5–1. 5–2 Chapter Five Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

5–1

Operations andSupply Chain Management

CHASE | SHANKAR | JACOBS

14e

5–2

StrategicCapacityManagement

Chapter FiveCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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Learning Objectives

• LO5–1: Explain what capacity management is and why it is strategically important.

• LO5–2: Exemplify how to plan capacity.

• LO5–3: Evaluate capacity alternatives using decision trees.

• LO5–4: Compare capacity planning in services to capacity planning in manufacturing

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.Economies of Scale Made of Steel

• The Economics of Very Big Ships

• Economy of Container Ships– Allows a T-shirt made in China to be sent to the Netherlands

for just 2.5 cents.

– The Eleonora Maersk and the other seven ships in her class are among the largest ever built:

– Almost 400 m long, or the length of four soccer fields, and another half-field across.

– The ships can carry 7,500 or so 40-foot containers, each of which can hold 70,000 T-shirts.

• On this voyage, the Eleonora was carrying supplies for Europe’s New Year celebrations: 1,850 tons of fireworks, including 30 tons of gunpowder.

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Capacity Management in Operations

• Capacity – the ability to hold, receive, store, or accommodate

• In business, viewed as the amount of output that a system is capable of achieving over a specific period of time

• Capacity management needs to consider both inputs and outputs

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.Capacity Planning Time Durations

• Greater than one year

Long range

• Monthly or quarterly plans covering the next 6 to 18 months

Intermediate range

• Less than one month

Short range

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.Strategic Capacity Planning

• Determining the overall level of capacity-intensive resources that best supports the company’s long-range competitive strategy– Facilities– Equipment– Labor force size

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.Capacity Planning Concepts

• Capacity utilization rate – a measure of how close the firm is to its best possible operating level

• Economies of scale – the idea that as a planet gets larger and volume increases, the average cost per unit tends to drop

• Diseconomies of scale – at some point, the plant becomes too large and average cost per unit begins to increase

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.Capacity Planning Concepts

• Capacity focus – the idea that a production facility works best when it is concentrated on a limited set of production objectives– Focused factory or plant within a plant (PWP) concept

• Capacity flexibility – the ability to rapidly increase or decrease product levels or the ability to shift rapidly from one product or service to another– Comes from the plant, processes, and workers or from

strategies that use the capacity of other organizations

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Capacity Flexibility

•Ability to quickly adapt to change•Zero-changeover time

Flexible Plants

•Flexible manufacturing systems•Simple, easily set up equipment

Flexible Processes

•Ability to switch from one kind of task to another quickly•Multiple skills (cross training)

Flexible Workers

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Considerations in Changing Capacity

Maintaining System Balance

• Similar capacities desired at each operation• Manage bottleneck operations

Frequency of Capacity Additions

• Cost of upgrading too frequently• Cost of upgrading too infrequently

External Sources of Capacity

• Outsourcing• Sharing capacity

Decreasing Capacity

• Temporary reductions• Permanent reductions

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Frequent versus Infrequent Capacity

Expansions

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Determining Capacity Requirements

Use forecasting to predict sales for

individual products

Calculate labor and equipment requirements to meet forecasts

Project labor and equipment

availability over the planning

horizon

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Example 5.1—Determining Capacity

Requirements• Stewart Company produces two

flavors of salad dressing.– Paul’s and Newman’s

• Each is available in bottles and single-serving bags.

• What are the capacity and labor requirements for the next five years?

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Determining Capacity Requirements

Year

1 2 3 4 5

Paul’sBottles (000s) 60 100 150 200 250

Plastic bags (000s)

100 200 300 400 500

Newman’sBottles (000s) 75 85 95 97 98

Plastic bags (000s)

200 400 600 650 680

Step 1: Use forecasting to predict sales for individual products

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Determining Capacity Requirements

   Bottling Operation Bagging Operation

Year

1 2 3 4 5

Bottles (000s) 135 185 245 297 348

Plastic bags (000s) 300 600 900 1050 1180

Step 2: Calculate equipment and labor requirements

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Determining Capacity Requirements

Year

1 2 3 4 5

Plastic Bag Operation

Percentage capacity utilized 24 48 72 84 94

Machine requirement 1.2 2.4 3.6 4.2 4.7

Labor requirement 3.6 7.2 10.8 12.6 14.1

Bottle Operation

Percentage capacity utilized 30 41 54 66 77

Machine requirement 0.9 1.23 1.62 1.98 2.31

Labor requirement 1.8 2.46 3.24 3.96 4.62

Step 3: Project equipment and labor availabilities

Excel: Capacity Requirements

For the Excel template visit www.mhhe.com/sie-chase14e

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Decision Trees for Capacity Analysis

• A decision tree is a schematic model of the sequence of steps in a problem – including the conditions and consequences of each step.

• Decision trees help analysts understand the problem and assist in identifying the best solution.

• Decision tree components include the following:– Decision nodes – represented with squares

– Chance nodes – represented with circles

– Paths – links between nodes

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.Example 5.2: Decision Trees

• The owner of Hackers Computer Store is evaluating three options – expand at current site, expand to a new site, do nothing.

• The decision process includes the following assumptions and conditions.– Strong growth has a 55% probability– New site cost is $210,000

Payoffs: strong growth = $195,000; weak growth = $115,000

– Expanding current site cost is $87,000 (in either year 1 or 2) Payoffs: strong growth = $190,000; weak growth =

$100,000– Do nothing

Payoffs: strong growth = $170,000; weak growth = $105,000

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.Example 5.2: Decision Trees

• Calculate the value of each alternative

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.Example 5.2: Decision Trees

• Diagram the problem chronologically

Decision

Events

Decision

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.Example 5.2: Decision Trees

• Calculate value of each branch

$765,000

$365,000

$863,000

$413,000

$843,000

$850,000

$525,000

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Example 5.2• Work backwards to calculate the value of each

decision/event

$765,000

$365,000

$863,000

$413,000

$843,000

$850,000

$525,000

$660,500

$703,750 Do nothing = $850,000

Do nothing = $703,750

Do nothing has higher value than expand, so choose to do nothing

Do nothing has higher value than expand or move, so choose to do nothing

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.Example 5.2: Decision Trees

• Decision tree analysis with net present value calculations

Excel: Decision Trees

For the Excel template visit www.mhhe.com/sie-chase14e

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.Planning Service Capacity

Manufacturing Capacity

Goods can be stored for later use.

Goods can be shipped to other locations.

Volatility of demand is relatively low.

Service Capacity

Capacity must be available when service is needed –

cannot be stored.

Service must be available at customer demand

point.

Much higher volatility is typical.

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.Capacity Utilization and Service Quality

• The relationship between service capacity utilization and service quality is critical.– Utilization is measured by the portion of time

servers are busy.

• Optimal levels of utilization are context specific.– Low rates are appropriate when the degree of

uncertainty (in demand) is high and/or the stakes are high (e.g., emergency rooms, fire departments).

– Higher rates are possible for predictable services or those without extensive customer contact (e.g., commuter trains, postal sorting).

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Service Quality• Rate of service utilization and service

quality are directly linked.

Arrivals exceed services – many customers are never served

Sufficient capacity to provide quality service

Service quality declines – disruptions or high arrival levels lead to long wait times