1. DOM 511: OPERATIONS MANAGEMENT PRACTICE
Magutu Obara Peterson
University of Nairobi
School of Business
Département of Management Science
May - August 2012
magutumop2011

2. CAPACITY MANAGEMENT

4. Objectives Understanding Capacity
Capacity Utilization & Best Operating Level
Economies & Diseconomies of Scale
The Experience Curve
Capacity Focus, Flexibility & Planning
Determining Capacity Requirements
Decision Trees
Capacity Utilization & Service Quality 2

5. Introduction
The Airbus A380 is the largest plane ever built with 555 seats. With some modest redesign, such as extending the length of the plane, it could carry as many as 800 airline passengers. The pieces of the plane are so big, such as the cockpit, tail, wings, and cabin sections that the factories must be reconfigured. The European Consortium that builds the Airbus must make and transport these parts, some weighing 100 tons each, among many countries such as Spain, Britain, France, and Germany. Not only must factory capacity and scale be upsized, the elaborate transportation system to move these parts among European factories must also be changed. At a maximum speed of 15 miles per hour, the trip to Toulouse, France, from the seaport of Bordeaux takes three days. The French government has redone the entire 159-mile route, including 18 miles of new bypass routes around five towns, to handle the six giant truck trailers that carry these manufactured parts. 2

6. Capacity Management - The Meaning Of Capacity
Capacity is the capability of a manufacturing or service resource such as a facility, process, workstation, or piece of equipment to accomplish its purpose over a specified time period.
The capacity of a production unit (e.g. machine, factory) is its ability to produce or do that which the customer requires.

7. Capacity Management - The Meaning Of Capacity
In operations management, three types of capacity are often referred to:
Potential Capacity - The capacity that can be made available to influence the planning of senior management. This is essentially a long-term decision that does not influence day-to-day production management
Immediate Capacity - The amount of production capacity that can be made available in the short-term. This is the maximum potential capacity - assuming that it is used productively
Effective Capacity - An important concept. Not all productive capacity is actually used or usable. It is important for production managers to understand what capacity is actually achievable.

8. Typical capacity issues to address include:
Can the facility, process, or equipment accommodate new goods and services and adapt to changing demand for existing goods and services?
How large should facility, process, or equipment capacity be?
When should capacity changes take place?

9. Capacity and Value Chain
Capacity is determined by;
Resources available to the organization – facilities, equipment & labor (technology & process selection)
How resources available are organized (process design & facility layout)
Efficiency of resources as determined by specific work methods & procedures (work & supply chain design)
Capacity is vital to designing and managing value chains
At every stage of a chain, sufficient capacity must exist & be coordinated with other stages & processes 2

10. Issues of concern in capacity;
Can the facility, process or equipment accommodate new goods & services & adapt to changing demand for existing goods & services?
How large should facility, process, or equipment capacity be?
When should capacity changes take place? 2

11. Understanding Capacity
Capacity is the capability of a manufacturing or service resource such as facility, process, workstation, or piece of equipment to accomplish its purpose over a specified time period
Capacity can be view from 4 dimensions;
Quantity
Quality
Time
Location
What are the units of measuring capacity? 2

12. Understanding Capacity
Capacity is the capability of a manufacturing or service resource such as facility, process, workstation, or piece of equipment to accomplish its purpose over a specified time period
Capacity can be view from 4 dimensions;
Quantity
Quality
Time
Location
Time may be a constraint where a customer has a particular required delivery date. In this situation, capacity managers often "plan backwards". In other words, they allocate the final stage (operation) of the production tasks to the period where delivery is required; the penultimate task one period earlier and so on.
What are the units of measuring capacity? 2

13. Capacity Planning
Operations managers must decide on the appropriate levels of capacity to meet current & future demand – hence need for proper planning
Capacity planning should take place at multiple levels i.e capacity planning is generally viewed in 3 durations
Long range – Annual plans for 2-5 years. Basically plans on the productive resources; Takes a long time to acquire & needs top mgt participation & approval 3

14. Capacity Planning
Intermediate range ; monthly/quarterly plans for the next 6 to 18 months – decisions to make include, hiring, layoffs, new tools & minor equipment purchases & subcontracting
Short range ; less than one month, capacity issues addressed thro’ overtime, personnel transfers & production routings 3

15. Capacity Planning Production Scheduling
A schedule is a representation of the time necessary to carry out a particular task.
A job schedule shows the plan for the manufacture of a particular job. It is created through "work / study" reviews which determine the method and times required.
Most businesses carry out several production tasks at one time - which entails amalgamating several job schedules. This process is called "scheduling". The result is known as the production schedule or factory schedule for the factory/plant as a whole. 3

16. Capacity Planning
In preparing a production schedule, attention needs to be paid to: - Delivery dates (when are finished products due?) - Job schedules for each relevant production task - Capacities of production sections or departments involved - Efficiency of these production sections or departments - Planned holidays - Anticipated sickness / absenteeism / training - Availability of raw materials, components and packaging 3

17. Strategic Capacity Planning Defined
Capacity planning is the analysis of what you are capable of producing versus what your expected demand will be.
Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size that best supports the firms long range competitive strategy. This plans constrain the firm on volume & variety to deliver to the market place. 3

18. components of capacity management
There are two components of capacity management:
Capacity Planning (creating sufficient, flexible, capable, capacity & a valid, best, "do-able", resilient, plan, to accommodate demand)
Capacity Control (ensuring the plan is met by managing resources)
Without capacity (and materials) to meet the demand, the plan cannot be valid.

19. A. Capacity Planning
There are, in a typical business, four levels where capacity planning (& control) is required (as shown below). At each of these levels there may be a one-to-many relationship with the level below. There are certainly differences in both planning detail and planning horizon required to satisfy each level. For example at strategic planning level one, product groups (not necessarily individual products) are being forecast with an horizon of perhaps years. At level four, when you are managing an individual resource, you are dealing with detailed operating instructions for an individual process and horizons of perhaps seconds:

21. Level 1: Strategic Capacity Management
Capacity should be first be analyzed during business planning sessions. The company should have a good sense of their current capacity and at what percentage they are operating.
(as a part of business planning) includes capacity management activity to:
Define longer term capacity goals (time phased resources required to meet the business plan)
Capability
Capacity
Impact of New Product Introduction / old product kill
Manage gross and long term capacity to meet it which will include the following considerations and actions:
Devise upsize / downsize strategy (output or responsiveness)

22. Level 1: Strategic Capacity Management
Manage volume & variety change
Place products in business units / locations & position capacity geographically (to source supply)
Devise strategies to manage seasonal demand / demand variability
Attack the drivers of performance & attributes of resources to provide:
Resource Viability & Core Competence
Capacity (line) balancing
Replacement theory (Repair or replace?)
Create resilience and consistency of service in the supply chain

23. Level 2. Development, Sales and Operations Management
(Management of the demands on the business and the gross capacity to meet it and make it happen!) (The Sales & Operations part of this process is mainly covered in a separate article from our early work in this area "Participative Sales and Operations Planning".)
We have two general views of this process, as we will explain further:

24. Level 2. Development, Sales and Operations Management
If you basically, sell what you can make, you need a "Participative Master Production Scheduling Process" assisted by a simple capacity modelling system, (to organise resources to deliver it, which basically is answering the question, "When?")
Otherwise, you need or a full "Development, Sales & Operations Management Process" to make the trade-offs between the difficulty of selling vs. the difficulty of providing and to additionally manage the development and sales processes, which answers the three questions, "What, If and When?".

25. Level 3: Workflow Management / Scheduling
(Scheduling of individual functions, cells or process areas)
In the mid 1970's the commercial availability of computers also spawned capacity planning tools, whose models were very sophisticated even by comparison with today's systems. It is mathematically possible to create a comprehensive model of the manufacturing or supply chain processes run on powerful computers, which use a variety of optimising techniques, in recently created "Advanced Scheduling Systems", in order to schedule work. (Previous Technique T020: "Close Scheduling" provides an introduction to scheduling.)
Also MRP2 Systems took the MRP1 plan and scheduled operations to create a "work-to" list at operational level in the early 1980's.

26. Level 3: Workflow Management / Scheduling
However it is difficult to justify the additional cost and administration that these systems require, if:
Less sophisticated processes such as an effective master production scheduling process supported by a rough-cut capacity model is implemented first.

27. Level 4: Process Management
(E.g. individual settings, speeds, feeds, skills, set / make ready times etc.)
At level four we have been involved in some interesting & lively debates about:
What is the best method (running speeds, feeds, process settings, least waste, shortest lead-time etc.)? This is where Taguchi methods (Design Of Experiments) is particularly useful. (In one recent example we showed that by reducing conveyor speed, more throughput could be achieved.)
Identifying and then driving skills development (versatility / mobility) using skills matrices

28. B. Capacity Control
How much output should operations ideally produce if the order book is empty?
The answer of course is zero and of course ideally they should incur zero cost (a zero capacity floor) in doing so. So why are operations measured on maximising output?
The key question is how can we de-bottleneck, perhaps by reassigning underutilised resources.

29. B. Capacity Control
Strategic / Business Planning (where typically budgetary type controls operate) but this plan must be "do-able" (established by modelling it using the level 2 Rough Cut Capacity Planning tools)
Development, Sales and Operations Management / Master Production Schedule, where the overall plan is measured and performance against the plan analysed and actions taken to bring output into line with demand, but any conflict between the business plan and what customers want has to be reconciled at this level, not passed to level 3 unresolved.

30. Importance of Capacity Decisions:
Impacts ability to meet future demands
Affects operating costs
Major determinant of initial costs
Involves long-term commitment
Affects competitiveness
Affects ease of management
Globalization adds complexity
Impacts long range planning
Capacity is measured as efficiency and utilization

31. Measuring Capacity
The decision to increase capacity is not easy and can be extremely costly.
Make sure you've fully analyzed all of your options and backed them with financial calculations.
If you do purchase a new piece of equipment, there's a tendency to want to operate them at full-capacity to reduce the return on investment. This is a false way of thinking. You should be operating to meet your demand, not to keep the machines running. This line of thinking will lead to excess materials and increased costs.
Design capacity
maximum output rate or service capacity an operation, process, or facility is designed for
Effective capacity
Design capacity minus allowances such as personal time, maintenance, and scrap
Actual output
rate of output actually achieved--cannot exceed effective capacity.

32. Efficiency and Utilization
Actual output
Efficiency =
Effective capacity
Utilization =
Design capacity
Both measures expressed as percentages

33. Efficiency/Utilization Example
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 or used = units/day
= 72% Design capacity units/day
Design capacity is a.k.a best operating level
Actual output is a.k.a capacity used

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

35. Best Operating Level Underutilization Best Operating Level Average
Example: Engineers design engines and assembly lines to operate at an ideal or “best operating level” to maximize output and minimize ware
Underutilization
Best Operating
Level
Average
unit cost
of output
Volume
Overutilization

36. Example of Capacity Utilization
During one week of production, a plant produced 83 units of a product. Its historic highest or best utilization recorded was 120 units per week. What is this plant’s capacity utilization rate?
Answer:
Capacity utilization rate = Capacity used .
Best operating level
= 83/120
=0.69 or 69% 6

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

38. Economies & Diseconomies
Economies of scale are achieved when the average unit cost of a good or service decreases as the capacity and/or volume of throughput increases
Reverse for diseconomies of scale

39. 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
Total accumulated production of units
Cost or
price
per unit
Yesterday
Today
Tomorrow

40. The Experience Curve Class Exercise :
Discuss the impact of the experience curve on effective capacity and state the issues which may hinder a firm from riding smoothly down the experience curve.

41. 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) (from Skinner)
Extend focus concept to operating level 10

42. Capacity Focus Dimensions of capacity focus Cost Quality Flexibility
New product introduction
Reliability
Short lead times
With the new manufacturing technology it is possible for a firm to focus on a selected set of dimensions that most work towards corporate objectives 10

43. Capacity Flexibility
Flexible plants – Having the ability to rapidly increase or decrease production levels & change from one product to another.
Flexible processes ( Economies of scope ) – permit rapid low cost switching from one product to another
Flexible workers – Multi skilled, ability to switch easily from one kind of task to another, require broad based training 11

44. Capacity Planning: Balance
Unbalanced stages of production
Units
per
month
Stage 1
Stage 2
Stage 3
6,000
7,000
5,000
Balanced stages of production
Units
per
month
Stage 1
Stage 2
Stage 3
6,000
6,000
6,000 12

45. Capacity Planning
Maintaining System Balance: Output of one stage is the exact input requirements for the next stage
Balancing Techniques
Add capacity to bottleneck work centers
Scheduling overtime
Leasing equipment
subcontracting
Use of buffer inventories in front of the bottleneck
Duplicate the facilities of bottleneck dept. 13

46. Capacity Planning ii) Frequency of Capacity Additions
Frequent Additions ; Costs
Removing old & replacing new
Training employees on new
Purchase cost of new
Opportunity cost of idle plant during changeover
Infrequent Additions ; Costs
Purchase cost very high – big chunks
Overhead of underutilization –
Lost sales/market share during waiting
period 13

47. Managing Capacity By Adjusting Short-Term Capacity Levels
Add or share equipment
Sell unused capacity
Change labor capacity & schedules
Change labor skill mix 13

48. Managing Capacity By Shifting & stimulating Demand
Vary the price of goods or services
Provide customers information e.g call centers personal service time
Advertising & promotion eg Valetine day promotions
Add peripheral goods and/or services
Provide reservations 13

49. Capacity Planning iii) External Sources of Capacity
May be cheaper in the short run; Methods of achieving this include;
Outsourcing
Sharing 13

50. 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 14

51. Capacity Cushion
A firm may decide to have capacity in excess of expected demand I.e capacity cushion
Reasons
Anticipation of growth in demand
Provision for errors in estimation of demand
Compensation for any loss in capacity if BOL is not attainable
** Positive Vs Negative capacity cushion 14

52. Decision Theory
Helpful tool for financial comparison of alternatives under conditions of risk or uncertainty Suited to capacity decisions

53. 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

54. 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 dollars are presented in the table below: 21

55. 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

56. 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)
$90k
$50k
$10k
$200k
$25k
-$120k
$60k
$40k
$20k 23

57. 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)
$90k
$50k
$62k
$10k A
EVA=0.4(90)+0.5(50)+0.1(10)=$62k 24

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

59. Planning Service Capacity vs. Manufacturing Capacity
Time: Services can not be stored for later use and capacity must be available to provide a service when it is needed
Location: Service must be at the customer demand point and capacity must be located near the customer
Volatility of Demand: Much greater than in manufacturing. Services can not be stored hence hence inventory can not smooth demand. Also customers directly interact with system & have varying needs 26

60. Capacity Utilization & Service Quality
Best operating point is near 70% of capacity - Enough to keep servers busy but allows enough time to serve customers individually and keep enough capacity in reserve so as not to create too many managerial headaches.
From 70% to 100% of service capacity, what do you think happens to service quality? 27

61. Capacity Utilization & Service Quality
100%
Critical zone
70%
Mean arrival rate
Mean service rate 27

62. Capacity Utilization & Service Quality
From 70% to 100% of service capacity, ( The critical zone) customers are processed through the system but service quality declines. Above the critical zone, the line builds up & it is likely that many customers may never be served. 27

63. Capacity Utilization & Service Quality
Optimal utilization rate is very context specific. Low rates are appropriate when both the degree of uncertainty & the stakes are high. Eg hospitals & fire depts. Commuter trains & postal sorting operations are relatively predictable services & one can plan to operate much near 100% utilization 27

64. Capacity Expansion Strategies: Entrepreneurial Stage
Shift resources to different tasks as needed
Customer coproduction 29 29

65. Capacity Expansion Strategies: Multisite Rationalization Stage
Add services to existing site
Duplicate existing services at additional sites
Do both 30 30

66. Capacity Expansion Strategies: Growth Stage
“Bermuda Triangle” of operational complexity
Management difficulty exceeds management ability
New capacity management challenges
Need for fresh ideas
Need to upgrade older facilities 31 31

67. Capacity Expansion Strategies: Maturity Stage
Focus on operational efficiencies
Remodeling and replacement
Service modification
Duplication across entire service system 32 32

68. Capacity Expansion Strategies: Maturity Stage
Focus on operational efficiencies
Remodeling and replacement
Service modification
Duplication across entire service system 32 32

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