1 OM2, Ch. 10 Capacity Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible.

1

OM2, Ch. 10 Capacity Management

©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CAPACITY MANAGEMENTCHAPTER 10

DAVID A. COLLIERAND

JAMES R. EVANS

OM2

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LO1 Explain the concept of capacity.

LO2 Describe how to compute and use capacity measures.

LO3 Describe long-term capacity expansion strategies.

LO4 Describe short-term capacity adjustment strategies.

LO5 Explain the principles and logic of the Theory of Constraints.

l e a r n i n g o u t c o m e s

Chapter 10 Learning Outcomes

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Chapter 10 Capacity Management

If there’s a downside to selling a product users can’t live without, it’s that customers tend to be unforgiving when something goes wrong. That’s a lesson BlackBerry maker Research In Motion (RIM) Ltd., based in Waterloo, Ontario, learned in 2008 after the company’s popular wireless email service failed for about three hours – the second large-scale service disruption in less than a year – leaving so-called “Crackberry addict”" running for their desktop computers to read messages. Reports suggested the outage was related to RIM’s efforts to expand capacity at its central operating center as its subscriber base increased at the rate of one million new users every three months.(continued)

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What do you think? Have you ever experienced problems with a service because of inadequate labor or equipment capacity?

Critics argue that RIM is more susceptible to major service failures because of its centralized network architecture. RIM designs servers that relay email from a company’s own server to a network operating center, where it is then handed off to a wireless carrier and beamed to a subscriber’s device. The advantage of such a centralized setup is that it gives RIM more control over the system and its security, even during an interruption. The downside, however, is that a major problem at the operating center such as inadequate server and backup capacity threatens to cascade throughout the entire system, turning a localized issue into a continent-wide mess.


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Understanding Capacity

Capacity is the capability of a manufacturing or service resource such as a facility, process, workstation, or piece of equipment to accomplish its purpose over a specified time period.


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The resources available to the organization—facilities, equipment, and labor—how they are organized, and their efficiency as determined by specific work methods and procedures determine capacity.

Capacity can be viewed in one of two ways:

1. As the maximum rate of output per unit of time, or

2. As units of resource availability.


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Solved Problem

An automobile transmission-assembly factory normally operates two shifts per day, five days per week. During each shift, 400 transmissions can be completed under ideal conditions. What is the capacity of this factory?

Capacity = (2 shifts/day)(5 days/week) (400 tranmissions/shift)(4

weeks/month)

= 16,000 transmissions/month


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Key Capacity Issues

• Can the facility, process, or equipment accommodate new goods and services and adapt to changing demand for existing goods and services?

• How large should facility, process, or equipment capacity be?

• When should capacity changes take

place?


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Exhibit 10.1 Examples of Short- and Long-Term Capacity Decisions

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Economies of scale are achieved when the average unit cost of a good or service decreases as the capacity and/or volume of throughput increases.

Diseconomies 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.


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A focused factory is a way to achieve economies of scale without extensive investments in facilities and capacity by focusing on a narrow range of goods or services, target market segments, and/or dedicated processes to maximize efficiency and effectiveness.


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Safety capacity (often called the capacity cushion) is an amount of capacity reserved for unanticipated events, such as demand surges, materials shortages, and equipment breakdowns.

Average safety capacity (%)

= 100% − Average resource utilization % [10.1]


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Exhibit 10.2 The Demand versus Capacity Problem Structure

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Capacity Measurement in Job Shops

• In a job shop, setup time can be a substantial part of total system capacity.

Capacity Required (Ci) = Setup Time (Si) + [Processing Time (Pi) x Order Size (Qi)]

= Si + [(Pi)(Qi )] [10.2]


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Solved Problem

• Ham’s Dental Office (Exhibits 10.3 and 10.4) illustrates these calculations using a dental procedure mix.

• Setup times normally represent a substantial percentage of the total capacity of most job shops. Every effort must be made to reduce setup time to the lowest possible amount so as to “free up capacity” for creating output.


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Exhibit 10.3 Dental Office Procedures and Times for Today

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Exhibit 10.4

*Example computation: C = (å Si + Pi × Qi) = 15 + 15 + (90 × 2) = 210 minutes, assuming a setup for each patient.

Dental Office Demand-Capacity Analysis

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Long-Term Capacity Strategies

• In developing a long-range capacity plan, a firm must make the basic economic trade-off between the cost of capacity and the opportunity cost of not having adequate capacity.

• Long-term capacity planning must be closely tied to the strategic direction of the organization—what products and services it offers.


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• Complementary goods and services can be produced or delivered using the same resources available to the firm, but whose seasonal demand patterns are out of phase with each other.

• Complementary goods or services balance seasonal demand cycles and therefore use the excess capacity available, as illustrated in Exhibit 10.5.

Chapter 10 Long-Term Capacity Strategies

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Exhibit 10.5 Seasonal Demand and Complementary Goods or Services

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Briggs and Stratton Briggs & Stratton is the world’s largest producer of air-cooled gasoline engines for outdoor power equipment. The company designs, manufacturers, markets, and services these products for original equipment manufacturers worldwide. These engines are primarily aluminum alloy gasoline engines ranging from 3 through 25 horsepower. Briggs & Stratton is a leading designer, manufacturer, and marketer of portable generators, lawn mowers, snow throwers, pressure washers, and related accessories. It also provides engines for manufacturers of other small engine-driven equipment such as snowmobiles, go-karting, and jet skis.

(continued)


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Briggs and Stratton The complementary and diverse original equipment markets for Briggs & Stratton engines allows factory managers to plan equipment and labor capacities and schedules in a much more stable operating environment. This helps minimize manufacturing costs, stabilize workforce levels, and even out volumes so that assembly lines can be used in a more efficient fashion


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Four basic strategies for expanding capacity over some fixed time horizon:

1. One large capacity increase (Exhibit 10.6a).

2. Small capacity increases that match average demand (Exhibit 10.6b).

3. Small capacity increases that lead demand (Exhibit 10.6c).

4. Small capacity increases that lag demand (Exhibit 10.6d).

Chapter 10 Capacity Expansion Options

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Exhibit 10.6 Capacity Expansion Options

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Short Term Capacity Adjustment Decisions• Add or share equipment: lease equipment as

needed or set up a partnership arrangement with capacity sharing. Examples: mainframe computers, CAT scanner, farm equipment.

• Sell unused capacity: sell idle capacity to outside buyers and even competitors. Examples: computing capacity, perishable hotel rooms.

• Change labor capacity and schedules: short term changes in work force levels. Examples: overtime, extra shifts, temporary employees, outsourcing.

• Change labor skill mix: hiring the right people.• Shift work to slack periods


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Managing Capacity by Shifting and Stimulating Demand• Vary the price of goods or services: price is

the most powerful way to influence demand.• Provide customers information: best times to

call or visit.• Advertising and promotion: a vital role on

influencing demand; promotions are strategically distributed to increase demand during periods of low sales or excess capacity.

• Add peripheral goods and/or services: change demand during slack periods.

• Provide reservations: a promise to provide a good or service at some future time and place.


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If You Make a Reservation, Be Sure to Show Up!The following sign was seen on a doctor’s

reception desk: NO-SHOW POLICY Beginning August 15, 2008 we will be charging a $30 fee to patients who fail to keep their scheduled appointments. To avoid this fee, patients need to cancel their appointment 24 hours ahead. This fee is not covered by insurance and will be the patient’s responsibility. What does this statement demonstrate about the nature of service demand and capacity?


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Revenue Management Systems

A revenue management system (RMS) - often called yield management - consists of dynamic methods to forecast demand, allocate perishable assets across market segments, decide when to overbook and by how much, and determine what price to charge different customer (price) classes.

Revenue management systems consist of forecasting, allocation, overbooking, and pricing.


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Theory of ConstraintsThe Theory of Constraints (TOC) is a 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.

• Constraint: anything that limits an organization from moving toward or achieving its goal.


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Theory of Constraints• A physical constraint is associated with

the capacity of a resource (e.g., machine, employee).

• A bottleneck work activity is one that effectively limits capacity of the entire process.

• A nonbottleneck work activity is one in which idle capacity exists.

• A nonphysical constraint is environmental or organizational (e.g., low product demand or an inefficient management policy or procedure).


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Exhibit 10.7 Basic Principles of the Theory of Constraints

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David Christopher, Orthopedic Surgeon, Case Study1. What is the clinic’s current weekly workload?

2. Should the clinic hire more surgeons, and if so, how

many?

3. What other options and changes could be made to

maximize patient throughput and surgeries, and

therefore revenue, yet not comprise on the quality of

medical care?

4. What are your final recommendations? Explain your

reasoning.


1 OM2, Ch. 10 Capacity Management ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible.

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