Strategic Capacity Management

Dr. Ron LembkeOperations Management

Maximum Throughput of a Process

What is the capacity of the system? Should we add any capacity? How should we run the system? Where should we keep inventory?

50/hr 20/hr 10/hr 40/hr

Maximum Throughput of a Process

What is the capacity of the system?Convert to units / hr

6 min 5 min 4 min 5 min

10/hr 12/hr 15/hr 12/hr

PRODUCTIVITY MEASUREMENTS

Productivity

Productivity = Outputs / Inputs Partial: Output/Labor or Output/Capital Multifactor:

Output / (Labor + Capital + Energy ) Total Measure:

Output / Inputs

Automotive Productivity

Book Data:Jaguar: 14 cars/employeeVolvo: 29 cars/employeeMini: 39 cars/employee

US Productivity Growth

Source: Bureau of Labor Statistics

Total Factor Productivity Increases Take labor and capital

into account “percentage increase in

output that is not accounted for by changes in the volume of inputs of capital and labour.”

Source: Economist, 2009

Growth of Service Economy

01020304050607080

ServicesIndustryFarming

% of Labor Force

U.S. Productivity Gains

Services harder to make more productive Product Development team structure (Eg:

Chrysler Prowler, Boeing 787) Facilities improvements (less WIP, better

quality, flexibility) Keiretsu-like supplier cooperation -- tight

cooperation

U. S. Productivity Gains

Increased 1.37% per year 1990-95 Increased 2.37% per year 1995-98 Potential sources of productivity gains:

Capital investment (1.13%)Labor Quality (0.25%)Technological progress(0.99%)

Computers really are making us more productive.Source: WSJ, 8/1/00, “Further Gains in Productivity are Predicted,” A2

Improving Productivity

Develop productivity measurements– you can’t improve what you can’t measure

Identify and Improve bottleneck operations first

Establish goals, document and publicize improvements

HOURS WORKED

Hours Worked by Country

Netherl

ands

Norway

Belgium

Denmark

Luxe

mbourg

Switzerl

and

Spain

Austra

lia

Icelan

d

Portug

al

New Zela

nd

United

Stat

es

Mexico

Estonia

Poland

Hunga

ryChil

eKore

a0

500

1000

1500

2000

2500

Source: OECD, 2012

Average

Hours Worked and Productivity

Source: Eurofund, European Working Conditions Observatory, 2012

What Would Henry Say? Ford introduced the $5 (per day) wage in 1914 He introduced the 40 hour work week “so people would have more time to buy” It also meant more output: 3*8 > 2*10

“Now we know from our experience in changing from six to five days and back again that we can get at least as great production in five days as we can in six, and we shall probably get a greater, for the pressure will bring better methods.

Crowther, World’s Work, 1926

Forty Hour Week

Ernst Abbe, Karl Zeiss optics

1896: as much done in 9 as in 8.

Marginal Output of Time Value of working n

hrs is Onda As you work more

hours, your productivity per hour goes down

Eventually, it goes negative.

Better to work b instead of e hrs

S.J. Chapman, 1909, “Hours of Labour,” The Economic Journal 19(75) 353-373

“Crunch Mode”

Ea_spouse: 12/04 “Pre-crunch”SO was working 7 * 13: 91 per week!Maybe time off at 6pm Saturday$5k signing bonus, couldn’t quitClass action: April ‘06 $14.9m

Igda.org “Why Crunch Mode Doesn’t Work: 6 Lessons”

Learning Curves

time/unit goes down consistently Down by 10% as output doubles We can use Logarithms to approximate this

What will our cost per unit be when we’ve made 10,000 units?

If you ever need this, email me, and we can talk as much as you wantAlso, see Appendix B

Example 1

Paul’s 1 2 3 4 5Bottles 60 100 150 200 250Bags 100 200 300 400 500

Newman’sBottles 75 85 95 97 98Bags 200 400 600 650 680

0

100

200

300

400

500

600

1 2 3 4 5

BottlesBags

Demand for each product,by year.

Example 1

Totals 1 2 3 4 5Bottles 135 185 245 297 348Bags 300 600 900 1,050 1,180 bottle machines 150k/yr

Three currently = 150 * 3 = 450k bag machines 250k/yr

Five currently = 250 * 5 = 1,250k

Example 1 Bottles 135 185 245 297 348Machines 1 2 2 2 3Mach. usage 0.9 1.23 1.63 1.98 2.32Workers 1.8 2.46 3.27 3.96 4.64(2 workers per machine)

Bags 300 600 900 1,050 1,180Machines 2 3 4 5 5Mach Usage 1.2 2.4 3.6 4.2 4.7Workers 3.6 7.2 10.8 12.6 14.1(3 workers per machine)

Capacity Tradeoffs

Can we make combinations in between?

150,000Two-door cars

120,0004-doorcars

How much do we have?

We can only sustain so much effort. “Best Operating Level”

Output level process designed forLowest cost per unit

Capacity utilization = capacity used best operating level Hard to run > 1.0 for long

Time Horizons

Long-Range: over a year – acquiring, disposing of production resources

Intermediate Range: Monthly or quarterly plans, hiring, firing, layoffs

Short Range – less than a month, daily or weekly scheduling process, overtime, worker scheduling, etc.

Service Differences Arrival Rate very variable Can’t store the products - yesterday’s

flight? Service times variable Serve me “Right Now!” Rates change quickly Schedule capacity in 10 minute intervals,

not months How much capacity do we need?

Capacity Levels in Service

Zone of non-service<

Zone of service

Critical Zone

Mean service rate,

Mean arrival rate,

=100%

=70%

150

100

10050

Adding Capacity

Expensive to add capacity A few large expansions are cheaper (per

unit) than many small additions Large expansions allow of “clean sheet of

paper” thinking, re-design of processesCarry unused overhead for a long timeMay never be needed

Reengineering “Business Process Reengineering”

(Hammer and Champy) Companies grow over time, adding plants,

lines, facilities, etc. Growth may not end in optimal form Re-design processes from ground up

Capacity Planning How much capacity should we add? Conservative Optimistic

Forecast possible demand scenarios (Chapter 11)

Determine capacity needed for likely levels Determine “capacity cushion” desired

Toyota Capacity1997: Cars and vans? That’s crazy talkFirst time in North America

292,000 Camrys89,000 Siennas89,000 Avalons

Capacity Sources

In addition to expanding facilities:Two or three shiftsOutsourcing non-core activitiesTraining or acquisition of faster equipment

Decision Trees

Consider different possible decisions, and different possible outcomes

Compute expected profits of each decision Choose decision with highest expected

profits, work your way back up the tree.

Summary

Having enough capacity is crucial Measured productivity (single and multi-

factor) Increasing productivity key to economic

growth and profits Computed number of machines and

employees needed Making employees more productive is

often cheaper than adding machines