1 Slides used in class may be different from slides in student pack Chapter 11 Strategic Capacity Planning  Strategic Capacity Planning Defined  Capacity Utilization & Best Operating Level  Economies & Diseconomies of Scale  The Experience Curve  Capacity Focus, Flexibility & Planning  Determining Capacity Requirements  Decision Trees  Capacity Utilization & Service Quality

2 Slides used in class may be different from slides in student pack Strategic Capacity Planning Defined  Capacity:  Strategic capacity planning is an approach for determining the

3 Slides used in class may be different from slides in student pack Capacity Utilization  Capacity used – rate of output actually achieved  Best operating level – capacity for which the process was designed  Capacity utilization rate =

4 Slides used in class may be different from slides in student pack Best Operating Level Underutilization Best Operating Level Average unit cost of output Volume Overutilization

5 Slides used in class may be different from slides in student pack 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?  Answer: Capacity utilization rate = Capacity used. Best operating level = =

6 Slides used in class may be different from slides in student pack Economies & Diseconomies of Scale 100-unit plant 200-unit plant 300-unit plant 400-unit plant Volume Average unit cost of output Economies of Scale and the Experience Curve working Diseconomies of Scale start working

7 Slides used in class may be different from slides in student pack The Experience Curve Total accumulated production of units Cost or price per unit As plants produce more products, they gain experience in the best production methods and reduce their costs per unit.

8 Slides used in class may be different from slides in student pack 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

9 Slides used in class may be different from slides in student pack Capacity Flexibility  Flexible plants -  Flexible processes -  Flexible workers -

1010 Slides used in class may be different from slides in student pack Capacity Planning: Balance Stage 1Stage 2Stage 3 Units per month 6,0007,0005,000 Stage 1Stage 2Stage 3 Units per month 6,000 Maintaining System Balance: Output of one stage is the exact input requirements for the next stage

1 Slides used in class may be different from slides in student pack Capacity Planning  Frequency of Capacity Additions - –  External Sources of Capacity -

1212 Slides used in class may be different from slides in student pack 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.

1313 Slides used in class may be different from slides in student pack 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.

1414 Slides used in class may be different from slides in student pack 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? 

1515 Slides used in class may be different from slides in student pack 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.

Year:1234 Small (000s) Family (000s) Small Mach. Cap.300,000Labor6 Family-size Mach. Cap.240,000Labor6 Small Percent capacity used Machine requirement Labor requirement Family-size Percent capacity used Machine requirement Labor requirement Question: What are the Year 1 values for capacity, machine, and labor? © The McGraw-Hill Companies, Inc.,

Year:1234 Small (000s) Family (000s) Small Mach. Cap.300,000Labor6 Family-size Mach. Cap.240,000Labor6 Small Percent capacity used Machine requirement Labor requirement Family-size Percent capacity used Machine requirement Labor requirement Question: What are the values for columns 2, 3 and 4 in the table below? 56.67% % % % % % © The McGraw-Hill Companies, Inc., 2000

1818 Slides used in class may be different from slides in student pack Capacity Planning Process Forecast Demand Compute Needed Capacity Develop Alternative Plans Evaluate Capacity Plans Compute Rated Capacity Select Best Capacity Plan Implement Best Plan Quantitative Factors (e.g., Cost) Qualitative Factors (e.g., Skills)

1919 Slides used in class may be different from slides in student pack Managing Existing Capacity Capacity Management i Vary prices i Vary promotion i Change lead times (e.g., backorders) i Offer complementary products Demand Management

2020 Slides used in class may be different from slides in student pack Example of a Decision Tree Problem A glass factory specializing in crystal is experiencing a substantial backlog, and the firm's management is considering three courses of action: A) Arrange for subcontracting, B) Construct new facilities. C) Do nothing (no change) The correct choice depends largely upon demand, which may be low, medium, or high. By consensus, management estimates the respective demand probabilities as.10,.50, and.40.

2121 Slides used in class may be different from slides in student pack Example of a Decision Tree Problem: The Payoff Table The management also estimates the profits when choosing from the three alternatives (A, B, and C) under the differing probable levels of demand. These costs, in thousands of dollars are presented in the table below:

2 Slides used in class may be different from slides in student pack Example of a Decision Tree Problem: Step 1. We start by drawing the three decisions Subcontract Build New No Change

2323 Slides used in class may be different from slides in student pack Example of Decision Tree Problem: Step 2. Add our possible states of nature, probabilities, and payoffs Subcontract Build New No Change

2424 Slides used in class may be different from slides in student pack Example of Decision Tree Problem: Step 3. Determine the expected value of each decision High demand (.4) Medium demand (.5) Low demand (.1) Subcontract $90k $50k $10k

2525 Slides used in class may be different from slides in student pack Example of Decision Tree Problem: Step 4. Make decision High demand (.4) Medium demand (.5) Low demand (.1) High demand (.4) Medium demand (.5) Low demand (.1) A B C High demand (.4) Medium demand (.5) Low demand (.1) $90k $50k $10k $200k $25k -$120k $60k $40k $20k $62k

2626 Slides used in class may be different from slides in student pack Planning Service Capacity Decision points:  Time -  Location -  Volatility of Demand -

2727 Slides used in class may be different from slides in student pack 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? -