Tata McGraw CHAPTER 5 Strategic Capacity Management

Chapter 5 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 OBJECTIVES 5-3

Strategic 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 5-4

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

5–6 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Capacity utilization rate – a measure of how close the firm is to its best possible operating level Economies of scale – the idea that as a planet gets larger and volume increases, the average cost per unit tends to drop Diseconomies of scale – at some point, the plant becomes too large and average cost per unit begins to increase

5–7 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Greater than one yearGreater than one year Long range Monthly or quarterly plans covering the next 6 to 18 monthsMonthly or quarterly plans covering the next 6 to 18 months Intermediate range Less than one monthLess than one month Short range

Best Operating Level Example: Engineers design engines and assembly lines to operate at an ideal or “best operating level” to maximize output and minimize ware Underutilization Best Operating Level Average unit cost of output Volume Overutilization 5-8

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 = 83/120 =0.69 or 69%   Answer: Capacity utilization rate = Capacity used Best operating level = 83/120 =0.69 or 69% 5-9

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 Learning Curve working Diseconomies of Scale start working 5-10

The Learning Curve As plants produce more products, they gain experience in the best production methods and reduce their costs per unit Total accumulated production of units Cost or price per unit Yesterday Today Tomorrow 5-11

5–12 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Capacity focus – the idea that a production facility works best when it is concentrated on a limited set of production objectives – Focused factory or plant within a plant (PWP) concept Capacity flexibility – the ability to rapidly increase or decrease product levels or the ability to shift rapidly from one product or service to another – Comes from the plant, processes, and workers or from strategies that use the capacity of other organizations

Capacity Planning: Balance Stage 1Stage 2Stage 3 Units per month 6,0007,0005,000 Unbalanced stages of production Stage 1Stage 2Stage 3 Units per month 6,000 Balanced stages of production Maintaining System Balance: Output of one stage is the exact input requirements for the next stage 5-13

Determining Capacity Requirements 1. Forecast sales within each individual product line 2. Calculate equipment and labor requirements to meet the forecasts 3. Project equipment and labor availability over the planning horizon 5-14

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. 5-15

Example of Capacity Requirements (Continued): Product from a Capacity Viewpoint Question: Are we really producing two different types of mustards from the standpoint of capacity requirements? Answer: No, it’s the same product just packaged differently. Question: Are we really producing two different types of mustards from the standpoint of capacity requirements? Answer: No, it’s the same product just packaged differently. 5-16

Example of Capacity Requirements (Continued) : 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. 5-17

5–18 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Manufacturing Capacity Goods can be stored for later use. Goods can be shipped to other locations. Volatility of demand is relatively low. Service Capacity Capacity must be available when service is needed – cannot be stored. Service must be available at customer demand point. Much higher volatility is typical.

5–19 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. The relationship between service capacity utilization and service quality is critical. – Utilization is measured by the portion of time servers are busy. Optimal levels of utilization are context specific. – Low rates are appropriate when the degree of uncertainty (in demand) is high and/or the stakes are high (e.g., emergency rooms, fire departments). – Higher rates are possible for predictable services or those without extensive customer contact (e.g., commuter trains, postal sorting).

5–20 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Rate of service utilization and service quality are directly linked. Arrivals exceed services – many customers are never served Sufficient capacity to provide quality service Service quality declines – disruptions or high arrival levels lead to long wait times

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? 5-21

1-22 End of Chapter