capacity pl

8/3/2019 Capacity Pl.

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The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin

Strategic CapacityManagement


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y Strategic Capacity Planning Defined

y Capacity Utilization & Best OperatingLevel

y Economies & Diseconomies of Scaley The Experience Curve

y Capacity Focus, Flexibility & Planning

y

Determining Capacity Requirementsy Decision Trees

y Capacity Utilization & Service Quality

OBJECTIVES


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Strategic Capacity Planning

y Capacitycan be defined as the ability to hold,receive, store, or accommodate. The amount ofthe output that a system is capable of achieving

over a specific period of time

y Strategic capacity planning is an approach fordetermining the overall capacity level of capital

intensive resources, including facilities,equipment, and overall labor force size that bestsupports the companys long-range competitivestrategy.


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Capacity Utilization

y Capacity usedy rate of output actually achieved

y Best operating levely capacity for which the process was designed

The capacity utilization rate is expressed as apercentage and requires that the numerator

and denominator be measured in the sameunits and time periods

leveloperatingBest

usedCapacity

ratenutilizatioCapacity!


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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


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Example of Capacity Utilization

y During one week of production, a plant produced 83units of a product. Its historic highest or bestutilization recorded was 120 units per week. What isthis plants capacity utilization rate?

y Answer:

Capacity utilization rate = Capacity used .Best operating level

= 83/120=0.69 or 69%


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Economies & Diseconomies of Scale

100-unitplant

200-unit

plant 300-unit

plant

400-unit

plant

Volume

Average

unit cost

of output

Economies of Scale and the Experience Curve working

Diseconomies of Scale start working


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The Experience

Curve

As plants 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


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Capacity Focus

y The concept of thefocused factory holds thatproduction facilities work best when theyfocus on a fairly limited set of productionobjectives

y Plants Within Plants (PWP)y

Extend focus concept to operating levely Isolation of various processes within the plant.


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Capacity Flexibility

Ability to rapidly increase or decrease production levels or to shiftproduction capacity quickly from one product or service to another

y Flexible plants : zero-changeover-time plant. Usingmovable equipment, knockdown walls and easily

accessible and re-routable utilities.

y Flexible processes

y Flexible workers: having multiple skills and abilityto switch quickly from one kind of task to another


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Capacity Planning: Balance

Maintaining System Balance: Output of one stage isthe exact input requirements for the next stage

Stage 1 Stage 2 Stage 3Units

per

month6,000 7,000 5,000

Unbalanced stages of production

Stage 1 Stage 2 Stage 3Unitsper

month6,000 6,000 6,000

Balanced stages of production


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Capacity Planning

y

Frequency of Capacity Additions: Two types of cost:the cost of upgrading too frequently and that ofupgrading too infrequently. Upgrading capacity toofrequently is expensive. Upgrading capacity tooinfrequently is also expensive.

y External Sources of Capacity: In some cases, it may

not be cheaper to add capacity at all, but rather to useexisting external source of capacity. Two strategies are:Outsourcing and sharing Capacity.


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Determining Capacity Requirements

y 1. Forecast sales within each individualproduct line

y 2. Calculate equipment and laborrequirements to meet the forecasts

y3. Project equipment and labor availabilityover the planning horizon


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Capacity Decisionsy Capacity

y maximum capability toproduce

y rated capacity is theoreticaly effective capacity includes

efficiency and utilization

y Capacity utilizationy percent of available time

spent working

y Capacity efficiencyy how well a machine or

worker performs comparedto a standard output level

y Capacity load

y standard hours of workassigned to a facility

y Capacity load percenty ratio of load to capacity


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Capacity Expansion Strategies


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Capacity Decisions (cont.)y Capacity increase depends on

y volume and certainty of anticipated demand

y strategic objectives

y costs of expansion and operation

y Best operating level

y % of capacity utilization that minimizes unit costs

y Capacity cushiony % of capacity held in reserve for unexpected

occurrences


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Economies of Scaley it costs less per unit to produce high levels of

output

y fixed costs can be spread over a larger number of unitsy production or operating costs do not increase linearly

with output levels

y quantity discounts are available for material purchases

y operating efficiency increases as workers gainexperience


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Diseconomies of Scaley Occur above a certain level of output

y Diseconomies of Distribution

y Diseconomies of Bureaucracy

y Diseconomies ofConfusion

y Diseconomies of Vulnerability


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Best Operating Level for a Hotel


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Diseconomies of Confusion


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Example of a Decision Tree Problem

A glass factory specializing in crystal is experiencing a

substantial backlog, and the firm's management is

considering three courses of action:

A) Arrange for subcontractingB) Construct new facilities

C) Do nothing (no change)

The correct choice depends largely upon demand, which

may be low, medium, or high. By consensus, management

estimates the respective demand probabilities as 0.1, 0.5,

and 0.4.


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Example of a Decision Tree Problem (Continued): The

PayoffTable

0.1 0.5 0.4

Low Medium High

A 10 50 90

B -120 25 200

C 20 40 60

The management also estimates the profits

when choosing from the three alternatives (A,

B, and C) under the differing probable levels of

demand. These profits, in thousands of

Rupees are presented in the table below:


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Example of a Decision Tree Problem (Continued): Step 1. We start by

drawing th

e th

ree decisions

A

B

C


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Ex

ample of DecisionTree Problem (Continued): Step 2. Add ourpossible states of nature, probabilities, and payoffs

A

B

C

High demand (0.4)

Medium demand (0.5)

Low demand (0.1)

Rs90k

Rs50k

Rs10kHigh demand (0.4)

Medium demand (0.5)

Low demand (0.1)

Rs200k

Rs25k

-Rs120k

High demand (0.4)

Medium demand (0.5)

Low demand (0.1)

Rs60k

Rs40k

Rs20k


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Example of Decision Tree Problem (Continued): Step 3. Determine

the expected value of each decision

High demand (0.4)

Medium demand (0.5)

Low demand (0.1)

A

Rs90k

Rs50k

Rs10k

EVA=0.4(90)+0.5(50)+0.1(10)=Rs62k

Rs62k


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Example of Decision Tree Problem (Continued): Step 4.

Make decision

High demand (0.4)

Medium demand (0.5)

Low demand (0.1)

High demand (0.4)

Medium demand (0.5)

Low demand (0.1)

A

B

C

High demand (0.4)Medium demand (0.5)

Low demand (0.1)

Rs90k

Rs50k

Rs10k

Rs200kRs25k

-Rs120k

Rs60kRs40k

Rs20k

Rs62k

Rs80.5k

Rs46k

Alternative B generates the greatest expected profit, so

our choice is B or to construct a new facility


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Planning Service Capacity vs. Manufacturing

Capacity

y Time: Goods can not be stored for lateruse and capacity must be available to

provide a service when it is neededy Location: Service goods must be at the

customer demand point and capacitymust be located near the customer

yVolatility of Demand: Much greater thanin manufacturing


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Capacity Utilization &

Service Quality

y Best operating point is near 70% ofcapacity from 70% to 100% of service

capacity, what do you think happens toservice quality? It Declines Drastically.

y If it is below 40% some of the customerswill never be served as the line build upmay be too high .

capacity pl

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