1. Strategic Capacity Management
Dr. Ron Lembke
Operations Management

2. Maximum Throughput of a Process
What is the capacity of the system?
Should we add any capacity?
How should we run the system?
Where should we keep inventory?

3. Maximum Throughput of a Process
6 min
5 min
4 min
5 min
What is the capacity of the system?
Convert to units / hr
10/hr
12/hr
15/hr
12/hr

4. Productivity measurements

5. Productivity Productivity = Outputs / Inputs
Partial: Output/Labor or Output/Capital
Multifactor:
Output / (Labor + Capital + Energy )
Total Measure:
Output / Inputs

6. Automotive Productivity
Book Data:
Jaguar: 14 cars/employee
Volvo: 29 cars/employee
Mini: 39 cars/employee

7. US Productivity Growth
Source: Bureau of Labor Statistics

8. Total Factor Productivity Increases
Take labor and capital into account
“percentage increase in output that is not accounted for by changes in the volume of inputs of capital and labour.”
Source: Economist, 2009

9. Growth of Service Economy
% of Labor Force

10. U.S. Productivity Gains Services harder to make more productive
Product Development team structure (Eg: Chrysler Prowler, Boeing 787)
Facilities improvements (less WIP, better quality, flexibility)
Keiretsu-like supplier cooperation -- tight cooperation

11. How much do we have?

12. Loss of capacity

13. How much do we have? We can only sustain so much effort.
“Best Operating Level”
Output level process designed for
Lowest cost per unit
Capacity utilization = capacity used
best operating level
Hard to run > 1.0 for long

14. Hours Worked by Country
Avg
Source: OECD, 2012

15. Hours Worked and Productivity
Source: Eurofund, European Working Conditions Observatory, 2012

16. Marginal Output of Time
Value of working n hrs is Onda
As you work more hours, your productivity per hour goes down
Eventually, it goes negative.
Better to work b instead of e hrs
S.J. Chapman, 1909, “Hours of Labour,” The Economic Journal 19(75)

17. What Would Henry Say? Ford introduced the $5 (per day) wage in 1914
He introduced the 40 hour work week
“so people would have more time to buy”
It also meant more output: 3*8 > 2*10
“Now we know from our experience in changing from six to five days and back again that we can get at least as great production in five days as we can in six, and we shall probably get a greater, for the pressure will bring better methods.
Crowther, World’s Work, 1926

18. Henry Ford 1919 bought paper Buys newspaper Jan, 1919
May, 1920, anti-Jewish articles start
Mein Kampf, p. 929
Grand Cross of the German Eagle, 1938
1920, German version 1922
1925
1919 bought paper

19. Denial
“Shocked!” Closes paper, 12/27 Apologized 4/5 of letters to Ford in July, 1927 were supportive, from Jews. Jan, 1937 disavows “any connection whatsoever with the publication in Germany of a book known as The International Jew.”
With son Edsel, 1927

20. Toyota Capacity 1997: Cars and vans? That’s crazy talk
First time in North America
292,000 Camrys
89,000 Siennas
89,000 Avalons

21. Learning Curves time/unit goes down consistently
Down by 10% as output doubles
We can use Logarithms to approximate this
What will our cost per unit be when we’ve made 10,000 units?
If you ever need this, me, and we can talk as much as you want
Also, see Appendix, Ch 4.

22. Economies of Scale Cost per unit cheaper, the more you make
Fixed costs spread over more units

23. Dis- economies of scale
Congestion, confusion, supervision
Running at 100 mph means more maintenance needed
Overtime, burnout, mistakes

24. Service Differences Can’t store the products - yesterday’s flight?
Serve me “Right Now!”
Arrival Rate very variable
Rates change quickly
Service times variable
Schedule capacity in 10 minute intervals, not months
How much capacity do we need?

25. Capacity Levels in Service
=100%
Mean
arrival
rate, 
Zone of non-service
<
=70%
Critical Zone
100
Zone of service 50
100
150
Mean service rate, 

26. Time Horizons
Long-Range: over a year – acquiring, disposing of production resources
Intermediate Range: Monthly or quarterly plans, hiring, firing, layoffs
Short Range – less than a month, daily or weekly scheduling process, overtime, worker scheduling, etc.

27. Adding Capacity Expensive to add capacity
A few large expansions are cheaper (per unit) than many small additions
Large expansions allow of “clean sheet of paper” thinking, re-design of processes
Carry unused overhead for a long time
May never be needed

28. Capacity Planning How much capacity should we add?
Conservative Optimistic
Forecast possible demand scenarios (Chapter 3)
Determine capacity needed for likely levels
Determine “capacity cushion” desired

29. Capacity Sources In addition to expanding facilities:
Two or three shifts
Outsourcing non-core activities
Training or acquisition of faster equipment

30. Decision Trees
Consider different possible decisions, and different possible outcomes
Compute expected profits of each decision
Choose decision with highest expected profits, work your way back up the tree.

31. Summary Having enough capacity is crucial
Measured productivity (single and multi-factor)
Increasing productivity key to economic growth and profits
Computed number of machines and employees needed
Making employees more productive is often cheaper than adding machines