Operations Management For Competitive Advantage © The McGraw-Hill Companies, Inc., 2001 C HASE A QUILANO J ACOBS ninth edition 1 Strategic Capacity Management

Operations Management For Competitive Advantage

©The McGraw-Hill Companies, Inc., 2001CHASE AQUILANO JACOBS

ninth edition 1

Strategic Capacity Strategic Capacity ManagementManagement

Operations ManagementFor Competitive Advantage

CHASE AQUILANO JACOBS

ninth edition

Chapter 9



ninth edition 2

Chapter 9

Strategic Capacity Planning

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



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Strategic Capacity PlanningDefined

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

Capacity used– rate of output actually achieved

Best operating level– capacity for which the process was designed

Capacity utilization rate = Capacity used

Best operating level



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Best Operating Level

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?

Answer: Capacity utilization rate = Capacity used .

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



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Economies & Diseconomies of Scale

100-unitplant

200-unitplant 300-unit

plant

400-unitplant

Volume

Averageunit costof output

Economies of Scale and the Experience Curve working

Diseconomies of Scale start working



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The Experience Curve

Total accumulated production of units

Cost orpriceper unit

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



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Capacity Focus

The concept of the focused factory holds that production facilities work best when they focus on a fairly limited set of production objectives.

Plants Within Plants (PWP) (from Skinner)– Extend focus concept to operating level



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Capacity Flexibility

Flexible plants

Flexible processes

Flexible workers



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Capacity Planning: Balance

Maintaining System Balance

Stage 1 Stage 2 Stage 3

Unitsper

month

6,000 7,000 4,500



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Capacity Planning

Frequency of Capacity Additions

External Sources of Capacity



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Determining Capacity Requirements

Forecast sales within each individual product line.

Calculate equipment and labor requirements to meet the forecasts.

Project equipment and labor availability over the planning horizon.



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Example of Capacity Requirements

A manufacturer produces two lines of mustard, FancyFine and Generic line. Each is sold in small and family-size plastic bottles.

The following table shows forecast demand for the next four years.

Year: 1 2 3 4FancyFine

Small (000s) 50 60 80 100Family (000s) 35 50 70 90Generic

Small (000s) 100 110 120 140Family (000s) 80 90 100 110



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Example of Capacity Requirements: The Product from a Capacity Viewpoint

Question: Are we really producing two different types of mustards from the standpoint of capacity requirements?

Answer: No, it’s the same product just packaged differently.



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Example of Capacity Requirements: Equipment and Labor Requirements

Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200

Three 100,000 units-per-year machines are available for small-bottle production. Two operators required per machine.

Two 120,000 units-per-year machines are available for family-sized-bottle production. Three operators required per machine.


Small Mach. Cap. 300,000 Labor 6Family-size Mach. Cap. 240,000 Labor 6

Small

Percent capacity used 50.00%Machine requirement 1.50Labor requirement 3.00Family-size

Percent capacity used 47.92%Machine requirement 0.96Labor requirement 2.88

Question: What are the Year 1 values for capacity, machine, and labor?

150,000/300,000=50% At 1 machine for 100,000, it takes 1.5 machines for 150,000

At 2 operators for 100,000, it takes 3 operators for 150,000

©The McGraw-Hill Companies, Inc., 2001

17


Small Mach. Cap. 300,000 Labor 6Family-size Mach. Cap. 240,000 Labor 6

Small

Percent capacity used 50.00%Machine requirement 1.50Labor requirement 3.00Family-size

Percent capacity used 47.92%Machine requirement 0.96Labor requirement 2.88

Question: What are the values for columns 2, 3 and 4 in the table below?

56.67%1.703.40

58.33%1.173.50

66.67%2.004.00

70.83%1.424.25

80.00%2.404.80

83.33%1.675.00

18

©The McGraw-Hill Companies, Inc., 2001



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Example of a Decision Tree Problem

A glass factory specializing in crystal is experiencing a substantial backlog, and the firm's management is considering three courses of action:

A) Arrange for subcontracting,B) Construct new facilities.C) Do nothing (no change)

The correct choice depends largely upon demand, which may be low, medium, or high. By consensus, management estimates the respective demand probabilities as .10, .50, and .40.



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Example of a Decision Tree Problem: The Payoff Table

0.1 0.5 0.4Low Medium High

A 10 50 90B -120 25 200C 20 40 60

The management also estimates the profits when choosing from the three alternatives (A, B, and C) under the differing probable levels of demand. These costs, in thousands of dollars are presented in the table below:



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Example of a Decision Tree Problem: Step 1. We start by drawing the three decisions

A

B

C



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Example of Decision Tree Problem: Step 2. Add our possible states of nature, probabilities, and payoffs

A

B

C

High demand (.4)

Medium demand (.5)

Low demand (.1)

$90k$50k

$10k

High demand (.4)

Medium demand (.5)

Low demand (.1)

$200k$25k

-$120k

High demand (.4)

Medium demand (.5)

Low demand (.1)

$60k$40k

$20k



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Example of Decision Tree Problem: Step 3. Determine the expected value of each decision

High demand (.4)

Medium demand (.5)

Low demand (.1)

A

$90k$50k

$10k

EVA=.4(90)+.5(50)+.1(10)=$62k

$62k



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Example of Decision Tree Problem: Step 4. Make decision

High demand (.4)

Medium demand (.5)

Low demand (.1)

High demand (.4)

Medium demand (.5)

Low demand (.1)

A

B

CHigh demand (.4)

Medium demand (.5)

Low demand (.1)

$90k$50k

$10k

$200k$25k

-$120k

$60k$40k

$20k

$62k

$80.5k

$46k

Alternative B generates the greatest expected profit, so our choice is B or to construct a new facility.



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Planning Service Capacity

Time

Location

Volatility of Demand



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Capacity Utilization & Service Quality

Best operating point is near 70% of capacity

From 70% to 100% of service capacity, what do you think happens to service quality?

Documents

Operations Management For Competitive Advantage © The McGraw-Hill Companies, Inc., 2001 C HASE A QUILANO J ACOBS ninth edition 1 Strategic Capacity Management