Module 4: Capacity Capacity Operations Management as a Competitive Weapon Module 4 Capacity

OM Course Framework Strategic Issues Tactical Issues Module 4: Capacity OM Course Framework Manufacturing Design & Selection Process Analysis Operations Strategy Strategic Issues Aggregate Planning Inventory Location Capacity Tactical Issues TOC JIT MRP Operational Issues This course deals with the management of ‘processes.’ Applies to: For-profit and non-profit organizations Service and manufacturing organizations Module 4: Capacity

Learning Objectives Explain basic capacity concepts Module 4: Capacity Learning Objectives At the end of this module, each student will be able to: Explain basic capacity concepts Describe some economies Explain basic capacity strategies Analyze basic capacity decisions Explain managing existing capacity Module 4: Capacity

1. Basic Capacity Concepts Module 4: Capacity 1. Basic Capacity Concepts Attainable output rate of a system in a given period of time (general definition) Design capacity May be units, hours, dollars, sq. ft. etc. Example: Tons of steel per month Output rate at which average unit cost is at a minimum (aka, best operating level) Module 4: Capacity

Average unit cost (dollars per patient) 2. Economies of Scale Average unit cost (dollars per patient) Output rate (patients per week) 250-bed hospital 750-bed hospital 500-bed hospital Module 4: Capacity

Other ‘Economies’ Economies of scale Economies of scope/variety Module 4: Capacity Other ‘Economies’ Economies of scale Lower unit cost for increased capacity Economies of scope/variety Ability to manufacture many products for lower unit cost than individual products (synergy) Module 4: Capacity

Other ‘Economies’ Learning economies (differences) Module 4: Capacity Other ‘Economies’ Learning economies (differences) Combine learning from differences among customers, suppliers, sister operations, and rivals in different nations and can apply these lessons to the entire business Module 4: Capacity

Other ‘Economies’ Network economies (similarities) Module 4: Capacity Other ‘Economies’ Network economies (similarities) Arise from collaborative global operations projects that align or standardize parts, designs, or information systems internationally to create a network. Then more projects can use the same networks to provide uniform products worldwide. Module 4: Capacity

Expansionist Strategy Planned unused capacity Forecast of capacity required Time between increments Capacity increment Capacity Time Module 4: Capacity

Wait-and-See Strategy Time Capacity Forecast of capacity required Planned use of short-term options Time between increments Capacity increment Module 4: Capacity

[Dp + (D/Q)s]product 1 + ... + [Dp + (D/Q)s]product n 4. Capacity Decisions Estimate Capacity Requirements Item Client X Client Y Annual demand forecast (copies) 2000 6000 Standard processing time (hour/copy) 0.5 0.7 Average lot size (copies per report) 20 30 Standard setup time (hours) 0.25 0.40 [Dp + (D/Q)s]product 1 + ... + [Dp + (D/Q)s]product n N[1 - (C/100)] M = Module 4: Capacity

(250 days/year)(1 shift/day)(8 hours/shift)(1.0 - 15/100) 4. Capacity Decisions Estimate Capacity Requirements Item Client X Client Y Annual demand forecast (copies) 2000 6000 Standard processing time (hour/copy) 0.5 0.7 Average lot size (copies per report) 20 30 Standard setup time (hours) 0.25 0.40 [2000(0.5) + (2000/20)(0.25)]client X + [6000(0.7) + (6000/30)(0.4)]client Y (250 days/year)(1 shift/day)(8 hours/shift)(1.0 - 15/100) M = Module 4: Capacity

(250 days/year)(1 shift/day)(8 hours/shift)(1.0 - 15/100) 4. Capacity Decisions Estimate Capacity Requirements Item Client X Client Y Annual demand forecast (copies) 2000 6000 Standard processing time (hour/copy) 0.5 0.7 Average lot size (copies per report) 20 30 Standard setup time (hours) 0.25 0.40 M = [2000(0.5) + (2000/20)(0.25)]client X + [6000(0.7) + (6000/30)(0.4)]client Y (250 days/year)(1 shift/day)(8 hours/shift)(1.0 - 15/100) Module 4: Capacity

4. Capacity Decisions Estimate Capacity Requirements Item Client X Client Y Annual demand forecast (copies) 2000 6000 Standard processing time (hour/copy) 0.5 0.7 Average lot size (copies per report) 20 30 Standard setup time (hours) 0.25 0.40 M = = 3.12  4 machines 5305 1700 Module 4: Capacity

5. Managing Existing Capacity Demand Management Capacity Management Vary prices Vary promotion Change lead times (e.g., backorders) Offer complementary products Module 4: Capacity

Complementary Products Module 4: Capacity Complementary Products Time (Months) Sales (Units) 1,000 2,000 3,000 4,000 5,000 J M S N Total Snow-mobiles Variation is reduced by combining demands Jet Skis Module 4: Capacity

5. 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 Redesign the product for faster processing Yield management Module 4: Capacity