Issues covered in this chapter Resource Usage Issues include: Quality Capacity levels Number of sites Size of sites Location Speed Performance objectives Dependability Market Competitiveness Flexibility Cost Development and Organization Capacity (configuration) Supply Networks Process Technology Decision areas Issues covered in this chapter

Issues in capacity strategy Configuring Capacity Managing Capacity Change Overall Level of Capacity Location of Capacity Timing of Change Magnitude of Change Location of changed capacity Type of Capacity Issues in capacity strategy

Ice Cream Division Canned Food Division Actual output Effective capacity Actual output Effective capacity Efficiency = Efficiency = 3724 4134 4622 5437 = = 90.08% = = 85.01% Planned Loss Avoidable Loss Planned Loss Avoidable Loss Total Capacity Total Capacity 3762 hrs 410 hrs 2459 hrs 815 hrs 7896 hrs 7896 hrs Effective Capacity Effective Capacity Actual Output Actual Output 4134 hrs 5437 hrs 3724 hrs 3724 hrs Actual output Total capacity Actual output Total capacity Utilization = Utilization = 3724 7896 4622 7896 = = 47.16% = = 58.54% Utilization and efficiency measures for two divisions of a food processing company

Some factors influencing the overall level of capacity Forecast level of demand Availability of capital Cost structure of capacity increment Changes in future demand OPERATIONS RESOURCES Overall level of capacity MARKET REQUIREMENTS Uncertainty of future demand Economies of scale Flexibility of capacity provisions Consequences of over/under supply Some factors influencing the overall level of capacity

LONG-TERM CAPACITY CHANGE STRATEGY Issues include….. NUMBER OF SITES CAPACITY OF EACH SITE LOCATION OF EACH SITE a LONG-TERM CAPACITY CHANGE STRATEGY ALLOCATION OF TASKS TO EACH SITE

Questions Options Questions: “Who should be involved in these decisions?” “How does the company make this type of decision?” Questions Options NUMBER OF SITES and CAPACITY OF SITES Many small sites? Few larger sites? LOCATION OF SITES Supply side dominated? Demand side dominated? ALLOCATION OF TASKS TO SITES All sites make all products/services? Each site focuses on a few products/ services? LONG-TERM CAPACITY CHANGE STRATEGY Capacity leads demand? Capacity lags demand?

Why is capacity strategy important? Without an appropriate capacity strategy operations will always be struggling to supply markets in a competitive manner Getting capacity strategy right is the starting point for developing competitive operations

? How should one judge a capacity strategy ? NUMBER OF SITES What performance measures will all these decisions have a major impact on ? CAPACITY OF EACH SITE LOCATION OF EACH SITE ? LONG-TERM CAPACITY CHANGE STRATEGY ALLOCATION OF TASKS TO SITES

Should capacity lead or lag demand ? Capacity leads demand Capacity lags demand Capacity Capacity Demand Demand Volume Volume Time Time What competitive objectives will be affected?

The three options ….. Capacity Leading Strategy Demand Capacity Leading Strategy Capacity Volume Time Time Demand Capacity Lagging Strategy Capacity Volume Time Demand Capacity Smoothing Strategy Capacity Volume Time

Cost, volume, profit illustration 12 10 8 Cost Costs / Revenue ($) Forecast demand = 9000 units 6 4 Revenue 2 2 4 6 8 10 12 Volume in thousands of units Cost, volume, profit illustration

Unit cost curve 8 8 6 6 Unit cost (total cost / volume) Diseconomies of scale kick in Nominal capacity limit 4 4 2 2 1 2 3 4 5 6 1 2 3 4 5 6 Volume in thousands of units Volume in thousands of units (a) (b) Unit cost curve

Cash flow with extended physical capacity Cash flow with two identical capacity increments Physical capacity of facilities Demand Cumulative cash flow Volume Time Effective Capacity Time Expanding physical capacity in advance of effective capacity can bring greater returns in the longer term

Some factors influencing the number and size of sites Economies of scale Required service level Size and number of sites OPERATIONS RESOURCES MARKET REQUIREMENTS Geographical distribution of demand Supply costs Some factors influencing the number and size of sites

Some factors influencing the location of sites Resource costs Required service level Land and facilities investment Suitability of site OPERATIONS RESOURCES Location of sites MARKET REQUIREMENTS Resource availability Image of location Community factors Some factors influencing the location of sites

Office rents in various cities ($’000 per square metre, January 1999) London (city) Hong Kong New York (midtown) Singapore Stockholm Amsterdam Madrid 0.4 0.6 0.8 1.0 1.2 Office rents in various cities ($’000 per square metre, January 1999) Source: Richard Ellis, The Economist

Denmark Britain Japan France Germany Sweden Netherlands Spain United States = 100 60 80 100 120 140 160 Unit labour costs in various countries (1998) (includes effects of currency exchange rates and productivity) Source: OECD, The Economist

(a) Location concerned with profit maximization; Fast food restaurant Electronics manufacturer Revenue Revenue Costs / Revenue Costs Costs / Revenue Costs Location A Location B Location A Location of operation Location of operation (a) (b) (a) Location concerned with profit maximization; (b) Location concerned with cost minimization

Cost-volume-profit curves for two alternative capacity strategies $US 4m Revenue 3m 3 Brayford facilities 2m 1 Bi-line 8 facility & 1 Brayford facility 1m 150000 Current volume 1000 2000 3000 4000 Monthly volume (kg) Cost-volume-profit curves for two alternative capacity strategies