1. S7 - 1© 2011 Pearson Education, Inc. publishing as Prentice Hall Process Strategies ( process, repetitive, product) The objective of the process strategy is to build a production process that has capacity to meet customer requirements (quality & quantity)customer requirements (quality & quantity) product specifications (quality & cost)product specifications (quality & cost) within finance (fixed costs = capital invested)within finance (fixed costs = capital invested) other managerial constraints (flexibility)other managerial constraints (flexibility)

2. S7 - 2 Process Strategy & Capacity Process strategy chosen has to Meet consumer demand (quality & quantity expectations) –low/medium/high ? –constant or changing ? –predictable or unpredictable ? Meet Business requirements (average cost per unit) –efficient use of existing capacity –ability to change output (up or down) if needed © 2011 Pearson Education, Inc. publishing as Prentice Hall

3. S7 - 3© 2011 Pearson Education, Inc. publishing as Prentice Hall Capacity  The number of units a facility can produce, hold, receive, or store, in a period of time  Has a big effect on fixed costs (& therefore break even )  Determines if demand will be satisfied  Three time horizons  Long (>1yr)  Medium (3 -18 months)  Short (<3 months)

4. S7 - 4© 2011 Pearson Education, Inc. publishing as Prentice Hall Planning Over a Time Horizon (relates to forecasting accuracy) Figure S7.1 To increase capacityTo use excess capacity Medium (3-18 month) SubcontractAdd personnel Add equipmentBuild or use inventory Add shifts Short (< 3 month) Schedule jobs Schedule personnel Allocate machinery * Long (> 12 month) Add facilities Add long lead time equipment * * Difficult to adjust capacity as limited options exist Options for Adjusting Capacity

5. S7 - 5© 2011 Pearson Education, Inc. publishing as Prentice Hall Capacity and Strategy  Capacity decisions impact all 10 decisions of operations management as well as other functional areas of the organization  Capacity decisions must be integrated into the organization’s mission and strategy

6. S7 - 6© 2011 Pearson Education, Inc. publishing as Prentice Hall Capacity Considerations 1.Forecast demand accurately (marketing department do this) 2.Understand the technology and capacity increments 3.Find the optimum operating level (volume) 4.Build for change (flexibility is desirable)

7. S7 - 7© 2011 Pearson Education, Inc. publishing as Prentice Hall Economies and Diseconomies of Scale Economies of scale Diseconomies of scale 25 - room roadside motel 50 - room roadside motel 75 - room roadside motel Number of Rooms 255075 Average unit cost (dollars per room per night) Figure S7.2

8. S7 - 8© 2011 Pearson Education, Inc. publishing as Prentice Hall Decision making about Capacity Changes (a)Leading demand with incremental expansion Demand Expected demand New capacity (c)Attempts to have an average capacity with incremental expansion Demand New capacity Expected demand (b)Capacity lags demand with incremental expansion Demand New capacity Expected demand Figure S7.6

9. S7 - 9© 2011 Pearson Education, Inc. publishing as Prentice Hall Managing Demand  Demand exceeds capacity  reduce demand by raising prices, scheduling longer lead time  Long term solution is to increase capacity  Capacity exceeds demand  Stimulate market (advertising, price cuts, etc)  Product changes (diversify, make to stock)  Adjusting to seasonal demands  Produce products with opposite demand patterns (surf wear / snow wear)

10. S7 - 10© 2011 Pearson Education, Inc. publishing as Prentice Hall Complementary Demand Patterns 4,000 – 3,000 – 2,000 – 1,000 – J F M A M J J A S O N D J F M A M J J A S O N D J Sales in units Time (months) Combining both demand patterns reduces the variation Snowmobile motor sales Jet ski engine sales Figure S7.3

11. S7 - 11© 2011 Pearson Education, Inc. publishing as Prentice Hall Tactics for Matching Capacity to Demand 1.Making staffing changes (extra shifts(+), reduce hours (-)) 2.Adjusting equipment  Purchasing additional machinery(+)  Selling or leasing out existing equipment(-) 3.Improving processes to increase throughput (+) 4.Redesigning products to facilitate more throughput(+) 5.Adding process flexibility to meet changing product preferences (+/-) 6.Closing facilities(-)

12. S7 - 12 Capacity Management Strategies © 2011 Pearson Education, Inc. publishing as Prentice Hall Level Capacity Strategy Keeping operations running steadily through low demand periods to build up inventory for high demand periods. Typical of any business where fixed assets are a big part of the operation. (hotels, theatres, hospitals). Inflexible in face of changing demand.

13. S7 - 13 Capacity Management Strategies © 2011 Pearson Education, Inc. publishing as Prentice Hall Chase Demand Strategy Change operations by increasing / decreasing inputs so that capacity meets the demand. Requires good forecasting and flexible resourcing (eg outsourcing, spare capacity). Often seen in services. (cannot build inventory ad so must meet demand when it is there).

14. S7 - 14 CHASE & LEVEL compared © 2011 Pearson Education, Inc. publishing as Prentice Hall Level CapacityChase Demand Size of variationSmallLarge Speed of changeSlowFast PredictabilityPredictableUnpredictable Costs StructureFixed cost highVariable cost high Cost of complaintsHighLow Cost of lost businessLowHigh

15. S7 - 15© 2011 Pearson Education, Inc. publishing as Prentice Hall Demand & Capacity Management in Services  Demand management  Appointment, reservations, FCFS rule  Capacity management  Staffing levels & scheduling  full-time  part-time  Temporary/casual

16. S7 - 16 Labour Flexibility Strategies © 2011 Pearson Education, Inc. publishing as Prentice Hall 1.External numerical flexibility (outsourcing, subcontracting, ‘overflow’ part-time staff) GOOD : allows core operations to continue more easily BAD : possible loss of control on cost and quality 2.Internal numerical flexibility (flexible hours contracts, overtime, frequent scheduling, holiday planning) GOOD: maximises effective capacity when needed BAD: disruptive to staff – can be problems

17. S7 - 17 Labour Flexibility Strategies © 2011 Pearson Education, Inc. publishing as Prentice Hall 3.Functional flexibility (multiskilling) (change staff roles to meet different needs) GOOD: works well in simple businesses. BAD: training costs, occupational identity issues (person and industry). 4.Financial flexibility (performance pay, seasonal pay) (pay reflects the existing need/output of staff) GOOD : may increase employment options BAD : may be difficult for staff

18. S7 - 18© 2011 Pearson Education, Inc. publishing as Prentice Hall

19. S7 - 19© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

20. S7 - 20© 2011 Pearson Education, Inc. publishing as Prentice Hall Utilization and Efficiency Utilization is the percent of design capacity achieved Efficiency is the percent of effective capacity achieved Utilization = Actual output/Design capacity (as %) Efficiency = Actual output/Effective capacity (as %)

21. S7 - 21© 2011 Pearson Education, Inc. publishing as Prentice Hall Bakery Example Bakery Example (design capacity & utilisation) Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, 3 - 8 hour shifts Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

22. S7 - 22© 2011 Pearson Education, Inc. publishing as Prentice Hall Bakery Example Bakery Example (design capacity & utilisation) Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, 3 - 8 hour shifts Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls

23. S7 - 23© 2011 Pearson Education, Inc. publishing as Prentice Hall Bakery Example Bakery Example (design capacity & utilisation) Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, 3 - 8 hour shifts Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls Utilization = 148,000/201,600 = 73.4%

24. S7 - 24© 2011 Pearson Education, Inc. publishing as Prentice Hall Bakery Example Bakery Example (design capacity & utilisation) Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, 3 - 8 hour shifts Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls Utilization = 148,000/201,600 = 73.4%

25. S7 - 25© 2011 Pearson Education, Inc. publishing as Prentice Hall Bakery Example Bakery Example (effective capacity & efficiency) Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, 3 - 8 hour shifts Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls Utilization = 148,000/201,600 = 73.4% Efficiency = 148,000/175,000 = 84.6%

26. S7 - 26© 2011 Pearson Education, Inc. publishing as Prentice Hall Bakery Example Bakery Example (effective capacity & efficiency) Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, 3 - 8 hour shifts Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls Utilization = 148,000/201,600 = 73.4% Efficiency = 148,000/175,000 = 84.6%

27. S7 - 27© 2011 Pearson Education, Inc. publishing as Prentice Hall Bakery Example Bakery Example (effective capacity & efficiency) Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, 3 - 8 hour shifts Efficiency = 84.6% Efficiency of new line = 75% Expected Output = (Effective Capacity)(Efficiency) = (175,000)(.75) = 131,250 rolls

28. S7 - 28© 2011 Pearson Education, Inc. publishing as Prentice Hall Bakery Example Bakery Example (effective capacity & efficiency) Actual production last week = 148,000 rolls Effective capacity = 175,000 rolls Design capacity = 1,200 rolls per hour Bakery operates 7 days/week, 3 - 8 hour shifts Efficiency = 84.6% Efficiency of new line = 75% Expected Output = (Effective Capacity)(Efficiency) = (175,000)(.75) = 131,250 rolls

29. S7 - 29© 2011 Pearson Education, Inc. publishing as Prentice Hall