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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

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

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

11. [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)
Standard processing time (hour/copy)
Average lot size (copies per report) 20 30
Standard setup time (hours)
[Dp + (D/Q)s]product [Dp + (D/Q)s]product n
N[1 - (C/100)]
M =
Module 4: Capacity

12. (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)
Standard processing time (hour/copy)
Average lot size (copies per report) 20 30
Standard setup time (hours)
[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)( /100)
M =
Module 4: Capacity

13. (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)
Standard processing time (hour/copy)
Average lot size (copies per report) 20 30
Standard setup time (hours)
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)( /100)
Module 4: Capacity

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

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

16. 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

17. 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