6 – 1 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Capacity Planning (Long-Term Capacity Planning) 6

6 – 2 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Planning Management Chapter 6 – Capacity planning (long-term capacity planning) 1. Economies and diseconomies of scale 2. Capacity timing and sizing strategies 3. Systematic approach to capacity decisions Chapter 7 – Constraint management (short-term capacity planning) Theory of constraints Identification and management of bottlenecks Product mix decisions using bottlenecks Managing constraints in a line process Capacity management

6 – 3 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Capacity and Scale best operating level = 500 beds (blue dot in the diagram) Figure 6.1 – Economies and Diseconomies of Scale 250-bed hospital 500-bed hospital 750-bed hospital Output rate (patients per week) Average unit cost (dollars per patient) Economies of scale Diseconomies of scale

6 – 4 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. A. Expansionist strategy Planned unused capacity Time Capacity Forecast of capacity required Time between increments Capacity increment Figure 6.2 – Two Capacity Strategies

6 – 5 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Time Capacity Planned use of short-term options Time between increments Capacity increment B. Wait-and-see strategy Forecast of capacity required Figure 6.2 – Two Capacity Strategies

6 – 6 Output Measures for Estimating Capacity Requirements Output Measures are the simplest way to express capacity. Output Measures are the simplest way to express capacity. Products produced or customers served per unit of time Products produced or customers served per unit of time Example: Current capacity is 50 per day and demand is expected to double in five years. Management uses a capacity cushion of 20%. Capacity (M) in 5 years should be: M = 100/( ) = 125 customers

6 – 7 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Input Measures for Estimating Capacity Requirements Input Measures are typically based on resource availability: e.g. Availability of workers, machines, workstations, seats, etc. For one service or product processed at one operation with a one year time period, the capacity requirement, M, is Capacity requirement = Processing hours required for years demand Hours available from a single capacity unit (such as an employee or machine) per year, after deducting desired cushion M = Dp N[ 1 – ( C /100) ] where D =demand forecast for the year (number of customers serviced or units of product) p =processing time (in hours per customer served or unit produced) N =total number of hours per year during which the process operates C =desired capacity cushion (expressed as a percent)

6 – 8 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Input Measures for Estimating Capacity Requirements if multiple products are produced, setup times may be required Capacity requirement = Processing and setup hours required for years demand, summed over all services or products Hours available from a single capacity unit per year, after deducting desired cushion M = [Dp + ( D / Q ) s] product 1 + [Dp + ( D / Q ) s] product 1 + … + [Dp + ( D / Q ) s] product n N[ 1 – ( C /100) ] where Q =number of units in each lot s =setup time (in hours) per lot

6 – 9 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Decision Trees 1 Low demand [0.40] High demand [0.60] Low demand [0.40] High demand [0.60] $70,000 $220,000 $40,000 $135,000 $90,000 Small expansion Large expansion Dont expand Expand 2 Figure 6.4 – A Decision Tree for Capacity Expansion $135,000 $109,000 $148,000