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Explain the concept of capacity Describe how to compute and use capacity measures Describe long-term capacity expansion strategies Describe short-term capacity adjustment strategies Explain the principles and logic of the Theory of Constraints

Capacity Capability of a manufacturing or service resource to accomplish its purpose over a specified time period Viewed in two ways Maximum rate of output per unit of time or Units of resource availability

10.1 Examples of Short- and Long-Term Capacity Decisions

Economies and Diseconomies of Scale Achieved when the average unit cost of a good or service decreases as the capacity and/or volume of throughput increases Economies of scale Occur when the average unit cost of the good or service begins to increase as the capacity and/or volume of throughput increases Diseconomies of scale

(dollars per room per night) Economies and Diseconomies of Scale in capacity investments. Number of Rooms 25 50 75 (dollars per room per night) Average unit cost Many rooms -must have some variety, FC/75 Cheap, basic no variety, FC/25 Cheaper, basic no variety, FC/50 25 - room roadside motel 75 - room roadside motel 50 - room roadside motel Economies of scale Diseconomies of scale Figure S7.2 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Focused Factory Way to achieve economies of scale without extensive investments in facilities and capacity by focusing on: Narrow range of goods or services Target market segments Dedicated processes to maximize efficiency and effectiveness

Steel mini mills in USA = focused factory Only one product (means no reheating and casting cost). Only open when there is demand for the product. Flexible labour plan Work = $22/hr all the overtime you want No work = $8 /hr 20hrs max maintenance

Safety Capacity (Capacity Cushion) Amount of capacity reserved for unanticipated events Demand surges Materials shortages Equipment breakdowns Average safety capacity(%) = 100% - Average resource utilization(%)

10.2 The Demand Versus Capacity Problem Structure

Capacity Measurement Work order: Specification of work to be performed for a customer or a client For any production situation, setup time can be a substantial part of total system capacity

Capacity Measurement Capacity required (Ci) = Setup time (Si) + [Processing time (Pi) x Order size (Qi)] Where Ci = Capacity requirements in units of time for work order i Si = Setup or changeover time for work order i as a fixed amount that does not vary with volume Pi = Processing time for each unit of work order Qi = Size of order i in number of units ΣCi = Σ[Si + (Pi x Qi)]

Design capacity (measured as utilisation) Capacity Definitions Design capacity (measured as utilisation) is the maximum theoretical output of a system normally expressed as a rate (output/time) Effective capacity (measured as efficiency) is the actual output expects to achieve given current operating constraints (e.g. downtime for maintenance) Often lower than design capacity

Utilization and Efficiency Utilization is the percent of design capacity achieved Utilization = Actual output/Design capacity (as %) Efficiency is the percent of effective capacity achieved Efficiency = Actual output/Effective capacity (as %)

Capacity Calculations A house painting business can (in theory) paint 100 houses per year. The boss has set a target of 90 houses per year to allow time for maintenance of the equipment, breakdowns etc. The business records show that over the last ten years they only paint 85 houses per year on average.

Long-Term Capacity Strategies Long-term capacity planning is closely tied to the strategic direction of the organization Complementary goods and services Produced or delivered using the same resources available to the firm Balance seasonal demand cycles and use the excess capacity available

Main Strategies for capacity management CHASE – change capacity to ‘chase’ demand changes. LEVEL – Keep capacity constant , try to manage demand. Level Capacity Chase Demand Size of variation Small Large Speed of change Slow Fast Predictability Predictable Unpredictable Costs Structure Fixed cost high Variable cost high Cost of complaints High Low Cost of lost business © 2011 Pearson Education, Inc. publishing as Prentice Hall

10.5 Seasonal Demand and Complementary Goods or Services

Snow mobiles and jetskis Same components and technology Snow mobiles and jetskis Same components and technology. Opposite seasonal peaks (summer & winter).

10.6 Capacity Expansion Options

Short-Term Capacity Management Done by adjusting short-term capacity levels Add or share equipment Sell unused capacity Change labor capacity and schedules Change labor skill mix Shift work to slack periods

Short-Term Capacity Management Shift and stimulate demand Vary the price of goods or services Provide customers with information Advertising and promotion Add peripheral goods and/or services Provide reservations

Short-Term Capacity Management Revenue management system(RMS) Dynamic methods to: Forecast demand Allocate perishable assets across market segments Decide when to overbook and by how much Determine what price to charge different customer (price) classes

Demand & Capacity Management in Services Demand management Appointment, reservations, FCFS rule Capacity management Staffing levels & scheduling full-time part-time Temporary/casual © 2011 Pearson Education, Inc. publishing as Prentice Hall

Set of principles that focuses on increasing total process throughput Theory of Constraints Set of principles that focuses on increasing total process throughput By maximizing the utilization of all bottleneck work activities and workstations Throughput: Amount of money generated per time period through actual sales

Constraint Anything that limits an organization from moving toward or achieving its goal Physical constraint: Associated with the capacity of a resource Bottleneck work activity: Effectively limits capacity of the entire process Nonbottleneck work activity: One in which idle capacity exists Nonphysical constraint: Associated with environmental or organizational capacity

Capability of a manufacturing or service resource to accomplish its purpose over a specified time period is known as capacity Capacity measurement ΣCi = Σ[Si + (Pi x Qi)] In developing a long-range capacity, a firm makes an economic trade-off between: Cost of capacity Opportunity cost of not having adequate capacity

If short-term demand is stable and sufficient capacity is available then, managing operations to ensure that demand satisfaction is easy Anything that limits an organization from moving toward or achieving its goal is known as constraint

Bottleneck work activity Capacity Complementary goods and services Constraint Diseconomies of scale Economies of scale Focused Factory Nonbottleneck work activity Nonphysical constraint

Physical constraint Revenue management system (RMS) Safety Capacity Theory of Constraints Throughput Work order