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5–2 Chapter Five Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

5–3 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. LO5–1: Explain what capacity management is and why it is strategically important. LO5–2: Exemplify how to plan capacity. LO5–3: Evaluate capacity alternatives using decision trees. LO5–4: Compare capacity planning in services to capacity planning in manufacturing

5–4 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. The Economics of Very Big Ships Economy of Container Ships – Allows a T-shirt made in China to be sent to the Netherlands for just 2.5 cents. – The Eleonora Maersk and the other seven ships in her class are among the largest ever built: – Almost 400 m long, or the length of four soccer fields, and another half-field across. – The ships can carry 7,500 or so 40-foot containers, each of which can hold 70,000 T-shirts. On this voyage, the Eleonora was carrying supplies for Europe’s New Year celebrations: 1,850 tons of fireworks, including 30 tons of gunpowder.

5–5 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Capacity – the ability to hold, receive, store, or accommodate In business, viewed as the amount of output that a system is capable of achieving over a specific period of time Capacity management needs to consider both inputs and outputs

5–6 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Greater than one year Long range Monthly or quarterly plans covering the next 6 to 18 months Intermediate range Less than one month Short range

5–7 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Determining the overall level of capacity-intensive resources that best supports the company’s long-range competitive strategy – Facilities – Equipment – Labor force size

5–8 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Capacity utilization rate – a measure of how close the firm is to its best possible operating level Economies of scale – the idea that as a planet gets larger and volume increases, the average cost per unit tends to drop Diseconomies of scale – at some point, the plant becomes too large and average cost per unit begins to increase

5–9 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Capacity focus – the idea that a production facility works best when it is concentrated on a limited set of production objectives – Focused factory or plant within a plant (PWP) concept Capacity flexibility – the ability to rapidly increase or decrease product levels or the ability to shift rapidly from one product or service to another – Comes from the plant, processes, and workers or from strategies that use the capacity of other organizations

5–10 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Ability to quickly adapt to change Zero-changeover time Flexible Plants Flexible manufacturing systems Simple, easily set up equipment Flexible Processes Ability to switch from one kind of task to another quickly Multiple skills (cross training) Flexible Workers

5–11 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Similar capacities desired at each operation Manage bottleneck operations Maintaining System Balance Cost of upgrading too frequently Cost of upgrading too infrequently Frequency of Capacity Additions Outsourcing Sharing capacity External Sources of Capacity Temporary reductions Permanent reductions Decreasing Capacity

5–12 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.

5–13 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Use forecasting to predict sales for individual products Calculate labor and equipment requirements to meet forecasts Project labor and equipment availability over the planning horizon

5–14 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Stewart Company produces two flavors of salad dressing. – Paul’s and Newman’s Each is available in bottles and single- serving bags. What are the capacity and labor requirements for the next five years?

5–15 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Step 1: Use forecasting to predict sales for individual products

5–16 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.   Bottling Operation Bagging Operation Year Bottles (000s) Plastic bags (000s) Step 2: Calculate equipment and labor requirements

5–17 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Year Plastic Bag Operation Percentage capacity utilized Machine requirement Labor requirement Bottle Operation Percentage capacity utilized Machine requirement Labor requirement Step 3: Project equipment and labor availabilities Excel: Capacity Requirements For the Excel template visit

5–18 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. A decision tree is a schematic model of the sequence of steps in a problem – including the conditions and consequences of each step. Decision trees help analysts understand the problem and assist in identifying the best solution. Decision tree components include the following: – Decision nodes – represented with squares – Chance nodes – represented with circles – Paths – links between nodes

5–19 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. The owner of Hackers Computer Store is evaluating three options – expand at current site, expand to a new site, do nothing. The decision process includes the following assumptions and conditions. – Strong growth has a 55% probability – New site cost is $210,000  Payoffs: strong growth = $195,000; weak growth = $115,000 – Expanding current site cost is $87,000 (in either year 1 or 2)  Payoffs: strong growth = $190,000; weak growth = $100,000 – Do nothing  Payoffs: strong growth = $170,000; weak growth = $105,000

5–20 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Calculate the value of each alternative

5–21 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Diagram the problem chronologically Decision Events Decision

5–22 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Calculate value of each branch $765,000 $365,000 $863,000 $413,000 $843,000 $850,000 $525,000

5–23 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Work backwards to calculate the value of each decision/event $765,000 $365,000 $863,000 $413,000 $843,000 $850,000 $525,000 $660,500 $703,750 Do nothing = $850,000 Do nothing = $703,750 Do nothing has higher value than expand, so choose to do nothing Do nothing has higher value than expand or move, so choose to do nothing

5–24 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Decision tree analysis with net present value calculations Excel: Decision Trees For the Excel template visit

5–25 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Manufacturing Capacity Goods can be stored for later use. Goods can be shipped to other locations. Volatility of demand is relatively low. Service Capacity Capacity must be available when service is needed – cannot be stored. Service must be available at customer demand point. Much higher volatility is typical.

5–26 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. The relationship between service capacity utilization and service quality is critical. – Utilization is measured by the portion of time servers are busy. Optimal levels of utilization are context specific. – Low rates are appropriate when the degree of uncertainty (in demand) is high and/or the stakes are high (e.g., emergency rooms, fire departments). – Higher rates are possible for predictable services or those without extensive customer contact (e.g., commuter trains, postal sorting).

5–27 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved. Rate of service utilization and service quality are directly linked. Arrivals exceed services – many customers are never served Sufficient capacity to provide quality service Service quality declines – disruptions or high arrival levels lead to long wait times