Download Production and Operations Management: Manufacturing and Services

CHAPTER 5
Strategic Capacity
Management
•
Tata McGraw
Chapter 5
Strategic Capacity
Management
5-3
OBJECTIVES
• Strategic Capacity Planning Defined
• Capacity Utilization & Best Operating
Level
• Economies & Diseconomies of Scale
• The Experience Curve
• Capacity Focus, Flexibility & Planning
• Determining Capacity Requirements
• Capacity Utilization & Service Quality
5-4
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
5-5
Capacity Utilization
Capacity used
Capacity utilization rate 
Best operating level
• Where
• Capacity used
–
rate of output actually achieved
• Best operating level
–
capacity for which the process was
designed
• 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
Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
• Capacity utilization rate – a measure of how
close the firm is to its best possible operating
level
5–6
• Greater than one year
Intermediate range
• Monthly or quarterly plans covering the next 6 to
18 months
Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
Long range
Short range
• Less than one month
5–7
5-8
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
Average
unit cost
of output
Overutilization
Underutilization
Best Operating
Level
Volume
5-9
Example of Capacity Utilization
• 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%
5-10
Economies & Diseconomies of Scale
Economies of Scale and the Learning Curve working
Average
unit cost
of output
100-unit
plant
200-unit
plant
300-unit
plant
400-unit
plant
Diseconomies of Scale start working
Volume
5-11
As plants produce more products, they
gain experience in the best production
methods and reduce their costs per unit
The Learning Curve
Yesterday
Cost or
price
per unit
Today
Tomorrow
Total accumulated production of units
– 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
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
– Comes from the plant, processes, and workers or
from strategies that use the capacity of other
organizations
5–12
5-13
Capacity Planning: Balance
Unbalanced stages of production
Units
per
month
Stage 1
Stage 2
6,000
7,000
Stage 3
5,000
Maintaining System Balance: Output of one stage is
the exact input requirements for the next stage
Balanced stages of production
Units
per
month
Stage 1
Stage 2
6,000
6,000
Stage 3
6,000
5-14
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
5-15
Example of Capacity Requirements
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:
FancyFine
Small (000s)
Family (000s)
Generic
Small (000s)
Family (000s)
1
2
3
4
50
35
60
50
80
70
100
90
100
80
110
90
120
100
140
110
5-16
Example of Capacity Requirements (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.
5-17
Example of Capacity Requirements (Continued) : Equipment and Labor
Requirements
Year:
Small (000s)
Family (000s)
1
150
115
2
170
140
3
200
170
4
240
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.
Service
Capacity
Goods can be stored for later
use.
Capacity must be available
when service is needed –
cannot be stored.
Goods can be shipped to
other locations.
Service must be available at
customer demand point.
Volatility of demand is
relatively low.
Much higher volatility is
typical.
Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
Manufacturing
Capacity
5–18
– 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).
Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
• The relationship between service capacity
utilization and service quality is critical.
5–19
Arrivals exceed
services – many
customers are never
served
declines – disruptions
or high arrival levels
lead to long wait times
Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
• Rate of service utilization and service quality
are directly linked.
Service quality
Sufficient capacity to
provide quality
service
5–20
5-21
Capacity Utilization &
Service Quality
• Best operating point is near 70%
of capacity
• From 70% to 100% of service
capacity, what do you think
happens to service quality?
5-22
End of Chapter 5
1-22