1. Copyright ©2016 Cengage Learning. All Rights Reserved
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

2. 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

3. 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

4. 10.1 Examples of Short- and Long-Term Capacity Decisions

5. 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

6. (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

7. 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

8. 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

9. 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. 10.2 The Demand Versus Capacity Problem Structure

11. 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

12. 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)]

13. 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

14. 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 %)

15. 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.

17. 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

18. 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

19. 10.5 Seasonal Demand and Complementary Goods or Services

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

21. 10.6 Capacity Expansion Options

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

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

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