s7 - 1© 2011 pearson education, inc. publishing as prentice hall process strategies ( process,...

S7 - 1© 2011 Pearson Education, Inc. publishing as Prentice Hall

Process StrategiesProcess Strategies( process, repetitive, product)( process, repetitive, product)

The objective of the process strategy is to build a The objective of the process strategy is to build a production process that has capacity to meetproduction process that has capacity to meet

•customer requirements customer requirements (quality & quantity) (quality & quantity)

•product specifications product specifications (quality & cost)(quality & cost)

•within finance within finance (fixed costs = capital invested)(fixed costs = capital invested)

•other managerial constraints other managerial constraints (flexibility)(flexibility)

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Process Strategy & CapacityProcess Strategy & CapacityProcess strategy chosen has to

•Meet consumer demand (quality & quantity expectations)

– low/medium/high ?

– constant or changing ?

– predictable or unpredictable ?

•Meet Business requirements (average cost per unit)

– efficient use of existing capacity

– ability to change output (up or down) if needed

© 2011 Pearson Education, Inc. publishing as Prentice Hall


CapacityCapacity The number of units a facility can produce, hold,

receive, or store, in a period of time

Has a big effect on fixed costs (& therefore break even )

Determines if demand will be satisfied

Three time horizons

Long (>1yr)

Medium (3 -18 months)

Short (<3 months)


Planning Over a Time HorizonPlanning Over a Time Horizon(relates to forecasting accuracy)(relates to forecasting accuracy)

Figure S7.1

To increase capacity To use excess capacity

Medium(3-18 month)

Subcontract Add personnelAdd equipment Build or use inventory Add shifts

Short(< 3 month)

Schedule jobsSchedule personnel Allocate machinery*

Long (> 12 month)

Add facilitiesAdd long lead time equipment *

* Difficult to adjust capacity as limited options exist

Options for Adjusting Capacity


Capacity and StrategyCapacity and Strategy

Capacity decisions impact all 10 decisions of operations management as well as other functional areas of the organization

Capacity decisions must be integrated into the organization’s mission and strategy


Capacity ConsiderationsCapacity Considerations

1. Forecast demand accurately(marketing department do this)

2. Understand the technology and capacity increments

3. Find the optimum operating level (volume)

4. Build for change(flexibility is desirable)


Economies and Economies and Diseconomies of ScaleDiseconomies of Scale

Economies of scale

Diseconomies of scale

25 - room roadside motel 50 - room

roadside motel

75 - room roadside motel

Number of Rooms25 50 75

Av

era

ge

un

it c

os

t(d

olla

rs p

er

roo

m p

er n

igh

t)

Figure S7.2


Decision making about Decision making about Capacity ChangesCapacity Changes

(a) Leading demand with incremental expansion

Dem

and

Expected demand

New capacity

(c) Attempts to have an average capacity with incremental expansion

Dem

and

New capacity Expected

demand

(b) Capacity lags demand with incremental expansion

Dem

and

New capacity

Expected demand

Figure S7.6


Managing DemandManaging Demand Demand exceeds capacity

reduce demand by raising prices, scheduling longer lead time

Long term solution is to increase capacity

Capacity exceeds demand Stimulate market (advertising, price cuts, etc)

Product changes (diversify, make to stock)

Adjusting to seasonal demands Produce products with opposite demand

patterns (surf wear / snow wear)


Complementary Demand Complementary Demand PatternsPatterns

4,000 –

3,000 –

2,000 –

1,000 –

J F M A M J J A S O N D J F M A M J J A S O N D J

Sal

es i

n u

nit

s

Time (months)

Combining both demand patterns reduces the variation

Snowmobile motor sales

Jet ski engine sales

Figure S7.3


Tactics for Matching Tactics for Matching Capacity to DemandCapacity to Demand

1. Making staffing changes (extra shifts(+), reduce hours (-))

2. Adjusting equipment Purchasing additional machinery(+)

Selling or leasing out existing equipment(-)

3. Improving processes to increase throughput (+)

4. Redesigning products to facilitate more throughput(+)

5. Adding process flexibility to meet changing product preferences (+/-)

6. Closing facilities(-)

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Capacity Management StrategiesCapacity Management Strategies


Level Capacity Strategy

Keeping operations running steadily through low demand periods to build up inventory for high demand periods.

Typical of any business where fixed assets are a big part of the operation. (hotels,

theatres, hospitals).

Inflexible in face of changing demand.

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Capacity Management StrategiesCapacity Management Strategies


Chase Demand Strategy

Change operations by increasing / decreasing inputs so that capacity meets the demand.

Requires good forecasting and flexible resourcing (eg outsourcing, spare capacity).

Often seen in services. (cannot build inventory ad so must meet demand when it is there).

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CHASE & LEVEL comparedCHASE & LEVEL compared


Level Capacity Chase Demand

Size of variation Small Large

Speed of change Slow Fast

Predictability Predictable Unpredictable

Costs Structure Fixed cost high Variable cost high

Cost of complaints High Low

Cost of lost business Low High


Demand & Capacity Management Demand & Capacity Management in Servicesin Services

Demand management Appointment, reservations, FCFS rule

Capacity management Staffing levels & scheduling

full-time

part-time

Temporary/casual

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Labour Flexibility StrategiesLabour Flexibility Strategies


1. External numerical flexibility(outsourcing, subcontracting, ‘overflow’ part-time staff)GOOD : allows core operations to continue more easilyBAD : possible loss of control on cost and quality

2. Internal numerical flexibility(flexible hours contracts, overtime, frequent scheduling, holiday planning)GOOD: maximises effective capacity when neededBAD: disruptive to staff – can be problems

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Labour Flexibility StrategiesLabour Flexibility Strategies


3. Functional flexibility (multiskilling)(change staff roles to meet different needs)GOOD: works well in simple businesses.BAD: training costs, occupational identity

issues (person and industry).

4. Financial flexibility (performance pay, seasonal pay)(pay reflects the existing need/output of staff)GOOD : may increase employment optionsBAD : may be difficult for staff


Capacity DefinitionsCapacity Definitions

Design capacity (measured as utilisation)

is the maximum theoretical output of a system

normally expressed as a rate (output/time)

Effective capacity (measured as efficiency)

is the actual output expects to achieve given current operating constraints (e.g. downtime for maintenance)

Often lower than design capacity


Utilization and EfficiencyUtilization and Efficiency

Utilization is the percent of design capacity Utilization is the percent of design capacity achievedachieved

Efficiency is the percent of effective capacity Efficiency is the percent of effective capacity achievedachieved

Utilization = Actual output/Design capacity (as %)

Efficiency = Actual output/Effective capacity (as %)


Bakery ExampleBakery Example(design capacity & utilisation)

Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shifts

Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls





Utilization = 148,000/201,600 = 73.4%


Bakery ExampleBakery Example(effective capacity & efficiency)



Utilization = 148,000/201,600 = 73.4%

Efficiency = 148,000/175,000 = 84.6%





Utilization = 148,000/201,600 = 73.4%

Efficiency = 148,000/175,000 = 84.6%



Actual production last week = 148,000 rollsEffective capacity = 175,000 rollsDesign capacity = 1,200 rolls per hourBakery operates 7 days/week, 3 - 8 hour shiftsEfficiency = 84.6%Efficiency of new line = 75%

Expected Output = (Effective Capacity)(Efficiency)

= (175,000)(.75) = 131,250 rolls

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