant plant Diseconomies of Scale start working Volume
26 Achieving Superior Efficiency g p yEconomies of scaleUnit 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 specialization • S Specialization h f i li ti has favorable i bl impact on productivity b t d ti it by enabling employees to become very skilled at p performing a p g particular taskDiseconomies of scaleUnit cost increases associated with a large scale of output • Increased bureaucracy associated with large-scale y g enterprises • Resulting managerial inefficiencies
28 Economies of ScaleDeclining costs result from:– Fixed costs being spread over more and more units– Longer production runs result in a smaller proportion of labor being allocated to setups– Proportionally less material scrap– … and other economies
29Diseconomies of ScaleIncreasing costs result from increasedcongestion of workers and material, ti f k d t i lwhich contributes to:– Increasing inefficiency– Difficulty in scheduling– Damaged goods– Reduced morale– Increased use of overtime– … and other diseconomies
30 The As plants p p produce more pproducts, they , yExperience gain experience in the best production Curve methods and reduce their costs per unit YesterdayCost or Today yprice Tomorrowper unit Total accumulated production of units
31 When the Economies of scale meet the experience curveThere must be two conditions to be met for this strategy to succeed:1.1 The product must fit customer’s need; customer s2. The demand must be sufficiently large to support the volume. t th l
32 Economies of ScopeThe ability to produce many productmodels in one flexible facility more cheaplythan in separate facilitiesHighly flexible and programmableautomation allows quick, inexpensivepproduct-to-product changes p gEconomies are created by spreading theautomation cost over many products
33 Sharing ResourcesS a g esou ces and capabilities across o orSharing resources a d capab es ac oss two omore business units in different industries to realizeeconomies of scope.– Economies of scope arise when business units are able to effectively able to pool, share, and utilize expensive resources or capabilities: Economies of scope are possible only whenthere are significant commonalities between one or more value-chain functions.
Capacity Focus 35TheTh concept of th f t f the focused factory df tholds that production facilities workbestPlants Within Plants (PWP)– Each of which may have separate suborgz suborgz, equip, & process & workforce mgmt policies for diff pdts.– Extend focus concept to operating level
36 Capacity Flexibility p y y• Flexible plants – zero changeover timeUsing moveable equip, easily accessible & reroutable utilities.• Flexible processes – flexible mfg systems on one side & easily set up equip on the other side(as defined in economies of scope) i f )• Flexible workers - having multiple skills. g p
37 Considerations in adding cap g p1. Maintaining System Balance --Cap. Addition at bottleneck stage --use of buffer inv. In front of bottlenecks f b ff i I f t f b ttl k --duplicating the facilities of the deptt deptt.1. Frequency of Cap additions – depends y on the direct costs involved.2. External sources of Capacity – E t l fC it Outsourcing or sharing capacity g g p y
38 Capacity Planning: Balance Unbalanced stages of productionUnits Stage 1 Stage 2 Stage 3 permonth 6,000 7,000 5,000Maintaining System Balance: Output of one stage is g y p g the exact input requirements for the next stage Balanced stages of production Units Stage 1 g Stage 2 g Stage 3 g per month 6,000 6,000 6,000
Outsourcing Service 39 Functions– B ildi maintenance Building i t– Data processing– Delivery– Payroll y– Bookkeeping– Customer service– Mailroom– Benefits administration– … and more
40 Break Even Analysis yBE Analysis is a critical tool for determining the capacity, a facility must have to achieve profitability. fit bilitDecisions can be made about the type and cap of equipment needed and a better judgment about success of the enterprise can b made. be d
41 Break-E Break-Even E B k Example lMultiproduct Case F BEP$ = ∑ 1- Vi Pi x (Wi) where V = variable cost per unit P = price per unit F = fi d costs fixed t W = percent each product is of total dollar sales i = each product
42Multiproduct ExampleM lti d tE lFixed costs = $3,500 per month Annual ForecastedItem Price i Cost Sales Units l iSandwich $2.95 $1.25 7,000Soft drink .80 .30 , 7,000Baked potato 1.55 .47 5,000Tea .75 .25 5,000Salad bar 2.85 2 85 1.00 1 00 3,000 3 000
43 Multiproduct Example M lti d tE l Fixed costs = $3,500 per month Annual Forecasted Item Price i Cost Sales Units l i Sandwich $2.95 $1.25 7,000 Soft drink .80 .30 , 7,000 Baked potato 1.55 .47 Annual 5,000 Weighted Tea Selling Variable .75 .25 Forecasted 5,000 Contribution % of Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7) Salad bar 2.85 2 85 1.00 1 00 3,000 3 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 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 Multiproduct =Example M lti d BEP E t l $ F ∑ 1 - P x (W ) V i i i Fixed costs = $3,500 per month $3,500 x 12 Annual Forecasted = = $67 200 $67,200 Item Price i Cost .625 l Units 62 Sales i Sandwich $2.95 $1.25 7,000 Soft drink .80 Daily .30 $67,200 , 7,000 sales = = $215.38 $215 38 Baked potato 1.55 .47 Annual days 312 5,000 Weighted Tea Selling Variable .75 .25 Forecasted 5,000 Contribution % of Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7) Salad bar 2.85 2 85 1.00 x $215 383 000 1 00 .446 $215.383,000 446Sandwich $2.95 $1.25 .42 .58 $20,650 = 32.6 ≈ 33 .446 .259 $2.95 sandwichesSoft drink .80 .30 .38 .62 5,600 .121 .075Baked 1.55 .47 .30 .70 7,750 .167 per day.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
45 Question BowlThe objective of Strategic Capacity Planning is to provide an approach for determining the overall capacity level of which of the following?a. F Facilities ili ib. Equipmentc. Labor force sized. All of the abovee. None of the above
46 Question BowlTo improve the Capacity Utilization Rate we can do which of the following?a. Reduce “capacity used”b. Increase “capacity used”c. Increase “best operating level”d. All of the abovede. None of the above
47 Question BowlWhen we talk about Capacity Flexibility which of the following types of flexibility are included?a. Pl Plants tb. Processesc. Workersd. All of the abovee. None of the above
48 Question BowlWhen adding capacity to existing operations which of the following are considerations that should be included in the planning effort?a Maintaining system balancea.b. Frequency of additionsc. E t External sources ld. All of the abovee. None of the above