Strategic Capacity Management

Capacity is the amount of output that a system is capable of achieving over a specified period of time. Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size 3

Types of Capacity Design or installed capacity Effective or operating capacity Normal capacity Time Horizons Long Range Intermediate Range Short Range

Determinants of Effective Capacity Facilities Products or services Processes Human considerations Operations External forces

Plants Within Plants (PWP) 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) Extend focus concept to operating level 10

Capacity Flexibility Flexible plants Flexible processes Flexible workers 11

Efficiency/Utilization Example Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 units/day Actual output = 36 units/day Efficiency = = 90% Effective capacity 40 units/ day Utilization = Actual output = 36 units/day = 72% Design capacity 50 units/day Capacity cushion is 28%

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? Capacity utilization rate = Actual output. Best operating level = 83/120 =0.69 or 69% 6

Capacity Bottlenecks Inputs To customers (a) Operation 2 a bottleneck 50/hr 1 2 3 200/hr This slide and the next are based on Figure 8.2. The Figure is shown in two sections to improve legibility. 14

Capacity Bottlenecks 2 3 1 Inputs To customers 200/hr (b) All operations bottlenecks 15

Capacity Planning: Balance Unbalanced stages of production Units per month Stage 1 Stage 2 Stage 3 6,000 7,000 5,000 Maintaining System Balance: Output of one stage is the exact input requirements for the next stage Balanced stages of production Units per month Stage 1 Stage 2 Stage 3 6,000 6,000 6,000 12

Types of Processes (Continued) Stage 1 Stage 2 Buffer Multi-stage Process with Buffer 4

Kanban Operation

Capacity Strategies (MTS) Planned unused capacity Forecast of capacity required Capacity increment Capacity Time between increments We add in the details describing the various components of the graph. Time (a) Expansionist strategy 26

Capacity Strategies (MTO) Planned use of short-term options Forecast of capacity required Capacity increment Capacity Time between increments The detailed descriptions are added in this slide. Time (b) Wait-and-see strategy 29

Percent of North American Vehicles Made on Flexible Assembly Lines Build In Flexibility Percent of North American Vehicles Made on Flexible Assembly Lines 100% – 80% – 60% – 40% – 20% – 0 – Nissan Chrysler Honda GM Toyota Ford

Evaluating Alternatives Production units have an optimal rate of output for minimal cost. Average cost per unit Minimum cost Rate of output

Evaluating Alternatives (contd…) Minimum cost & optimal operating rate are functions of size of production unit. Small plant Average cost per unit Medium plant Large plant Output rate

Planning Service Capacity vs. Manufacturing 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 26

What is the Theory of Constraints? “The core idea in the Theory of Constraints is that every real system such as a profit-making enterprise must have at least one constraint (Internal or External)”. “There really is no choice in the matter. Either you manage constraints or they manage you. The constraints will determine the output of the system whether they are acknowledged and managed or not”

Goldratt’s Goal of the Firm The goal of a firm is to make money 4

Significance of Bottlenecks Maximum speed of the process is the speed of the slowest operation Any improvements will be wasted unless the bottleneck is relieved Solving this problem is likely to have the biggest positive impact on the business

Constraints Any system can produce only as much as its critically constrained resource Constraint 60 units Per day 70 units Per day 40 units Per day 60 units Per day Maximum Throughput = 40 units per day

Theory of Constraints Continuous Improvement Comparison

The Goal-Goldratt Balance the flow of product through the plant with demand from the market. Not to balance the capacities of operations with demand. Q. What determines the flow of product through the plant. The bottleneck resources. So how do you solve the problem of “bottleneck”? A. Find more capacity for the bottleneck, don’t try to move them at start or end- which you cant in processes. Have enough capacity to meet demand. Cut batch sizes for non-bottleneck parts in half.

The Goal How do the “making money” measures translate to the production environment? Throughput – Is the rate at which the system generates money through “Sales” Inventory – all the money that the system has invested in purchasing things which it intends to sell. Operational Expenses – all the money the system spends in order to turn inventory into throughput.

The Goal What was the common word in all three measurement definitions? Money going into the system Money stuck inside the system Money flowing out of the system

Issues with TOC Constraining resource must be maximized All other operations must be geared toward this goal May require sub optimization in other areas Upstream operations must provide only what the constraint can handle Downstream operations will only receive what the constraint can put out Constraint must be kept operating at its full capacity If not, the entire process slows further Advantages Improves capacity decisions in the short-run Avoids build up of inventory Aids in process understanding Avoids local optimization Improves communication between departments

Goal???? “Most of the time, your struggle for high efficiencies is taking you……[away]from goal” “A plant in which everyone is working all the time is very inefficient” “Pareto Principle”

from the “cost world” to the “throughput world” The Goal Why Alex’s plant was successful: Change in Focus from the “cost world” to the “throughput world” Throughput Cost Inventory Throughput Cost Inventory

Capacity Utilization & Service Quality Best operating point is near 70% of capacity High level of un certainity- Low utilization High Level of Certainity- 70% to 100% of service capacity 27