Chapter 11 Strategic Capacity Management Strategic Capacity Planning Defined Capacity Utilization & Best Operating Level Economies & Diseconomies of Scale The Experience Curve Capacity Focus, Flexibility & Planning Determining Capacity Requirements Capacity Utilization & Service Quality 2

Strategic Capacity Planning Defined Strategic capacity planning is an approach for determining the 3

Capacity Utilization Where Capacity used Best operating level rate of output actually achieved Best operating level capacity for which the process was designed 5

Best Operating Level Underutilization Best Operating Level Average unit cost of output Volume Overutilization

Example of Capacity Utilization During one week of production, a plant produced 83 units of a product. Its design capacity (best operating level) is 120 units per week. What is this plant’s capacity utilization rate? Answer: Capacity utilization rate = Capacity used Design Capacity = 6

Economies & Diseconomies of Scale Economies of Scale and the Experience Curve working 100-unit plant Average unit cost of output 200-unit plant 400-unit plant 300-unit plant Diseconomies of Scale start working Volume 8

The Experience Curve Cost or price per unit As plants produce more products, they gain experience in the best production methods and reduce their costs per unit. Cost or price per unit Total accumulated production of units 9

Capacity Focus The concept of the focused factory holds that production facilities work best Plants Within Plants (PWP) (from Skinner) Extend focus concept to operating level 10

Capacity Flexibility Flexible plants - Flexible processes - Flexible workers - 11

Capacity Planning: Balance 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 Units per month Stage 1 Stage 2 Stage 3 6,000 6,000 6,000 12

Capacity Planning Frequency of Capacity Additions - - External Sources of Capacity - 13

Determining Capacity Requirements Typical steps: 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. 14

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.

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:

Example of Capacity Requirements: Equipment and Labor Requirements 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.

Year: 1 2 3 4 Small (000s) 150 170 200 240 Family (000s) 115 140 170 16 Question: What are the Year 1 values for capacity, machine, and labor? Year: 1 2 3 4 Small (000s) 150 170 200 240 Family (000s) 115 140 170 200 Small Mach. Cap. 300,000 Labor 6 Family-size Mach. Cap. 240,000 Labor 6 Small Percent capacity used Machine requirement Labor requirement Family-size Percent capacity used Machine requirement Labor requirement

Capacity Planning Process Develop Quantitative Forecast Alternative Factors Demand Plans (e.g., Cost) Compute Evaluate Qualitative Rated Capacity Factors Capacity Plans (e.g., Skills) Compute Select Best Implement Needed Capacity Best Plan Capacity Plan

Managing Existing Capacity Demand Management Capacity Management Vary prices Vary promotion Change lead times (e.g., backorders) Offer complementary products Vary staffing Change equipment & processes Change methods Redesign the product for faster processing

Planning Service vs. Manufacturing Capacity Time: Location: Volatility of Demand: 26

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? - 27