Session 10 [compatibility mode]
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This document discusses strategic capacity management. It defines capacity and provides examples of how capacity is measured in different organizations. It also discusses measuring and determining effective capacity, factors that affect capacity utilization, approaches to capacity expansion, balancing capacity throughout a system, and considerations for adding capacity like maintaining system balance. The concepts of economies and diseconomies of scale and the experience curve are explained. Finally, it covers capacity focus, flexibility and planning, and using break even analysis in capacity decision making.
Session 10 [compatibility mode]
- 1. 1 Session 10 Strategic Capacity Management OBJECTIVES • Strategic Capacity Planning Defined • Capacity Utilization & Best Operating Level • Economies & Diseconomies of Scale • The Experience Curve • Capacity Focus, Flexibility & Planning
- 2. Strategic Capacity 2 Planning Pl i Capacity – The maximum level of output – The amount of resource inputsp available relative to output requirements at a p q particular time – Capacity is the upper limit or ceiling on the load that an operating unit can handle. handle
- 3. 3 Examples of Capacity Measures Type of Measures of Capacity Organization Organi ation Inputs Inp ts Outputs O tp ts Manufacturer Machine hours Number of units per shift per shift Hospital Number of beds Number of patients treated Airline Number of planes Number of or seats seat-miles flown Restaurant Number of seats Customers/time Retailer Area of store Sales dollars Theater Number of seats Customers/time
- 4. 4 Measurements of Capacity y Output Rate Capacity – For a facility having a single product or a few homogeneous products the unit of measure products, is straightforward (barrels of beer per month) – F a facility having a di For f ilit h i diverse mix of products, i f d t an aggregate unit of capacity must be established using a common unit of output t bli h d i it f t t (sales dollars per week)
- 5. 5 Measurements of Capacity y Input Rate Capacity – Commonly used for service operations where output measures are particularly difficult Hospitals use available beds per month Airlines use available seat-miles per month Movie theatres use available seats per month
- 6. Terminology 6 Design capacity – The maximum output rate or service capacity an p p y operation, process or facility is designed for. Effective capacity – Design Capacity minus allowances such as personal time, maintenance or scrap. Actual output – rate of output actually achieved--cannot exceed effective capacity.
- 7. 7 Capacity Utilization p y Capacity used – rate of output actually achieved Best operating level – capacity for which the process was designed ( (effective or maximum capacity) p y) Capacity Used Utilization = _______________ Best Operating Level
- 8. 8 Utilization--Example p Best operating level = 120 units/week Actual output = 83 units/week Capacity used 83 units/wk Utilization = = = .692 692 Utilization = operating level 120 units/wk Best ?
- 9. 9 Two Measures of System y Effectiveness 1. Efficiency == Actual Output ----------------------- Effective capacity 2. 2 Utilization == Actual Output ----------------------- Design capacity
- 10. Factors – To determine 10 Effective C Eff ti Capacity it A. A Facilities – Design Location layout Env. B. Product/Services - Design g Prod or Service Mix C. Process - Q C P Quantity capabilities tit biliti Q Quality Capabilities y p
- 11. Factors – To determine 11 Effective C Eff ti Capacity it D. D Human factor – Job Content Job Design Training & exp Motivation, Motivation Compensation Absenteeism & labour turn over rates E. E Policy – running for O/T, IInd or IIIrd shift O/T
- 12. Factors – To determine 12 Effective C Eff ti Capacity it F. Operational – Scheduling p g Material Magmt. QA Maint. Policies Equipment Breakdowns G. External factors –Pdt stds Safety regulations Unions Pollution control stds
- 13. 13 Capacity Planning p y g The basic questions in capacity planning are: – What type of capacity is needed? – How much is needed? – When is it needed? – How does productivity relate to capacity?
- 14. 14 Key Decisions of Cap. Plnng 1. The amount of Cap needed – consideration of exp demand & cap costs costs. 2. The timing of changes -- Availability of capital, lead time needed to make c a ges & e p de a d a e changes exp demand 3. Need to maintain bal throughout the system s stem – proportionate changes in all areas of the system. 4. Extent of flexibility of facilities and the workforce – Uncertainty about the demand & variety of work requirement.
- 15. 15 Managing Demand M i D d Demand exceeds capacity Curtail demand by raising prices, scheduling prices longer lead time Long term solution is to increase capacity g p y Capacity exceeds demand Stimulate market Sti l t k t Product changes Adjusting to seasonal demands Produce products with complementary demand p p y patterns
- 16. 16 Complementary Demand C l t D d Patterns 4,000 – Sales in units 3,000 – 2,000 – s 1,000 – Jet ski engine sales l JFMAMJJASONDJFMAMJJASONDJ Time (months) Figure S7.3
- 17. 17 Complementary Demand C l t D d Patterns 4,000 – Snowmobile S bil Sales in units 3,000 – motor sales 2,000 – s 1,000 – Jet ski engine sales l JFMAMJJASONDJFMAMJJASONDJ Time (months) Figure S7.3
- 18. 18 Complementary Demand C l t D d Patterns Combining both demand patterns p reduces the variation 4,000 – Snowmobile S bil Sales in units 3,000 – motor sales 2,000 – s 1,000 – Jet ski engine sales l JFMAMJJASONDJFMAMJJASONDJ Time (months) Figure S7.3
- 19. 19 Forecasting Cap requirements Cap planng decision involves two main considerations 1. Long term – Overall level of capacity 2. Short term – variations in cap. Requirements Created by – Seasonal – can be easily found out b using std f by i d forecasting tech, reflected i h fl d in monthly, weekly and daily basis. y y y Random irregular fl t ti i l fluctuations in i demand
- 20. Forecasting Cap requirements 20 Link Between Marketing & Operations, determination of capacity requirements is based on the inf supplied from mktg 1. Through customer contacts 2 Demographic analyses 2. 3. Forecasts Then, Operations calculate the exact cap requirements. requirements
- 21. 21 Approaches to Capacity pp p y Expansion (a) Leading demand with incremental expansion New capacity mand Expected demand Dem 1 2 3 Time (years)
- 22. 22 Approaches to Capacity pp p y Expansion (b) Leading demand with one-step expansion one- New capacity p y Expected mand demand Dem 1 2 3 Time (years)
- 23. 23 Approaches to Capacity pp p y Expansion (c) Capacity lags demand with incremental expansion New capacity Expected mand demand Dem 1 2 3 Time (years)
- 24. 24 Approaches to Capacity pp p y Expansion (d) Attempts to have an average capacity with incremental expansion New capacity Expected mand demand Dem 1 2 3 Time (years)
- 25. 25 Economies & Diseconomies of Scale Economies of Scale and the Experience Curve working fS C 100-unit Average plant l t unit cost 200-unit of output plant 400-unit 300 unit 300-unit plant plant Diseconomies of Scale start working Volume
- 26. 26 Achieving Superior Efficiency g p y Economies of scale Unit cost reductions associated with a large scale of output • Ability to spread fixed costs over a large production volume • Ability of companies producing in large volumes to achieve a greater division of labor and specialization • S Specialization h f i li ti has favorable i bl impact on productivity b t d ti it by enabling employees to become very skilled at p performing a p g particular task Diseconomies of scale Unit cost increases associated with a large scale of output • Increased bureaucracy associated with large-scale y g enterprises • Resulting managerial inefficiencies
- 27. 27 Economies and Diseconomies of Scale
- 28. 28 Economies of Scale Declining costs result from: – Fixed costs being spread over more and more units – Longer production runs result in a smaller proportion of labor being allocated to setups – Proportionally less material scrap – … and other economies
- 29. 29 Diseconomies of Scale Increasing costs result from increased congestion of workers and material, ti f k d t i l which contributes to: – Increasing inefficiency – Difficulty in scheduling – Damaged goods – Reduced morale – Increased use of overtime – … and other diseconomies
- 30. 30 The As plants p p produce more pproducts, they , y Experience gain experience in the best production Curve methods and reduce their costs per unit Yesterday Cost or Today y price Tomorrow per unit Total accumulated production of units
- 31. 31 When the Economies of scale meet the experience curve There must be two conditions to be met for this strategy to succeed: 1. 1 The product must fit customer’s need; customer s 2. The demand must be sufficiently large to support the volume. t th l
- 32. 32 Economies of Scope The ability to produce many product models in one flexible facility more cheaply than in separate facilities Highly flexible and programmable automation allows quick, inexpensive p product-to-product changes p g Economies are created by spreading the automation cost over many products
- 33. 33 Sharing Resources S a g esou ces and capabilities across o or Sharing resources a d capab es ac oss two o more business units in different industries to realize economies of scope. – Economies of scope arise when business units are able to effectively able to pool, share, and utilize expensive resources or capabilities: Economies of scope are possible only when there are significant commonalities between one or more value-chain functions.
- 34. 34 Sharing Resources g at Procter & Gamble
- 35. Capacity Focus 35 The Th concept of th f t f the focused factory df t holds that production facilities work best Plants Within Plants (PWP) – Each of which may have separate suborgz suborgz, equip, & process & workforce mgmt policies for diff pdts. – Extend focus concept to operating level
- 36. 36 Capacity Flexibility p y y • Flexible plants – zero changeover time Using moveable equip, easily accessible & reroutable utilities. • Flexible processes – flexible mfg systems on one side & easily set up equip on the other side(as defined in economies of scope) i f ) • Flexible workers - having multiple skills. g p
- 37. 37 Considerations in adding cap g p 1. Maintaining System Balance --Cap. Addition at bottleneck stage --use of buffer inv. In front of bottlenecks f b ff i I f t f b ttl k --duplicating the facilities of the deptt deptt. 1. Frequency of Cap additions – depends y on the direct costs involved. 2. External sources of Capacity – E t l fC it Outsourcing or sharing capacity g g p y
- 38. 38 Capacity Planning: Balance Unbalanced stages of production Units Stage 1 Stage 2 Stage 3 per month 6,000 7,000 5,000 Maintaining System Balance: Output of one stage is g y p g the exact input requirements for the next stage Balanced stages of production Units Stage 1 g Stage 2 g Stage 3 g per month 6,000 6,000 6,000
- 39. Outsourcing Service 39 Functions – B ildi maintenance Building i t – Data processing – Delivery – Payroll y – Bookkeeping – Customer service – Mailroom – Benefits administration – … and more
- 40. 40 Break Even Analysis y BE Analysis is a critical tool for determining the capacity, a facility must have to achieve profitability. fit bilit Decisions can be made about the type and cap of equipment needed and a better judgment about success of the enterprise can b made. be d
- 41. 41 Break-E Break-Even E B k Example l Multiproduct Case F BEP$ = ∑ 1- Vi Pi x (Wi) where V = variable cost per unit P = price per unit F = fi d costs fixed t W = percent each product is of total dollar sales i = each product
- 42. 42 Multiproduct Example M lti d tE l Fixed costs = $3,500 per month Annual Forecasted Item Price i Cost Sales Units l i Sandwich $2.95 $1.25 7,000 Soft drink .80 .30 , 7,000 Baked potato 1.55 .47 5,000 Tea .75 .25 5,000 Salad bar 2.85 2 85 1.00 1 00 3,000 3 000
- 43. 43 Multiproduct Example M lti d tE l Fixed costs = $3,500 per month Annual Forecasted Item Price i Cost Sales Units l i Sandwich $2.95 $1.25 7,000 Soft drink .80 .30 , 7,000 Baked potato 1.55 .47 Annual 5,000 Weighted Tea Selling Variable .75 .25 Forecasted 5,000 Contribution % of Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7) Salad bar 2.85 2 85 1.00 1 00 3,000 3 000 Sandwich $2.95 $1.25 .42 .58 $20,650 .446 .259 Soft drink .80 .30 .38 .62 5,600 .121 .075 Baked 1.55 .47 .30 .70 7,750 .167 .117 potato Tea .75 .25 .33 .67 3,750 .081 .054 Salad bar 2.85 1.00 .35 .65 8,550 .185 .120 $46,300 1.000 .625
- 44. 44 Multiproduct =Example M lti d BEP E t l $ F ∑ 1 - P x (W ) V i i i Fixed costs = $3,500 per month $3,500 x 12 Annual Forecasted = = $67 200 $67,200 Item Price i Cost .625 l Units 62 Sales i Sandwich $2.95 $1.25 7,000 Soft drink .80 Daily .30 $67,200 , 7,000 sales = = $215.38 $215 38 Baked potato 1.55 .47 Annual days 312 5,000 Weighted Tea Selling Variable .75 .25 Forecasted 5,000 Contribution % of Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7) Salad bar 2.85 2 85 1.00 x $215 383 000 1 00 .446 $215.383,000 446 Sandwich $2.95 $1.25 .42 .58 $20,650 = 32.6 ≈ 33 .446 .259 $2.95 sandwiches Soft drink .80 .30 .38 .62 5,600 .121 .075 Baked 1.55 .47 .30 .70 7,750 .167 per day.117 potato Tea .75 .25 .33 .67 3,750 .081 .054 Salad bar 2.85 1.00 .35 .65 8,550 .185 .120 $46,300 1.000 .625
- 45. 45 Question Bowl The objective of Strategic Capacity Planning is to provide an approach for determining the overall capacity level of which of the following? a. F Facilities ili i b. Equipment c. Labor force size d. All of the above e. None of the above
- 46. 46 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 d e. None of the above
- 47. 47 Question Bowl When we talk about Capacity Flexibility which of the following types of flexibility are included? a. Pl Plants t b. Processes c. Workers d. All of the above e. None of the above
- 48. 48 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 a. b. Frequency of additions c. E t External sources l d. All of the above e. None of the above
- 49. 49 End of Session 10