1 Capacity Planning: Long- Term & Short-Term This presentation explores: – The nature of strategic capacity planning – Capacity terminology – Determining capacity requirements – Decision trees – Service capacity planning ....
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1
Capacity Planning: Long-Term & Short-Term
This presentation explores:
– The nature of strategic capacity planning
– Capacity terminology
– Determining capacity requirements
– Decision trees
– Service capacity planning ....
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Strategic Capacity Planning Capacity
– The amount of resource inputs available relative to output requirements at a particular time
Strategic Capacity Planning (Long-Range) ....
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Planning Time Frames Long range - more than 1 year and involves top
management e.g. buildings, facilities, specialized equipment
Intermediate range - 6 to 18 months: monthly/quarterly plans; capacity varied by hiring, firing, tool improvement, etc.
Short range - less than I month: overtime, transfers, routings, etc.
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Best Operating Level
Underutilization Over Utilization
Best OperatingLevel
Averageunit costof output
Volume ....
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Capacity Utilization (does not account for operating efficiency)
Design capacity– maximum obtainable output
Capacity used– rate of output actually achieved ....
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Utilization--Example Design capacity = 120 units/week
Actual output = 83 units/week
Utilization = ? ....
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Economies of Scale & Long-term Capacity Planning
100-unitplant
200-unitplant 300-unit
plant
400-unitplant
Volume
Averageunit costof output
....
•Economy of Scale combined with Experience Curve could be a competitive strategy
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The Experience Curve
Total accumulated production of units
Cost orpriceper unit
....
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Capacity Utilization Rate Defined
Cap utilization Rate = Cap. Used / Best Optg Level
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How to Plan for Long-Term Capacity Flexibility
Flexible plants - minimal changeover time between product lines.
Flexible processes - flexible manufacturing systems and easy setup of manufacturing equipment; able to realize economies of scope
Flexible workers - cross training; vertical job enlargement (also called job enrichment as opposed to job enlargement).
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Strategic Capacity Planning Decisions continued ..
Frequency of Capacity Additions - need balance between frequent and infrequent capacity additions
External Sources of Capacity - possible in manufacturing (e.g. chemicals and energy) but easier in service industries (e.g. banking, airline, healthcare).
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Timing of Capacity Increments
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Determining Capacity Requirements Steps ... Forecast sales within each individual product line
Calculate equipment and labor requirements to meet the forecasts
Project equipment and labor availability over the planning horizon ....
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Example--Capacity Requirements
A manufacturer produces two lines of ketchup, FancyFine and a Generic line. Each is sold in small and family-size plastic bottles – differentiator here, is size of bottles.
The following table shows forecast demand for the next four years.
Year: 1 2 3 4FancyFine
Small (000s) 50 60 80 100Family (000s) 35 50 70 90Generic
Small (000s) 100 110 120 140Family (000s) 80 90 100 110
....
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The Product from a Capacity Viewpoint Are we really producing two different types of
ketchup from the standpoint of capacity requirements - (if the two brands are manufactured on same identical production lines)? ....
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Equipment and Labor Requirements
Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200
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.
....
Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200
Small Mach. Cap. 300,000 Labor 6Family-size Mach. Cap. 240,000 Labor 6
Small
Percent capacity used 50.00%Machine requirement 1.50Labor requirement 3.00Family-size
Percent capacity used 47.92%Machine requirement 0.96Labor requirement 2.88
Exercise: Fill in the blanks for periods 2-4. ....
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Capabilities and the Location Decision Often driven by short-term considerations
– wage rates– exchange rates
Better approach is to consider how location impacts development of long-term capabilities
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Long-term Capacity Location: Six Step Process
Identify Sources of Value Identify Capabilities Needed Assess Implications of Location Decision on
Development of Capabilities Identify Potential Locations Evaluate Locations Develop Strategy for Building Network of
Locations
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Stage 1: Regional-International
Minimize transportation costs and provide acceptable service
Proper supply of labor Wage rates Unions (right-to-work laws) Regional taxes, regulations, trade barriers Political stability
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Stage 2: Community
Availability of acceptable sites Local government attitudes Regulations, zoning, taxes, labor supply Tax Incentives Community’s attitude Amenities
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Breakeven Location Model
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Locating Pure Service Organizations
Recipient to Facility– facility utilization– travel distance per citizen– travel distance per visit
Facility to Recipient
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Tools for Location Decisions: Decision TreesA 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 ranks the respective probabilities as .10, .50, and .40. A cost analysis that reveals the effects upon costs is shown in the following table.
....
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Payoff Table
0.1 0.5 0.4Low Medium High
A 10 50 90B -120 25 200C 20 40 60
....
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We start with our decisions...
A
B
C
....
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Then add our possible states of nature, probabilities, and payoffs
High demand (.4)
Medium demand (.5)
Low demand (.1)
High demand (.4)
Medium demand (.5)
Low demand (.1)
A
B
CHigh demand (.4)
Medium demand (.5)
Low demand (.1)
$90k$50k
$10k
$200k$25k
-$120k
$60k$40k
$20k
....
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Determine the expected value of each decisionHigh demand (.4)
Medium demand (.5)
Low demand (.1)
A
$90k$50k
$10k
EVA=.4(90)+.5(50)+.1(10)=$62k
$62k
Exercise: Complete the decision tree analysis.
....
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Planning Service Capacity Time - capacity cannot be stored.
Location - near customer
Volatility of Demand - much higher and difficult to plan for; e.g. how do restaurants and airlines plan for this?
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Capacity Utilization & Service Quality
Best operating point is near 70% of capacity
From 70% to 100% of service capacity (also called critical zones), what do you think happens to service quality? Why?
Context specific tradeoff - predictable services(e.g. commuter trains, mail sorting operations) should plan for 100% utilization rate while higher risk services (hospitals emergencies, fire services) should expect lower operating utilization rates.
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Capacity Expansion Strategies:Entrepreneurial Stage
Shift resources to different tasks as needed
Customer co-production - self-serve stands for all or some food items
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Capacity Expansion Strategies: Multi-site Rationalization Stage
Add services to existing site
Duplicate existing services at additional sites
Do both ....
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Capacity Expansion Strategies: Growth Stage
“Bermuda Triangle” of operational complexity– Management difficulty exceeds management ability
New capacity management challenges– Need for fresh ideas– Need to upgrade older facilities ....
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Capacity Expansion Strategies: Maturity Stage
Focus on operational efficiencies
Remodeling and replacement
Service modification
– Duplication across entire service system ....
382
Learning Curves Underlying Principles of Learning Curves
Plotting Learning Curves
Learning
From Learning Curves to Performance Improvement
393
Underlying Principles of Learning Curves1. Each time you perform a task it takes less time than
the last time you performed the same task
2. The extent of task time decreases over time
3. The reduction in time will follow a predictable pattern
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Learning Curves
% learning Rate(90% , 80%) - is used to denote a given exponential Learning Curve(L.C.)
– Yx = Kxn
– Y = hrs. to produce x unit; K = hrs to produce unit 1– x = Unit number – n = log b/log 2 where b = learning percent– logarithmic plot,.
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Organizational learning - Differences in Performance (L.C.) due to
position on the curve employee involvement in operations improvement
activities (cost, quality, etc.) existence of standards
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Typical Pattern of Learning and Forgetting
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Plotting Learning Curves
Initial Manufacturing Cost: $100/unit
90% Learning Curve: $100$90$81$73$66$59$53$48$43
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Plotting Learning Curves
0
10
20
30
40
50
60
70
80
90
100
1 3 5 7 9
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15
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25
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Unit number
Pro
du
ctio
n C
ost
($) 90 % Learning Curve
456
Learning Individual Learning
Organizational Learning
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From Learning Curves to Performance Improvement
Proper selection of workers.
Proper training.
Motivation.
Work specialization.
Do one or very few jobs at a time.
Provide quick and easy access for help.
Allow workers to help redesign their tasks.
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Estimating Learning Curves Before start of production run, use:
– industry standard; paying attention to differences and/or similarities in startup costs
Limited Start-up– use simple exponential curve e.g. labor for unit two/labor
for unit one With Historical data - production
– use statistical analysis; plot data on log/log graph and determine LC with
regression analysis or other curve fitting methodology.
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Short Term Capacity Planning
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Bottlenecks in Sequential Operations
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Efficiency and Output Increase when Machines are Being Added
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Product and Service Flows
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Process Flow Map for a Service
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The Theory of Constraints
Balance the flows not capacities throughout the shop
The utilization of a nonbottleneck is determined by other constraints in the system, such as the bottlenecks
Utilization is not the same as activation An hour lost at a bottleneck is an hour lost
for the whole shop
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The Theory of Constraints continued
An hour saved at a nonbottleneck is a mirage The bottlenecks govern the shop throughput and
WIP inventories The transfer batch size need not be the same as the
process batch size
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The Theory of Constraints concluded
Process batch size should be variable, not fixed A shop schedule should be set by examining all the
shop constraints simultaneously
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Implementing the Theory of Constraints Identify the System’s Constraints Exploit the Constraint Subordinate all else to the Constraint Elevate the Constraint If Constraint is no Longer a Bottleneck, Find the
Next Constraint and Repeat the Steps.
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Relationship between Capacity and Scheduling
Capacity is oriented toward the acquisition of productive resources
Scheduling related to the timing of the use of resources
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