Ch11 strg.capacity mgt

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Strategic Capacity Management

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Strategic Capacity Planning Defined Capacity Utilization & Best Operating Level The Experience Curve Capacity Focus, Flexibility & Planning Determining Capacity Requirements Decision Trees Capacity Utilization & Service Quality

OBJECTIVES

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Strategic Capacity Planning

Capacity can be defined as the ability to hold, receive, store, or accommodate

Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size

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Capacity Utilization

Where Capacity used

– rate of output actually achieved Best operating level

– capacity for which the process was designed

level operating Best

usedCapacity rate nutilizatioCapacity

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Best Operating Level

Example: Engineers design engines and assembly lines to operate at an ideal or “best operating level” to maximize output and minimize ware

Example: Engineers design engines and assembly lines to operate at an ideal or “best operating level” to maximize output and minimize ware

Underutilization

Best OperatingLevel

Averageunit costof output

Volume

Overutilization

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Example of Capacity Utilization

During one week of production, a plant produced 83 units of a product. Its historic highest or best utilization recorded was 120 units per week. What is this plant’s capacity utilization rate?

During one week of production, a plant produced 83 units of a product. Its historic highest or best utilization recorded was 120 units per week. What is this plant’s capacity utilization rate?

Answer: Capacity utilization rate = Capacity used .

Best operating level = 83/120 =0.69 or 69%

Answer: Capacity utilization rate = Capacity used .

Best operating level = 83/120 =0.69 or 69%

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The Experience

Curve

As plants produce more products, they gain experience in the best production methods and reduce their costs per unit

As plants produce more products, they gain experience in the best production methods and reduce their costs per unit

Total accumulated production of units

Cost orpriceper unit

Yesterday

Today

Tomorrow

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Learning curve technique

Learning Curve

Definition: The more often a worker does a particular type of job, the lesser time it takes to do the same job(Explanatory note: The per unit cost of production of a new item decreases as additional units of that product are manufactured)

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10

15

20

25

30

20 40 60 80 100 120 140 160

Units Produced

Ave

rage

Lab

our

hrs

requ

ired

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Capacity Flexibility

Flexible plants

Flexible processes

Flexible workers

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Capacity Planning: Balance

Stage 1 Stage 2 Stage 3Unitsper

month6,000 7,000 5,000

Unbalanced stages of productionUnbalanced stages of production

Stage 1 Stage 2 Stage 3Unitsper

month6,000 6,000 6,000

Balanced stages of productionBalanced stages of production

Maintaining System Balance: Output of one stage is the exact input requirements for the next stage

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Capacity Planning

Frequency of Capacity Additions

External Sources of Capacity

12Determining Capacity Requirements

1. Forecast sales within each individual product line

2. Calculate equipment and labor requirements to meet the forecasts

3. Project equipment and labor availability over the planning horizon

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Planning Service Capacity Vs. Manufacturing Capacity

Time: Goods can not be stored for later use and capacity must be available to provide a service when it is needed

Location: Service goods must be at the customer demand point and capacity must be located near the customer

Volatility of Demand: Much greater than in manufacturing

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Question BowlThe objective of Strategic Capacity

Planning is to provide an approach

for determining the overall capacity

level of which of the following?

a. Facilities

b. Equipment

c. Labor force size

d. All of the above

e. None of the above

Answer: d. All of the above

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Question Bowl

To improve the Capacity Utilization Rate we can

do which of the following?

a. Reduce “capacity used”

b. Increase “capacity used”

c. Increase “best operating level”

d. All of the above

e. None of the above

Answer: b. Increase “capacity used” (This increases the numerator in the Capacity Utilization Rate ratio, which is desirable.)

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Question BowlWhen we talk about Capacity Flexibility

which of the following types of flexibility

are included?

a. Plants

b. Processes

c. Workers

d. All of the above

e. None of the above

Answer: d. All of the above

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Question Bowl

When adding capacity to existing operations which of

the following are considerations that should be

included in the planning effort?

a. Maintaining system balance

b. Frequency of additions

c. External sources

d. All of the above

e. None of the above

Answer: d. All of the above

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Question Bowl

Which of the following is a term used to describe

the difference between projected capacity

requirements and the actual capacity

requirements?

a. Capacity cushion

b. Capacity utilization

c. Capacity utilization rate

d. All of the above

e. None of the above

Answer: a. Capacity cushion

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Question Bowl

In determining capacity requirements we must do

which of the following?

a. Address the demands for individual product lines

b. Address the demands for individual plants

c. Allocate production throughout the plant network

d. All of the above

e. None of the above

Answer: d. All of the above

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Question Bowl

In a Decision Tree problem used to evaluate

capacity alternatives we need which of the

following as prerequisite information?

a. Expect values of payoffs

b. Payoff values

c. A tree

d. All of the above

e. None of the above

Answer: b. Payoff values (Expected values are what is computed, not prerequisite to the analysis.)