1. Strategic Capacity Planning

2. Strategic Capacity Planning
What is Capacity refers to an upper limit or ceiling on the load that an operating unit (plant, department, machine, stores and etc) can handle.
Goal of Strategic capacity planning is to achieve a match between long term supply capabilities and predicted level of long term demand to supports the firm’s long term competitive strategy. 3

3. Basic questions in capacity handling
What kind of capacity is needed?
Depends on product/services that management intend to provide.
2. How much is needed?
The volume and certainty of anticipated demand
Strategic objectives in terms of growth, customer service and competitions
The cost of expansion and operation
Time Dimension of Capacity:
Long Range
Intermediate Range
Short Range 3

4. Basic questions in capacity handling
3. When is it needed?
Capacity lead strategy
Capacity lag strategy
Average capacity strategy 3

5. Capacity Panning Concept
Capacity Utilization Ratio revels how close a firm to its best operating point :
Capacity used -rate of output actually achieved
Best operating level -capacity for which the process was designed and thus is the volume at which average unit cost is minimized. 5

6. Designing Measuring Capacity
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
Actual output = units/day
Efficiency = = 90%
Effective capacity units/ day
Utilization = Actual output = units/day = 72%
Design capacity units/day
Effective capacity-affected by periodic maintenance, lunch break, problem in scheduling and operation, imbalance line etc
Actual capacity affected by breakdown, absenteeism, shortage and poor quality of raw material etc

7. Capacity Panning Concept
Economies of Scale : as a plant gets larger and volume increases the average cost per unit of output drops. Reasons for economies of scale are:
Reducing the fix cost per unit
Construction costs increases at a decreasing rate
Processing costs decrease as output rate increases because operations become more standard.
Diseconomies of Scale : when higher level of output cost more per unit to produce. Reasons for diseconomies of scale are:
Distribution costs increases due to traffic congestion and shipping from one large facility to several smaller ones.
Complexity increases costs, command and communication become more problem.
Inflexibility can be issue
Increased bureaucracy, slowing decision making and late approval 5

8. Capacity Panning Concept
The Experience Curve -As plants produce more products, they gain experience in the best production methods and reduce their costs per unit
Capacity Focus -The concept of the focused factory holds that production facilities work best when they focus on a fairly limited set of production objectives.
Plants Within Plants (PWP) extend focus concept to find best operating level
Capacity Flexibility – Ability to increase or decrease production levels, or to shift production capacity from one product or service to another.
Flexible plants, Flexible process, Flexible workers

9. Determining Capacity Requirements
1. Forecast sales within each individual product line
2. Calculate equipment and labor requirements to meet the forecasts
3. Project equipment and labor availability over the planning horizon
Capacity Cushion – is an amount of capacity in excess of expected demand. This may be positive or negative.
Positive Capacity Cushion - when a firm’s design capacity is more than capacity required to meet its demand
Negative Capacity Cushion - when a firm’s design capacity is less than capacity required to meet its demand 14

10. 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. 15

11. Example of Capacity Requirements (Continued) : 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. 17

12. At 1 machine for 100,000, it takes 1.5 machines for 150,000
Question: What are the Year 1 values for capacity, machine, and labor?
150,000/300,000=50%
At 1 machine for 100,000, it takes 1.5 machines for 150,000
At 2 operators for 100,000, it takes 3 operators for 150,000
The McGraw-Hill Companies, Inc., 2004 18

13. Question: What are the values for columns 2, 3 and 4 in the table below?
56.67%
1.70
3.40
66.67%
2.00
4.00
80.00%
2.40
4.80
58.33%
1.17
3.50
70.83%
1.42
4.25
83.33%
1.67
5.00
The McGraw-Hill Companies, Inc., 2004 18

14. Example of a Decision Tree Problem
A glass factory specializing in crystal is experiencing a substantial backlog, and the firm's management is considering three courses of action:
A) Arrange for subcontracting
B) Construct new facilities
C) Do nothing (no change)
The correct choice depends largely upon demand, which may be low, medium, or high. By consensus, management estimates the respective demand probabilities as 0.1, 0.5, and 0.4. 20

15. Example of a Decision Tree Problem (Continued): The Payoff Table
The management also estimates the profits when choosing from the three alternatives (A, B, and C) under the differing probable levels of demand. These profits, in thousands of Taka are presented in the table below: 21

16. Example of a Decision Tree Problem (Continued): Step 1
Example of a Decision Tree Problem (Continued): Step 1. We start by drawing the three decisions A B C 22

17. Example of Decision Tree Problem (Continued): Step 2
Example of Decision Tree Problem (Continued): Step 2. Add our possible states of nature, probabilities, and payoffs A B C
High demand (0.4)
Medium demand (0.5)
Low demand (0.1)
Tk 90
Tk 50
Tk 10
Tk 200
Tk 25
- Tk 120
Tk 60
Tk 40
Tk 20 23

18. Example of Decision Tree Problem (Continued): Step 3
Example of Decision Tree Problem (Continued): Step 3. Determine the expected value of each decision
High demand (0.4)
Medium demand (0.5)
Low demand (0.1)
$90
$50
$62
$10 A
EVA=0.4(90)+0.5(50)+0.1(10)=$62 24

19. Example of Decision Tree Problem Step 4. Make decision
High demand (0.4)
Medium demand (0.5)
Low demand (0.1) A B C
$90
$50
$10
$200
$25
-$120
$60
$40
$20
Tk 62
Tk 82
$80.5
Tk 46
Alternative B generates the greatest expected profit, so our choice is B or to construct a new facility 25

20. Planning Service Capacity vs. Manufacturing Capacity
Time: Goods can not be stored for later use and capacity must be available to provide a service when it is needed
Location: Service goods must be at the customer demand point and capacity must be located near the customer
Volatility of Demand: Much greater than in manufacturing
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? 26

21. Facility Location

22. Facility Location
Competitive Imperatives Impacting Location Issues in Facility Location
General Issues
Proximity to Customers
Business Climate
Total Costs
Infrastructure
Quality of Labor
Suppliers
Other Facilities
Global Issues
Free Trade Zones
Political Risk
Government Barriers
Trading Blocs
Environmental Regulation
Host Community
Competitive Advantage 3

23. Location Decision Factors
Macro Analysis
Regional / Sub Regional Factors
Location of Market
Raw materials
Labor factors
Climate and taxes
Foreign Govt
Community Considerations
Access to market
Material costs
Labor cost and availability
Community services, attitude
Taxes
Environmental regulations
Infrastructure support

24. Location Decision Factors
Micro Analysis - Site Related Factors
Land
Transportation
Environmental
Legal bindings and tax

25. Plant Location Methodology
Factor Rating -Decision based on quantitative and qualitative inputs.
Problems:
Do not account for wide range of cost associated with each factor.
May be provided with few points but potentially show a real difference in the value of locations.
Solution: Factor rating based on weighted scale
Centroid / Center of Gravity Method-Decision based on minimum distribution costs
Transportation Model -Decision based on movement costs of raw material or finished goods

26. Plant Location Methodology: Factor Rating Method
Two refineries sites (A and B) are assigned the following range of point values and respective points, where the more points the better for the site location.
Sites
A B
Major factors for site location
Pt. Range
129
100 50 74 45 8 34 40 20
156 70 90 96 55 4 14 50 5
Total pts 9

27. Plant Location Methodology: Center of Gravity Method
The center of gravity method is used for locating single facilities that considers existing facilities, the distances between them, and the volumes of goods to be shipped between them. Formulas used are:
Cx = X coordinate of center of gravity
Cy = X coordinate of center of gravity
dix = X coordinate of the ith location
diy = Y coordinate of the ith location
Vi = volume of goods moved to or from ith location 10

28. Plant Location Methodology: Example of Center of Gravity Method
Center of gravity method example
Several automobile showrooms are located according to the following grid which represents coordinate locations for each showroom. X Y A
(100,200) D
(250,580) Q
(790,900)
(0,0)
Question: What is the best location for a new Z-Mobile warehouse/temporary storage facility considering only distances and quantities sold per month? 11

29. Example of Center of Gravity Method: Determining Existing Facility Coordinates
(100,200) D
(250,580) Q
(790,900)
(0,0)
To begin, you must identify the existing facilities on a two-dimensional plane or grid and determine their coordinates.
You must also have the volume information on the business activity at the existing facilities. 12

30. Example of Center of Gravity Method: Determining the Coordinates of the New Facility
You then compute the new coordinates using the formulas: X Y A
(100,200) D
(250,580) Q
(790,900)
(0,0)
New location Z 13