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capacity management in operations management
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- 3. • Strategic CapacityPlanning Defined • Capacity Utilization & Best Operating Level • Economies & Diseconomies of Scale • The Experience Curve • Capacity Focus, Flexibility & Planning • Determining Capacity Requirements • Capacity Utilization & Service Quality OBJECTIVES 5-3
- 4. Strategic Capacity Planning •Capacity can be defined as the ability to hold, receive, store, or accommodate • Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size 5-4
- 5. Capacity Utilization • Where •Capacity used – rate of output actually achieved • Best operating level – capacity for which the process was designed level operating Best used Capacity rate n utilizatio Capacity 5-5
- 6. 5–6 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. • Capacity utilizationrate – a measure of how close the firm is to its best possible operating level • Economies of scale – the idea that as a planet gets larger and volume increases, the average cost per unit tends to drop • Diseconomies of scale – at some point, the plant becomes too large and average cost per unit begins to increase
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- 8. Best Operating Level Example:Engineers design engines and assembly lines to operate at an ideal or “best operating level” to maximize output and minimize ware Underutilization Best Operating Level Average unit cost of output Volume Overutilization 5-8
- 9. Example of CapacityUtilization • During one week of production, a plant produced 83 units of a product. Its historic highest or best utilization recorded was 120 units per week. What is this plant’s capacity utilization rate? Answer: Capacity utilization rate = Capacity used Best operating level = 83/120 =0.69 or 69% 5-9
- 10. Economies & Diseconomiesof Scale 100-unit plant 200-unit plant 300-unit plant 400-unit plant Volume Average unit cost of output Economies of Scale and the Learning Curve working Diseconomies of Scale start working 5-10
- 11. The Learning Curve Asplants produce more products, they gain experience in the best production methods and reduce their costs per unit Total accumulated production of units Cost or price per unit Yesterday Today Tomorrow 5-11
- 12. 5–12 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. • Capacity focus– the idea that a production facility works best when it is concentrated on a limited set of production objectives – Focused factory or plant within a plant (PWP) concept • Capacity flexibility – the ability to rapidly increase or decrease product levels or the ability to shift rapidly from one product or service to another – Comes from the plant, processes, and workers or from strategies that use the capacity of other organizations
- 13. Capacity Planning: Balance Stage1 Stage 2 Stage 3 Units per month 6,000 7,000 5,000 Unbalanced stages of production Stage 1 Stage 2 Stage 3 Units per month 6,000 6,000 6,000 Balanced stages of production Maintaining System Balance: Output of one stage is the exact input requirements for the next stage 5-13
- 14. Determining Capacity Requirements 1.Forecast sales within each individual product line 2. Calculate equipment and labor requirements to meet the forecasts 3. Project equipment and labor availability over the planning horizon 5-14
- 15. Example of CapacityRequirements 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: 1 2 3 4 FancyFine Small (000s) 50 60 80 100 Family (000s) 35 50 70 90 Generic Small (000s) 100 110 120 140 Family (000s) 80 90 100 110 5-15
- 16. Example of CapacityRequirements (Continued): Product from a Capacity Viewpoint • Question: Are we really producing two different types of mustards from the standpoint of capacity requirements? • Answer: No, it’s the same product just packaged differently. 5-16
- 17. Example of CapacityRequirements (Continued) : Equipment and Labor Requirements Year: 1 2 3 4 Small (000s) 150 170 200 240 Family (000s) 115 140 170 200 •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. 5-17
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- 19. 5–19 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. • The relationshipbetween service capacity utilization and service quality is critical. – Utilization is measured by the portion of time servers are busy. • Optimal levels of utilization are context specific. – Low rates are appropriate when the degree of uncertainty (in demand) is high and/or the stakes are high (e.g., emergency rooms, fire departments). – Higher rates are possible for predictable services or those without extensive customer contact (e.g., commuter trains, postal sorting).
- 20. 5–20 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. • Rate ofservice utilization and service quality are directly linked. Arrivals exceed services – many customers are never served Sufficient capacity to provide quality service Service quality declines – disruptions or high arrival levels lead to long wait times
- 21. Capacity Utilization & ServiceQuality • Best operating point is near 70% of capacity • From 70% to 100% of service capacity, what do you think happens to service quality? 5-21
- 22. 1-22 End of Chapter5 5-22