Presentation on theme: "Capacity After deciding what products/services should be offered and how they should be made, management must plan the capacity of its processes. Capacity."— Presentation transcript:
Capacity After deciding what products/services should be offered and how they should be made, management must plan the capacity of its processes. Capacity is the maximum rate of output for a process. Must have capacity to meet current and future demands. Long-term capacity plans deal with investments in new facilities and equipment. Short-term capacity plans focus on workforce size, overtime budgets, and inventories.
Capacity Planning This activity is central to the long-term success of an organization. Too much capacity can be as problematic as too little Capacity planning considers questions such as: How much of a cushion is needed? Should we expand capacity before the demand is there or wait until demand is more certain?
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.
Measuring capacity No single capacity measure is universally applicable. Capacity can be expressed in terms of outputs or inputs. Output measuresthe usual choice for line flow processes, usually high-volume Low amount of customization Product mix becomes an issue when the output is not uniform in work content. Input measuresused for flexible flow, low-volume processes High amount of customization Output varies in work content; a measure of total units produced is meaningless. Output is converted to some critical homogeneous input, such as labor hours or machine hours.
Utilization Fabrication can make 100 engines/day Management wants 45 engines/day Currently producing 50 engines/day Utilization peak = Average output rate Peak capacity Utilization effective = Average output rate Effective capacity x 100%
Utilization Fabrication can make 100 engines/day Management wants 45 engines/day Currently producing 50 engines/day Utilization peak = x 100% = 50% Utilization effective = x 100% = 111% The average output rate and the capacity must be measured in the same terms.
Types of Capacity Peak capacity Calling for extraordinary effort under ideal conditions that are not sustainable Allows for downtime for maintenance and repair. Engineering assessment of maximum annual output Effective capacity Economically sustainable under normal conditions
Utilization What does it mean? Even through the department falls well short of peak capacity, it is well beyond the output rate judged to be most economical. Its operations could be sustained at that level only through the use of considerable overtime; capacity expansion should be evaluated.
Utilization Capacity cushion peak = 100% – 50% = 50% Capacity cushion effective = 100% – 111% = – 11% Utilization peak = 50% Utilization effective = 111% Capacity cushion – amount of reserve capacity that a firm maintains to handle sudden increases in demand or temporary loss of production capacity.
Best Operating Level Underutilization Best Operating Level Average unit cost of output Volume Overutilization
Capacity Bottlenecks Inputs To customers (a) Operation 2 a bottleneck 50/hr /hr A bottleneck is an operation that has the lowest effective capacity of any operation in the facility and thus limits the systems output.
(b) All operations bottlenecks Capacity Bottlenecks In effect, the process can produce only as fast as the slowest operation. True expansion of a processs capacity occurs only when bottleneck capacity is increased. In the first slide, adding capacity at Operation 1 or 3 will not impact system capacity. However, when adding capacity to Operation 2, must then increase capacity at all 3 operations to increase capacity further. To increase capacity: new equipment, new facilities, expanded operating hours, increased shifts, increased work hours, or redesign the process
Theory of Constraints Focus is on whatever impedes, (i.e., bottlenecks) progress toward the goal of maximizing flow of total value-added funds (sales less discounts and variable costs) The focus on bottlenecks is the means to increase throughput and, consequently, the flow of value added funds. The performance of the overall system is a function of how bottleneck operations or processes are scheduled.
Theory of Constraints Short-term: overtime, temporary employees, outsource Increase effective capacity utilization at bottlenecks without experiencing the higher costs and poor customer service usually associated with maintaining output rates at peak capacity. Carefully monitor short-term schedules, minimize idle time, setups (changes from one product to another).
Theory of Constraints 1.Identify the system bottleneck(s) 2.Exploit the bottleneck(s) 3.Subordinate all other decisions to step 2 4.Elevate the bottleneck(s) 5.Do not let inertia set in
Economies of Scale Increasing output rate decreases the average unit cost Fixed costs are spread over more units Construction costs are reduced Costs of purchased materials are cut Process advantages are found
Diseconomies of Scale When the average costs per unit increases as the facilitys size increases. Excessive size can bring complexity, loss of focus, and inefficiencies, which raise the average unit cost. Characterized by loss of agility, less innovation, risk avoidance, and excessive analysis and planning at the expense of action. Nonlinear growth of overhead leads to employee ceilings.
Economies and Diseconomies of Scale Average unit cost (dollars per patient) Output rate (patients per week) 250-bed hospital 750-bed hospital 500-bed hospital Diseconomies of scale Economies of scale Best operating level is 500-beds; optimal depends on number of patients per week.
Capacity strategy Sizing capacity cushions Average utilization rates near 100% indicate: Need to increase capacity Poor customer service or declining productivity Utilization rates tend to be higher in capital- intensive industries.
Capacity Strategy Factors Leading to Large Capacity Cushions When demand is variable, uncertain, or product mix changes When finished goods inventory cannot be stored When customer service is important When capacity comes in large increments When supply of material or human resources is uncertain Factors leading to small capacity cushions Unused capacity costs money. Large cushions hide inefficiencies, absenteeism, unreliable material supply. When subcontractors are available to handle demand peaks
Capacity Strategy Timing and sizing of expansion Expansionist strategy Keeps ahead of demand, maintains a capacity cushion Large, infrequent jumps in capacity Higher financial risk Lower risk of losing market share Economies of scale may reduce fixed cost per unit May increase learning and help compete on price Preemptive marketing
Capacity Strategy Wait-and-see strategy Lags behind demand, relying on short-term peak capacity options (overtime, subcontractors) to meet demand Lower financial risk associated with overly optimistic demand forecast Lower risk of a technological advancement making a new facility obsolete Higher risk of losing market share Follow-the-leader strategy An intermediate strategy of copying competitors actions Tends to prevent anyone from gaining a competitive advantage
Capacity Strategies Time between increments Capacity increment Planned unused capacity Time (a) Expansionist strategy Forecast of capacity required Capacity
Capacity Strategies Time between increments Capacity increment Time Forecast of capacity required Capacity Planned use of short-term options (b) Wait-and-see strategy
Linking Capacity and Other Decisions Competitive Priorities Quality Management Capital Intensity Resource Flexibility Inventory Scheduling
Capacity Decisions Estimate Capacity Requirements ItemClient XClient Y Annual demand forecast (copies) Standard processing time (hour/copy) Average lot size (copies per report) Standard setup time (hours) [Dp + (D/Q)s] product [Dp + (D/Q)s] product n N[1 – (C/100)] M =
Capacity Decisions Estimate Capacity Requirements ItemClient XClient Y Annual demand forecast (copies) Standard processing time (hour/copy) Average lot size (copies per report) Standard setup time (hours) M = [2000(0.5) + (2000/20)(0.25)] client X + [6000(0.7) + (6000/30)(0.4)] client Y (250 days/year)(1 shift/day)(8 hours/shift)(1.0 – 15/100)
Capacity Decisions Estimate Capacity Requirements ItemClient XClient Y Annual demand forecast (copies) Standard processing time (hour/copy) Average lot size (copies per report) Standard setup time (hours) M = = machines Example 8.2
Capacity Decisions Kitchen capacity = 80,000 meals Dining room capacity = 105,000 meals Demand Year 1:90,000 meals Year 2:100,000 meals Year 3:110,000 meals Year 4:120,000 meals Year 5:130,000 meals Kitchen Capacity Gaps Year 1:90,000 – 80,000 = 10,000 Year 2:100,000 – 80,000 = 20,000 Year 3:110,000 – 80,000 = 30,000 Year 4:120,000 – 80,000 = 40,000 Year 5:130,000 – 80,000 = 50,000 Identify Capacity Gaps
Capacity Decisions Kitchen capacity = 80,000 meals Dining room capacity = 105,000 meals Demand Year 1:90,000 meals Year 2:100,000 meals Year 3:110,000 meals Year 4:120,000 meals Year 5:130,000 meals Dining Room Capacity Gaps Year 1:no gaps Year 2:no gaps Year 3:110,000 – 105,000 = 5,000 Year 4:120,000 – 105,000 = 15,000 Year 5:130,000 – 105,000 = 25,000 Identify Capacity Gaps
Capacity Decisions Simulation TIME TO PERFORM (SECONDS) Standard OPERATION AverageDeviation 1.Review renewal application for correctness153 2.Check file for violations and restrictions Process and record payment256 4.Conduct eye test Photograph applicant205 6.Issue temporary license305 AVERAGE CUSTOMER ARRIVAL TIME(PEOPLE PER MINUTE) 8:00 A.M. 9:00 A.M :00 A.M. 12:00 P.M :00 P.M. 1:00 P.M :00 P.M. 4:00 P.M.0.75