OM Chapter 10 Capacity Management

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1OM, Ch. 10 Capacity Management

2009 South-Western, a part of Cengage Learning

CAPACITY MANAGEMENTCHAPTER 10

DAVID A. COLLIER

AND

JAMES R. EVANS

OM


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Understanding Capacity

Capacityis the capability of a manufacturingor service resource such as a facility, process,

workstation, or piece of equipment toaccomplish its purpose over a specified timeperiod.

Chapter 10 Capacity Management


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The resources available to the organizationfacilities,equipment, and laborhow they are organized, andtheir 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 normallyoperates two shifts per day, five days per week.During each shift, 400 transmissions can be completed

under ideal conditions. What is the capacity of thisfactory?

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

tranmissions/shift)(4 weeks/month)

= 16,000 transmissions/month



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Typical capacity issues to address include:

Can the facility, process, or equipmentaccommodate new goods and services andadapt to changing demand for existing goodsand services?

How large should facility, process, or equipment

capacity be?

When should capacity changes take place?



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Economies of scaleare achieved when theaverage unit cost of a good or service decreases asthe capacity and/or volume of throughput

increases.

Diseconomies of scaleoccur when the averageunit cost of the good or service begins to increase

as the capacity and/or volume of throughputincreases.



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Afocused factoryisa way to achieve economiesof scale without extensive investments in facilitiesand capacity by focusing on a narrow range of

goods or services, target market segments, and/ordedicated processes to maximize efficiency andeffectiveness.



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OM, Ch. 10 Capacity Management



Safety capacity(often called the capacitycushion) is an amount of capacity reserved forunanticipated 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 asubstantial part of total system capacity.

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

= Si+ [(P

i)(Q

i

)]

[10.2]



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Long-Term Capacity Strategies

In developing a long-range capacity plan, afirm must make the basic economic trade-offbetween the cost of capacity and the

opportunity cost of not having adequatecapacity.

Long-term capacity planning must be closely

tied to the strategic direction of theorganizationwhat products and services itoffers.



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Complementary goods and servicescan beproduced or delivered using the same resourcesavailable to the firm, but whose seasonal

demand patterns are out of phase with eachother.

Complementary goods or services balance

seasonal demand cycles and therefore use theexcess capacity available, as illustrated in Exhibit10.5.

Chapter 10 Long-Term Capacity Strategies


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Exhibit 10.5 Seasonal Demand and Complementary Goods or Services


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Four basic strategies for expanding capacity oversome 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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Disadvantage of Unused Excess Capacity

Chapter 10 Short-Term Capacity Management

Rocks = demand

High water level = capacity

Bed of river


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Short-term capacity adjustmentsto capacity might include:

Add or share equipment:lease equipment as neededor set up a partnership arrangement with capacitysharing. Examples: mainframe computers, CAT scanner,farm equipment.

Sell unused capacity:sell idle capacity to outsidebuyers and even competitors. Examples: computingcapacity, perishable hotel rooms.

Change labor capacity and schedules:short term

changes in work force levels. Examples: overtime, extrashifts, 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 mostpowerful 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 toincrease demand during periods of low sales or excesscapacity.

Add peripheral goods and/or services:changedemand during slack periods.

Provide reservations:a promise to provide a good orservice at some future time and place.



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Theory of Constraints

TheTheory of Constraints (TOC)is a set ofprinciples that focuses on increasing total processthroughput by maximizing the utilization of all

bottleneck work activities and workstations.

Throughput:amount of money generatedper time period through actual sales.

Constraint:anything that limits anorganization from moving toward or achievingits goal.



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2009 S th W t t f C L i

Theory of Constraints

Aphysical constraintis associated with thecapacity of a resource (e.g., machine, employee).

A bottleneck work activityis one thateffectively limits capacity of the entire process.

Anonbottleneck work activityis one in whichidle capacity exists.

A nonphysical constraintisenvironmental ororganizational (e.g., low product demand or aninefficient management policy or procedure).


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OM Chapter 10 Capacity Management