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Tata McGraw

Chapter 5

Strategic Capacity Management

• 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

OBJECTIVES

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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

5-4

Capacity Utilization

• Where• Capacity used

– rate of output actually achieved

• Best operating level– capacity for which the process was designed

level operating Best

usedCapacity rate nutilizatioCapacity

5-5

5–6

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• Capacity utilization rate – a measure of how close the firm is to its best possible operating level

• 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

5–7

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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

Example: Engineers design engines and assembly lines to operate at an ideal or “best operating level” to maximize output and minimize ware

Underutilization

Best OperatingLevel

Averageunit costof output

Volume

Overutilization

5-8

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?

• 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%

Answer: Capacity utilization rate = Capacity used

Best operating level

= 83/120 =0.69 or 69%

5-9

Economies & Diseconomies of Scale

100-unitplant

200-unitplant 300-unit

plant

400-unitplant

Volume

Averageunit costof output

Economies of Scale and the Learning Curve workingEconomies of Scale and the Learning Curve working

Diseconomies of Scale start workingDiseconomies of Scale start working

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The Learning Curve

As plants produce more products, they gain experience in the best production methods and reduce their costs per unit

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 orpriceper unit

Yesterday

Today

Tomorrow

5-11

5–12

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• Capacity focus – the idea that a production facility works best when it is concentrated on a limited set of production objectives– 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– Comes from the plant, processes, and workers

or from strategies that use the capacity of other organizations

Capacity Planning: Balance

Stage 1 Stage 2 Stage 3Unitsper

month6,000 7,000 5,000

Unbalanced stages of productionUnbalanced stages of production

Stage 1 Stage 2 Stage 3Unitsper

month6,000 6,000 6,000

Balanced stages of productionBalanced stages of production

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

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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

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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: 1 2 3 4FancyFine

Small (000s) 50 60 80 100Family (000s) 35 50 70 90Generic

Small (000s) 100 110 120 140Family (000s) 80 90 100 110

5-15

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.

• 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.

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Example of Capacity Requirements (Continued) : Equipment and Labor Requirements

Year: 1 2 3 4Small (000s) 150 170 200 240Family (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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5–18

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5–19

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• The relationship between service capacity utilization and service quality is critical.– 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).

5–20

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• Rate of service utilization and service quality are directly linked.

Arrivals exceed services – many customers are never served

Sufficient capacity to provide quality service

Service quality declines – disruptions or high arrival levels lead to long wait times

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?

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1-22

End of Chapter 5

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