1. McGraw-Hill/Irwin Copyright © 2011 The McGraw-Hill Companies, All Rights Reserved Chapter 4 Strategic Capacity Management

2. 4-2 Learning Objectives 1.Recognize the concept of capacity and how important it is to “manage” capacity. 2.Explain the impact of economies of scale on the capacity of a firm. 3.Understand how to use decision trees to analyze alternatives when faced with the problem of adding capacity.

3. 4-3 Capacity Management in Operations Capacity can be defined as the ability to hold, receive, store, or accommodate Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size LO 1

4. 4-4 Capacity Planning Time Durations Long range Intermediate range: Short range: LO 1

5. 4-5 Capacity Planning Concepts Capacity: an attainable rate of output Best operating level: capacity for which the process was designed Capacity utilization rate reveals how close a firm is to its best operating level LO 1

6. 4-6 Economies and Diseconomies of Scale Economies of scale: as a plant gets larger, the average cost per unit drops –Lower operating and capital costs –Per unit cost of equipment drops –More specialization of labor At some point, the plant becomes too large –Diseconomies of scale becomes a problem LO 2

7. 4-7 Other Factors That Affect Plant Size Internal equipment Labor Capital expenditures Transportation costs Advantages of being close to markets LO 2

8. 4-8 Capacity Flexibility Capacity flexibility: the ability to rapidly increase or decrease production levels or to shift production capacity quickly from one product or service to another –Flexible plants: low changeover times –Flexible processes: easily set up equipment –Flexible workers: workers have multiple skills LO 2

9. 4-9 Considerations in Changing Capacity 1.Maintaining system balance –Want similar capacities at each operation –Deal with bottlenecks 2.Frequency of capacity additions –Cost of upgrading too frequently –Cost of upgrading too infrequently 3.External sources of capacity 1.Outsourcing 2.Sharing capacity LO 2

10. 4-10 Planning Service 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 LO 4

11. 4-11 Capacity Utilization and Service Quality Must consider the day-to-day relationship between service utilization and service quality Optimal utilization rate is very context specific –Low rates are appropriate when both the degree of uncertainty and stakes are high –Relatively predictable services or service facilities without customer contact can operate much nearer 100 percent utilization LO 4

12. 4-12 Using Decision Trees to Evaluate Capacity Alternatives Decision tree: a schematic model of the sequence of steps in a problem and the conditions and consequences of each step Decision tree helps understand problem and helps find solution Decision trees are composed of decision nodes with branches –Squares represent decision points –Circles represent chance events LO 3

13. 4-13 Decision Trees = Event node = Decision node E i = Event i P(E i ) = Probability of event i 1stdecision Possible 2nd decision Payoff 1 Payoff 2 Payoff 3 Alternative 3 Alternative 4 Alternative 5 Payoff 1 Payoff 2 Payoff 3 E 1 [P(E 1 )] E 2 [P(E 2 )] E 3 [P(E 3 )] E 2 [P(E 2 )] E 3 [P(E 3 )] E 1 [P(E 1 )] Alternative 1 Alternative 2 Payoff 1 Payoff 2 12

14. 4-14 Decision Trees Small facility Large facility 1

15. 4-15 Decision Trees Small facility Large facility Low demand [0.4] Don’t expand Expand $200$223$270 High demand [0.6] 1 2

16. 4-16 Decision Trees Low demand [0.4] Small facility Large facility Low demand [0.4] Don’t expand Expand Do nothing Advertise $200$223$270$40$800 Modest response [0.3] Sizable response [0.7] $20$220 High demand [0.6] 1 2 3

17. 4-17 Decision Trees Low demand [0.4] Small facility Large facility Low demand [0.4] Don’t expand Expand Do nothing Advertise $200$223$270$40$800 Modest response [0.3] Sizable response [0.7] $20$220 High demand [0.6] 1 2 3

18. 4-18 Decision Trees Low demand [0.4] Small facility Large facility Low demand [0.4] Don’t expand Expand Do nothing Advertise $200$223$270$40$800 Modest response [0.3] Sizable response [0.7] $20$220 High demand [0.6] 1 2 3 0.3(20) + 0.7(220)

19. 4-19 Decision Trees $160 Low demand [0.4] Small facility Large facility Low demand [0.4] Don’t expand Expand Do nothing Advertise $200$223$270$40$800 Modest response [0.3] Sizable response [0.7] $20$220 High demand [0.6] 1 2 3 0.3(20) + 0.7(220)

20. 4-20 Decision Trees $160 Low demand [0.4] $160 Small facility Large facility Low demand [0.4] Don’t expand Expand Do nothing Advertise $200$223$270$40$800 Modest response [0.3] Sizable response [0.7] $20$220 High demand [0.6] 1 2 3 $270

21. 4-21 Decision Trees ($160) Low demand [0.4] $270 $160 Small facility Large facility Low demand [0.4] Don’t expand Expand Do nothing Advertise $200$223$270$40$800 Modest response [0.3] Sizable response [0.7] $20$220 High demand [0.6] 1 2 3

22. 4-22 Decision Trees ($160) Low demand [0.4] $270 $160 Small facility Large facility Low demand [0.4] Don’t expand Expand Do nothing Advertise $200$223$270$40$800 Modest response [0.3] Sizable response [0.7] $20$220 High demand [0.6] 1 2 3 0.4(200) + 0.6(270) 0.4(160) + 0.6(800)

23. 4-23 Decision Trees ($160) Low demand [0.4] $270 $160 Small facility Large facility $242 $544 Low demand [0.4] Don’t expand Expand Do nothing Advertise $200$223$270$40$800 Modest response [0.3] Sizable response [0.7] $20$220 High demand [0.6] 1 2 3 0.4(200) + 0.6(270) 0.4(160) + 0.6(800)

24. 4-24 Decision Trees $160 Low demand [0.4] $270 $160 Small facility Large facility $544 $242 $544 Low demand [0.4] Don’t expand Expand Do nothing Advertise $200$223$270$40$800 Modest response [0.3] Sizable response [0.7] $20$220 High demand [0.6] 1 2 3

25. 4-25 Decision Trees $160 Low demand [0.4] $270 $160 Small facility Large facility $544 $242 $544 Low demand [0.4] Don’t expand Expand Do nothing Advertise $200$223$270$40$800 Modest response [0.3] Sizable response [0.7] $20$220 High demand [0.6] 1 2 3

26. 4-26 ANY QUESTIONS?