1. Chapter 11 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 2

2. Strategic Capacity Planning Defined
Strategic capacity planning is an approach for determining the 3

3. Capacity Utilization Where Capacity used Best operating level
rate of output actually achieved
Best operating level
capacity for which the process was designed 5

4. Best Operating Level Underutilization Best Operating Level Average
unit cost
of output
Volume
Overutilization

5. Example of Capacity Utilization
During one week of production, a plant produced 83 units of a product. Its design capacity (best operating level) is 120 units per week. What is this plant’s capacity utilization rate?
Answer:
Capacity utilization rate = Capacity used
Design Capacity = 6

6. Economies & Diseconomies of Scale
Economies of Scale and the Experience Curve working
100-unit
plant
Average
unit cost
of output
200-unit
plant
400-unit
plant
300-unit
plant
Diseconomies of Scale start working
Volume 8

7. The Experience Curve Cost or price per unit
As plants produce more products, they gain experience in the best production methods and reduce their costs per unit.
Cost or
price
per unit
Total accumulated production of units 9

8. Capacity Focus
The concept of the focused factory holds that production facilities work best
Plants Within Plants (PWP) (from Skinner)
Extend focus concept to operating level 10

9. Capacity Flexibility Flexible plants - Flexible processes -
Flexible workers - 11

10. Capacity Planning: Balance
Units
per
month
Stage 1
Stage 2
Stage 3
6,000
7,000
5,000
Maintaining System Balance: Output of one stage is the exact input requirements for the next stage
Units
per
month
Stage 1
Stage 2
Stage 3
6,000
6,000
6,000 12

11. Capacity Planning Frequency of Capacity Additions - -
External Sources of Capacity - 13

12. Determining Capacity Requirements
Typical steps:
Forecast sales within each individual product line.
Calculate equipment and labor requirements to meet the forecasts.
Project equipment and labor availability over the planning horizon. 14

13. 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.

14. Example of Capacity Requirements: The Product from a Capacity Viewpoint
Question: Are we really producing two different types of mustards from the standpoint of capacity requirements?
Answer:

15. Example of Capacity Requirements: Equipment and Labor Requirements
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.

16. Year: 1 2 3 4 Small (000s) 150 170 200 240 Family (000s) 115 140 17016
Question: What are the Year 1 values for capacity, machine, and labor?
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
Machine requirement
Labor requirement
Family-size
Percent capacity used
Machine requirement
Labor requirement

17. Capacity Planning Process
Develop
Quantitative
Forecast
Alternative
Factors
Demand
Plans
(e.g., Cost)
Compute
Evaluate
Qualitative
Rated
Capacity
Factors
Capacity
Plans
(e.g., Skills)
Compute
Select Best
Implement
Needed
Capacity
Best Plan
Capacity
Plan

18. Managing Existing Capacity
Demand Management
Capacity Management
Vary prices
Vary promotion
Change lead times (e.g., backorders)
Offer complementary products
Vary staffing
Change equipment & processes
Change methods
Redesign the product for faster processing

19. Planning Service vs. Manufacturing Capacity
Time:
Location:
Volatility of Demand: 26

20. 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? - 27