strategic capacity mgmt
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Strategic Capacity Management
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Capacity Planning Capacity can be defined as the ability to hold,
receive, store, or accommodate.
It can also be defined as output attainedwithin the normal operatingschedule/conditions
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Time Horizon for Capacity PlanningLong Range - Building, Equipments and Facilities(Greater than one year)
Intermediate Range - Hiring, layoffs, new tools,minor equipment purchase and subcontracting.
(Quarterly or monthly)
Short Range Daily and weekly scheduling,overtime, personnel transfer.
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Strategic Capacity Planning Strategic capacity planning is an approach for determining
the overall capacity level of capital intensive resources,including facilities, equipment, and overall labor force sizethat best supports companies long term competitive strategy.
Planning for capacity for a long run
How much should a plant be able to produce?
How many customers should a service facility be able toserve?
What kind of issues arise as the production systemexpands?
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Strategic Capacity PlanningCapacity strategies are formulated keeping in mine;
The growth rate and variability in demand
Cost of building and operating facilities of various
sizes
The rate and direction of technological innovation
The likely behavior of competitors
Availability of capital and other resources
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Steps involved in Capacity Planning Process
Estimate future capacity requirements Evaluate existing capacity and facilities and
identify gaps
Identify alternatives for meeting requirements.
Conduct financial analyses of each alternative
Assess key qualitative issues for each alternative.
Select one alternative to pursue.
Implement the selected alternative.
Monitor results
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Capacity Utilization
Where
Capacity used
rate of output actually achieved
Best operating level
capacity for which the process was designed
Volume of output at which average unit cost is
minimum
leveloperatingBest
usedCapacityratenutilizatioCapacity
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Best Operating LevelExample: Engineers design engines and assembly lines to
operate at an ideal or best operating level to maximizeoutput and minimize ware
Underutilization
Best OperatingLevel
Averageunit costof output
Volume
Overutilization
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Example of Capacity Utilization
During one week of production, a plantproduced 83 units of a product. Itshistoric highest or best utilization
recorded was 120 units per week. Whatis this plants capacity utilization rate?
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-unitplant 300-unit
plant
400-unitplant
Volume
Averageunit costof output
Economies of Scale and the Experience Curve working
Diseconomies of Scale start working
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The ExperienceCurve
As plants produce more products, theygain experience in the best productionmethods and reduce their costs per unit
Total accumulated production of units
Cost orpriceper unit
Yesterday
Today
Tomorrow
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Underlying Principles of Learning Curves
1. Each time you perform a task ittakes less time than the last timeyou performed the same task
2. The extent of task time decreasesover time
3. The reduction in time will follow apredictable pattern
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Example of a Learning Curve
Suppose you start aterm paper typingbusiness. You timeyourself on the first
paper, then the second,and so on.
Termpaper
1
2
3
4
5
6
Time (inMinutes)
100
90
84.62
81.00
78.30
76.16
Note that only 90 of100 minutes are used
in the secondrepetition. This is anexample of a 90%learning curve.
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Plotting theLearning Curve
All learning curves have thisdownward sloping curve.
90 % Learning Curve
020
40
60
80
100
120
0 1000 2000 3000 4000 5000
Unit
Production
T
ime(Minutes)
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Capacity Planning
Considerations in adding capacity;
Maintaining System Balance
Frequency of Capacity Additions
External Sources of Capacity
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Capacity Planning: Balance
Stage 1 Stage 2 Stage 3Unitsper
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
Maintaining System Balance: Output of one stage isthe exact input requirements for the next stage
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Determining Capacity Requirements
1. Forecast sales within each individualproduct line
2. Calculate equipment and laborrequirements to meet the forecasts
3. Project equipment and labor availability
over the planning horizon
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Example of Capacity Requirements
A manufacturer produces two lines of mustard,FancyFine and Generic line. Each is sold insmall 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 90Generic
Small (000s) 100 110 120 140
Family (000s) 80 90 100 110
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Example of Capacity Requirements (Continued):Product from a Capacity Viewpoint
Question: Are we really producing twodifferent types of mustards from thestandpoint of capacity requirements?
Answer: No, its the same product justpackaged differently.
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Example of Capacity Requirements (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.
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Year: 1 2 3 4
Small (000s) 150 170 200 240Family (000s) 115 140 170 200
Small Mach. Cap. 300,000 Labor 6
Family-size Mach. Cap. 240,000 Labor 6
Small
Percent capacity used 50.00%
Machine requirement 1.50
Labor requirement 3.00
Family-size
Percent capacity used 47.92%
Machine requirement 0.96
Labor requirement 2.88
Question: What are the Year 1 values for capacity, machine,and labor?
150,000/300,000=50%
At 2 operators for
100,000, it takes 3
operators for 150,000
At 1 machine for 100,000, it
takes 1.5 machines for 150,000
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Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200
Small Mach. Cap. 300,000 Labor 6
Family-size Mach. Cap. 240,000 Labor 6
Small
Percent capacity used 50.00%
Machine requirement 1.50
Labor requirement 3.00Family-size
Percent capacity used 47.92%
Machine requirement 0.96
Labor requirement 2.88
Question: What are the values for columns 2, 3 and 4 in the table below?
56.67%
1.70
3.40
58.33%
1.17
3.50
66.67%
2.00
4.00
70.83%
1.42
4.25
80.00%
2.40
4.80
83.33%
1.67
5.00
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Example of a Decision Tree Problem
A glass factory specializing in crystal is experiencing asubstantial backlog, and the firm's management isconsidering three courses of action:
A) Arrange for subcontractingB) Construct new facilitiesC) Do nothing (no change)
The correct choice depends largely upon demand, which
may be low, medium, or high. By consensus, managementestimates the respective demand probabilities as 0.1, 0.5,and 0.4.
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Example of a Decision Tree Problem(Continued): The Payoff Table
0.1 0.5 0.4
Low Medium HighA 10 50 90
B -120 25 200
C 20 40 60
The management also estimates the profitswhen choosing from the three alternatives (A,B, and C) under the differing probable levels of
demand. These profits, in thousands of dollarsare presented in the table below:
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Example of a Decision Tree Problem (Continued):Step 1. We start by drawing the three decisions
AB
C
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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
$90k
$50k
$10k
EVA=0.4(90)+0.5(50)+0.1(10)=$62k
$62k
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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
CHigh demand (0.4)
Medium demand (0.5)
Low demand (0.1)
$90k$50k
$10k
$200k
$25k
-$120k
$60k
$40k
$20k
$62k
$80.5k
$46k
Alternative B generates the greatest expected profit, soour choice is B or to construct a new facility
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Planning Service Capacity vs.Manufacturing Capacity
Time: Goods can not be stored for lateruse and capacity must be available toprovide a service when it is needed
Location: Service goods must be at thecustomer demand point and capacitymust be located near the customer
Volatility of Demand: Much greater thanin manufacturing
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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 servicequality?