Copyright © 2011 The McGraw-Hill Companies, All Rights Reserved CHAPTER 4 Strategic Capacity Management.

Copyright © 2011 The McGraw-Hill Companies, All Copyright © 2011 The McGraw-Hill Companies, All Rights ReservedRights Reserved

CHAPTER 4Strategic Capacity Management

Learning Objectives

1. Recognize the concept of capacity and how important it is to “manage” capacity.

2. Explain the impact of economies of scale on the capacity of a firm.

3. Understand Decision Making considerations when choosing a technique

4. Understand how to use decision trees to analyze alternatives when faced with the problem of adding capacity.

Capacity Management in Operations• 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

Capacity Planning Time Durations• Long range

• Intermediate range:

• Short range:

Economies and Diseconomies of Scale

• Economies of scale: as a business gets larger, the average cost per unit drops• Lower operating and capital costs• Per unit cost of equipment drops• More specialization of labor

• At some point, the business becomes too large• Diseconomies of scale becomes a problem

LO 2LO 2

Other Factors That Affect Business Size• Internal equipment• Labor• Capital expenditures• Transportation costs• Advantages of being close to markets

LO 2LO 2

Planning Service 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

LO 4LO 4

Capacity Utilization and Service Quality

• Must consider the day-to-day relationship between service utilization and service quality

• Optimal utilization rate is very context specific• Low rates are appropriate when both the degree of

uncertainty and stakes are high• Relatively predictable services or service facilities

without customer contact can operate much nearer 100 percent utilization

LO 4LO 4

DECISION MAKING

How Much Certainty exists?

Complete Risk

• Break-even decision theory• Calculus AOV• Linear Prog Queuing Theory• Integer Prog. Decision Trees• Goal Prog. Simulation• PERT and CPM

Extreme

• Game theory• Coin Flip

Six-Step Problem-Solving Process

• Step 1: Identify and Select the problem• Step 2: Analyze the problem• Step 3: Generate Potential Solutions• Step 4: Select and Plan the Solution• Step 5: Implement the Solution• Step 6: Evaluate the Solution

Using Decision Trees to Evaluate Capacity Alternatives• Decision tree: a schematic model of the sequence of

steps in a problem and the conditions and consequences of each step

• Decision tree helps understand problem and helps find solution

• Decision trees are composed of decision nodes with branches• Squares represent decision points• Circles represent chance events

LO 3LO 3

Decision Trees

= Event node= Event node

= Decision node= Decision node

EEii = Event = Event ii

PP((EEii) = Probability of event ) = Probability of event ii

1st1stdecisiondecision

PossiblePossible2nd decision2nd decision

Payoff 1Payoff 1

Payoff 2Payoff 2

Payoff 3Payoff 3

Alternative 3Alternative 3



Payoff 1Payoff 1

Payoff 2Payoff 2

Payoff 3Payoff 3

EE11 [ [PP((EE11)])]

EE22 [ [PP((EE22)])]

EE33 [ [PP((EE33)])]

EE22 [ [PP((EE22)])]

EE33 [ [PP((EE33)])]

EE 11 [ [PP

((EE 11)])]

Altern

ativ

e 1

Altern

ativ

e 1

Alternative 2

Alternative 2

Payoff 1Payoff 1

Payoff 2Payoff 2

11 22

Decision Trees

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility

11

Decision Trees

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility

Low demand [0.4]Low demand [0.4]

Don’t expandDon’t expand

ExpandExpand

$200$200

$223$223

$270$270

High demand

High demand

[0.6][0.6]

11

22

Decision Trees

Low dem

and

Low dem

and

[0.4]

[0.4]

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility



ExpandExpand

Do nothingDo nothing

AdvertiseAdvertise

$200$200

$223$223

$270$270

$40$40

$800$800

Modest response [0.3]Modest response [0.3]

Sizable response [0.7]Sizable response [0.7]

$20$20

$220$220

High demand

High demand

[0.6][0.6]

High demand [0.6]High demand [0.6]

11

22

33

Decision Trees

Low dem

and

Low dem

and

[0.4]

[0.4]

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility



ExpandExpand


AdvertiseAdvertise

$200$200

$223$223

$270$270

$40$40

$800$800



$20$20

$220$220

High demand

High demand

[0.6][0.6]


11

22

33

Decision Trees

Low dem

and

Low dem

and

[0.4]

[0.4]

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility



ExpandExpand


AdvertiseAdvertise

$200$200

$223$223

$270$270

$40$40

$800$800



$20$20

$220$220

High demand

High demand

[0.6][0.6]


11

22

33

0.3(20) + 0.7(220)0.3(20) + 0.7(220)

Decision Trees

$160$160Low d

emand

Low dem

and

[0.4]

[0.4]

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility



ExpandExpand


AdvertiseAdvertise

$200$200

$223$223

$270$270

$40$40

$800$800



$20$20

$220$220

High demand

High demand

[0.6][0.6]


11

22

33

0.3(20) + 0.7(220)0.3(20) + 0.7(220)

Decision Trees

$160$160Low d

emand

Low dem

and

[0.4]

[0.4]

$160$160

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility



ExpandExpand


AdvertiseAdvertise

$200$200

$223$223

$270$270

$40$40

$800$800



$20$20

$220$220

High demand

High demand

[0.6][0.6]


11

22

33

$270$270

Decision Trees

($160)($160)Low d

emand

Low dem

and

[0.4]

[0.4]

$270$270

$160$160

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility



ExpandExpand


AdvertiseAdvertise

$200$200

$223$223

$270$270

$40$40

$800$800



$20$20

$220$220

High demand

High demand

[0.6][0.6]


11

22

33

Decision Trees

($160)($160)Low d

emand

Low dem

and

[0.4]

[0.4]

$270$270

$160$160

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility



ExpandExpand


AdvertiseAdvertise

$200$200

$223$223

$270$270

$40$40

$800$800



$20$20

$220$220

High demand

High demand

[0.6][0.6]


11

22

33

0.4(200) + 0.6(270)0.4(200) + 0.6(270)

0.4(160) + 0.6(800)0.4(160) + 0.6(800)

Decision Trees

($160)($160)Low d

emand

Low dem

and

[0.4]

[0.4]

$270$270

$160$160

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility

$242$242

$544$544



ExpandExpand


AdvertiseAdvertise

$200$200

$223$223

$270$270

$40$40

$800$800



$20$20

$220$220

High demand

High demand

[0.6][0.6]


11

22

33

0.4(200) + 0.6(270)0.4(200) + 0.6(270)

0.4(160) + 0.6(800)0.4(160) + 0.6(800)

Decision Trees

$160$160Low d

emand

Low dem

and

[0.4]

[0.4]

$270$270

$160$160

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility

$544$544

$242$242

$544$544



ExpandExpand


AdvertiseAdvertise

$200$200

$223$223

$270$270

$40$40

$800$800



$20$20

$220$220

High demand

High demand

[0.6][0.6]


11

22

33

Decision Trees

$160$160Low d

emand

Low dem

and

[0.4]

[0.4]

$270$270

$160$160

Smal

l fac

ility

Smal

l fac

ility

Large facility

Large facility

$544$544

$242$242

$544$544



ExpandExpand


AdvertiseAdvertise

$200$200

$223$223

$270$270

$40$40

$800$800



$20$20

$220$220

High demand

High demand

[0.6][0.6]


11

22

33

ANY QUESTIONS?

Copyright © 2011 The McGraw-Hill Companies, All Rights Reserved CHAPTER 4 Strategic Capacity Management.

Documents

decision payoff

capacity utilization

decision making slide

solution slide

operations capacity

concept of capacity

step decision tree

solution decision trees