1. McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Strategic Capacity Management
Chapter 5
Strategic Capacity Management

3. OBJECTIVES Strategic Capacity Planning Defined
5-3
OBJECTIVES
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

4. Strategic Capacity Planning
5-4
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 3

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

6. 5-6
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

7. Example of Capacity Utilization
5-7
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% 6

8. Economies & Diseconomies of Scale
5-8
Economies & Diseconomies of Scale
100-unit
plant
200-unit
300-unit
400-unit
Volume
Average
unit cost
of output
Economies of Scale and the Learning Curve working
Diseconomies of Scale start working

9. Total accumulated production of units Cost or price per unit
5-9
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

10. Plants Within Plants (PWP)
5-10
Capacity Focus
The concept of the focused factory holds that production facilities work best when they focus on a fairly limited set of production objectives
Plants Within Plants (PWP)
Extend focus concept to operating level 10

11. Flexible plants Flexible processes Flexible workers
5-11
Capacity Flexibility
Flexible plants
Flexible processes
Flexible workers 11

12. Capacity Planning: Balance
5-12
Capacity Planning: Balance
Unbalanced stages of production
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
Balanced stages of production
Units
per
month
Stage 1
Stage 2
Stage 3
6,000
6,000
6,000 12

13. Frequency of Capacity Additions
5-13
Capacity Planning
Frequency of Capacity Additions
External Sources of Capacity 13

14. Determining Capacity Requirements
5-14
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 14

15. Example of Capacity Requirements
5-15
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. 15

16. Answer: No, it’s the same product just packaged differently.
5-16
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. 16

17. 5-17
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. 17

18. At 1 machine for 100,000, it takes 1.5 machines for 150,000
5-18
Question: What are the Year 1 values for capacity, machine, and labor?
150,000/300,000=50%
At 1 machine for 100,000, it takes 1.5 machines for 150,000
At 2 operators for 100,000, it takes 3 operators for 150,000
The McGraw-Hill Companies, Inc., 2004 18

19. 5-19
Question: What are the values for columns 2, 3 and 4 in the table below?
56.67%
1.70
3.40
66.67%
2.00
4.00
80.00%
2.40
4.80
58.33%
1.17
3.50
70.83%
1.42
4.25
83.33%
1.67
5.00 18

20. Example of a Decision Tree Problem
5-20
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 0.1, 0.5, and 0.4. 20

21. Example of a Decision Tree Problem (Continued): The Payoff Table
5-21
Example of a Decision Tree Problem (Continued): 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 profits, in thousands of dollars are presented in the table below: 21

22. 5-22
Example of a Decision Tree Problem (Continued): Step 1. We start by drawing the three decisions A B C 22

23. $90k $50k $10k A $200k $25k B -$120k C $60k $40k $20k
5-23
Example of Decision Tree Problem (Continued): Step 2. Add our possible states of nature, probabilities, and payoffs A B C
High demand (0.4)
Medium demand (0.5)
Low demand (0.1)
$90k
$50k
$10k
$200k
$25k
-$120k
$60k
$40k
$20k 23

24. EVA=0.4(90)+0.5(50)+0.1(10)=$62k $62k $90k $50k $10k A
5-24
Example of Decision Tree Problem (Continued): Step 3. Determine the expected value of each decision
High demand (0.4)
Medium demand (0.5)
Low demand (0.1)
$90k
$50k
$62k
$10k A
EVA=0.4(90)+0.5(50)+0.1(10)=$62k 24

25. Example of Decision Tree Problem (Continued): Step 4. Make decision
5-25
Example of Decision Tree Problem (Continued): Step 4. Make decision
High demand (0.4)
Medium demand (0.5)
Low demand (0.1) A B C
$90k
$50k
$10k
$200k
$25k
-$120k
$60k
$40k
$20k
$62k
$80.5k
$46k
Alternative B generates the greatest expected profit, so our choice is B or to construct a new facility 25

26. Planning Service Capacity vs. Manufacturing Capacity
5-26
Planning Service Capacity vs. Manufacturing Capacity
Time: Goods can not be stored for later use and capacity must be available to provide a service when it is needed
Location: Service goods must be at the customer demand point and capacity must be located near the customer
Volatility of Demand: Much greater than in manufacturing 26

27. Service Utilization and Service Quality
5-27
Service Utilization and Service Quality

28. Capacity Utilization & Service Quality
5-28
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

29. Answer: d. All of the above
5-29
Question Bowl
The objective of Strategic Capacity Planning is to provide an approach for determining the overall capacity level of which of the following?
Facilities
Equipment
Labor force size
All of the above
None of the above
Answer: d. All of the above 7

30. Reduce “capacity used” Increase “capacity used”
5-30
Question Bowl
To improve the Capacity Utilization Rate we can do which of the following?
Reduce “capacity used”
Increase “capacity used”
Increase “best operating level”
All of the above
None of the above
Answer: b. Increase “capacity used” (This increases the numerator in the Capacity Utilization Rate ratio, which is desirable.) 7

31. Answer: d. All of the above
5-31
Question Bowl
When we talk about Capacity Flexibility which of the following types of flexibility are included?
Plants
Processes
Workers
All of the above
None of the above
Answer: d. All of the above 7

32. Answer: d. All of the above
5-32
Question Bowl
When adding capacity to existing operations which of the following are considerations that should be included in the planning effort?
Maintaining system balance
Frequency of additions
External sources
All of the above
None of the above
Answer: d. All of the above 7

33. Answer: a. Capacity cushion
5-33
Question Bowl
Which of the following is a term used to describe the difference between projected capacity requirements and the actual capacity requirements?
Capacity cushion
Capacity utilization
Capacity utilization rate
All of the above
None of the above
Answer: a. Capacity cushion 7

34. Answer: d. All of the above
5-34
Question Bowl
In determining capacity requirements we must do which of the following?
Address the demands for individual product lines
Address the demands for individual plants
Allocate production throughout the plant network
All of the above
None of the above
Answer: d. All of the above 7

35. Expect values of payoffs Payoff values A tree All of the above
5-35
Question Bowl
In a Decision Tree problem used to evaluate capacity alternatives we need which of the following as prerequisite information?
Expect values of payoffs
Payoff values
A tree
All of the above
None of the above
Answer: b. Payoff values (Expected values are what is computed, not prerequisite to the analysis.) 7

36. 5-36
End of Chapter 5