COMMERCE 341 OPERATIONS MANAGEMENT

Capacity Analysis

Fall 2015Geoff Pond

Agenda

• Capacity Requirements• Measuring Capacity• Economies/Diseconomies of Scale• Strategies for Growth• Operational Strategies

Big Picture Look at the Capacity

Capacity is managed at many levels:- Strategic/Long-term planning (years)• Sets the design capacity for the facility.• Facility size, equipment and labor size.

- Intermediate term planning (yearly, monthly, quarterly)• Takes design capacity as the input.• Production planning – new tools, subcontracting.

- Short term planning (days, weeks)• Making adjustments to eliminate the variance between

planned and actual output.• Fine tuning to improve output.

Capacity Management

• Design Capacity– Idealistic– Perfect operating conditions– Maximum output

• Effective Capacity– Realistic operating conditions (machine failures, staff is sick,

SCM, QM failures, etc.)

Measuring Capacity: It is all relative…

Measuring Capacity: It is all relative…

Capacity is a rate of output– How long can we maintain this output level?

Best operating level– Level of capacity for which the process was designed– Volume of output at which average unit cost is minimized

Capacity utilization rate

%96cars/day 500

cars/day 480

Level OperatingBest

sedCapacity U Rate tilizationCapacity U

Volume

Average Unit Cost

Best Operating Level

Determining Capacity Requirements

• Use forecasting techniques to predict sales for individual products within each product line.

• Calculate equipment and labour requirements to meet product line forecasts.

• Project labour and equipment availability over the planning horizon.

Determining Capacity Requirements

1sedCapacity U

Level OperatingBest Cushion Capacity

%171cars/day 1000

cars/day 12001

sedCapacity U

Level OperatingBest Cushion Capacity

%83cars/day 1200

cars/day 1000

Level OperatingBest

sedCapacity U Rate tilizationCapacity U

units/year 1000 demand Annual /year,units 1200 capacity Design

Capacity Management

Getting the jargon down…

Stage 130s

Stage 240s

Stage 330s

10s

Cycle Time: 40 seconds (one unit completes production every 40 seconds)

Flow Time: 110 seconds (production time, from start to finish, including buffers)

Operating Time: Available production time per day (be sure to think about parallel lines)

Capacity Utilization: proportion of design capacity in use

Capacity Cushion: proportion of design capacity not being used

Strategic Capacity Planning

Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources that best supports the company’s long-range competitive strategy.

- Involves serious capital investments.- Decisions are irreversible in the short run. - Defines the boundaries of the firm’s production capabilities

and overall competitiveness.

Total Cost = Raw Material + Operating Costs + Capital Costs + Overhead Costs.

• Average cost = Total cost / Total Output

• 2 x Capacity 2 x Equipment Cost– Neither the plant nor sales,

general and administrative (SG&A).

– Typically better utilization of labour, R&D, IT, etc.

• Maintaining the demand may require significant discounts.

Strategic Issues - Economies / Diseconomies of Scale

Volume

Total Cost

50 100

Capacity Management

Economies of Scale

Bombardier CRJ200ER50 seats21 Million USD

Bombardier CRJ70575 seats (50% increase)29 Million USD (38% increase)

Capacity Management

What happens when we push an airliner beyond capacity?

Diseconomies of Scale

Delays, grumpy customers, lost customers, staff being pulled away from core responsibilities, overtime costs, subcontracting, etc…

Strategic Issues - Economies / Diseconomies of Scale

Total Cost = Raw Material + Operating Costs + Capital Costs + Overhead Costs.

• Average cost = Total cost / Total Output

Capacity

Average Cost

1000unit

facility

2000unit

facility

3000unit

facility

4000unit

facility

Capacity Management

China Fabrication and Assembly (CFA) – Part 1

Order qualifier – product/service characteristic required to remain viable in industry sector

Order winner – competitive characteristic that attracts customers to buy the firm’s product/service

Competitive Dimensions: Cost, Quality, Flexibility, Delivery

Mini-Case

Capacity Management

• Capacity Lead. In this case, an organization’s capacity never falls below the service or product demand. Improvements to capacity always go beyond consumer demand (often in a step-wise fashion). Consequently, consumer demand is always met and your customers are left happy. Unfortunately, because the capacity is greater than the consumer demand at virtually all times, there will be unused capacity, waste, or slack in the process which can be expensive.

• Capacity Lag. This is a very conservative strategy where increases in capacity are only implemented after an increase in demand has already been observed. Capacity increases are then implemented so that demand is met but not further beyond that point. Therefore, the capacity virtually always lags behind consumer demand in scenarios of monotonically increasing demand.

• Average Capacity. This is the middle ground. On average, a firm’s capacity meets demand. The average is not below demand (as in a capacity lag strategy) nor does it outpace demand (as in a capacity lead strategy).

Strategies for Growth

Capacity Management

Strategies for Growth

Forecast Demand

Capacity Growth

Lag (or Reactive) Strategy

• Operating at capacity or under capacity

• Utilization remains high at all times

When would this be a good strategy to use?

Time

Volu

me

Capacity Management

Strategies for Growth

Forecast Demand

Capacity Growth

Lead (or Anticipatory) Strategy

• Operating at capacity or over capacity at all times

• OT, subcontracting used to supplement existing capacity as needed

When would this be a good strategy to use?

Time

Volu

me

Capacity Management

Strategies for Growth

Forecast Demand

Mixed Strategy

Capacity Growth

• Mix of lead and lag.

• Most typical of industry.

Time

Volu

me

Capacity Management

Strategies for Growth

Forecast Demand

Large Capacity Increments

Capacity Growth• Few but substantial investments in

increased capacity.

• Can be higher risk.

• Under-utilization is accepted.

Time

Volu

me

Capacity Management

Strategies for Growth

Forecast Demand

Small Capacity Increments

Capacity Growth

• Few but substantial investments in increased capacity.

• Can be higher risk.

• Under-utilization is accepted.

Time

Volu

me

Capacity Management

Capacity Lead – anticipated growth• Lure customers away from other suppliers who are constrained

by capacity• Gain foothold in expanding market

Capacity Lag – weak competition• Economic uncertainty• Great deal of uncertainty in forecasted demand

Service Industry

Capacity Management

• Flowchart!

• Buffers can be a good thing!

• Blockages and starvation is bad, bad, bad (so look for them)

• Line balancing!

• Facility Layout

Operational Strategies

Capacity Management

Operational Strategies

How to increase capacity?• Split the task• Share the task• Parallel workstations• More skilled worker (training)• Overtime• Redesign– Process– Products

Capacity Management

Layout Strategies

Hall, R.W. (1987). Attaining Manufacturing Excellence, McGraw-Hill.

Capacity Management

Layout Strategies

Hall, R.W. (1987). Attaining Manufacturing Excellence, McGraw-Hill.

Capacity Management

Layout Strategies

Hall, R.W. (1987). Attaining Manufacturing Excellence, McGraw-Hill.

Capacity Management

Consider Part 2 of the in-class CFA case.

Mini-case

All Levels - Flexibility

Capacity flexibility is the ability to rapidly change (increase or decrease) production levels, or to shift capacity from one product to another, such as being able to produce different car models in a single assembly line.This involves: - Flexible plants - Flexible workers

- Better trained & higher paid- Job expansion & job enrichment

Flexible processes & design- Quick changeover- Common parts / processes

Services differ from goods in terms of:1. Intangibility – may not physically exist at all.2. Higher customer interaction in production.3. Higher variability in production depending on customer needs.4. Higher perishable and may be completely time dependent.5. Product specification is often defined in terms of 5 senses.

Capacity Planning: Goods vs. Services

29

Service Capacity vs. Production Capacity

Capacity planning in service is generally more constrained due to time and location requirements.

- Unlike goods, services cannot be stored so there is no inventory to smooth demand, variance in requests.

- Capacity must be available to produce service when demanded.

- Unlike goods, customer (frequently) comes to the service location which constrains location choice.

Service Capacity

Capacity Utilization vs. Service Quality

Average Service Rate

Mea

n A

rriv

al R

ate

No service

Service

Critical Zone

Utilization = 100%

Utilization = 70%

Capacity Management

Service Industry – Know Your Customer!United Airlines 737-800

Air Transat 737-800

Capacity Management

• Is it ethical to assign work such that a human worker yields 100% utilization?

• As part of capacity planning, the farming industry maximizes the number of animals (pigs, chicken, turkey, etc.) within a barn. As consumers, we all enjoy the consequences in terms of lower costs. Is there a limit?

Ethics

Vancouver Sun

Capacity Management

• Review Chapter 4• Try problems #10, 11, and 12.• Get working on those case studies (due 17-Oct)!• Read the supplement for Chapter 7 (available online)

• NO CLASS NEXT WEEK (offset for case competition)

In the next two weeks…

Introduction and Overview

• Capacity Lead – anticipated growth• Lure customers away from other suppliers who are constrained

by capacity• Gain foothold in expanding market• • Capacity Lag – weak competition• Economic uncertainty• Great deal of uncertainty in forecasted demand

Service Industry