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8/3/2019 Capacity Pl.
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The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin
Strategic CapacityManagement
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y Strategic Capacity Planning Defined
y Capacity Utilization & Best OperatingLevel
y Economies & Diseconomies of Scaley The Experience Curve
y Capacity Focus, Flexibility & Planning
y
Determining Capacity Requirementsy Decision Trees
y Capacity Utilization & Service Quality
OBJECTIVES
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Strategic Capacity Planning
y Capacitycan be defined as the ability to hold,receive, store, or accommodate. The amount ofthe output that a system is capable of achieving
over a specific period of time
y Strategic capacity planning is an approach fordetermining the overall capacity level of capital
intensive resources, including facilities,equipment, and overall labor force size that bestsupports the companys long-range competitivestrategy.
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Capacity Utilization
y Capacity usedy rate of output actually achieved
y Best operating levely capacity for which the process was designed
The capacity utilization rate is expressed as apercentage and requires that the numerator
and denominator be measured in the sameunits and time periods
leveloperatingBest
usedCapacity
ratenutilizatioCapacity!
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Best Operating Level
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
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Example of Capacity Utilization
y During one week of production, a plant produced 83units of a product. Its historic highest or bestutilization recorded was 120 units per week. What isthis plants capacity utilization rate?
y Answer:
Capacity utilization rate = Capacity used .Best operating level
= 83/120=0.69 or 69%
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Economies & Diseconomies of Scale
100-unitplant
200-unit
plant 300-unit
plant
400-unit
plant
Volume
Average
unit cost
of output
Economies of Scale and the Experience Curve working
Diseconomies of Scale start working
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The Experience
Curve
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
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Capacity Focus
y The concept of thefocused factory holds thatproduction facilities work best when theyfocus on a fairly limited set of productionobjectives
y Plants Within Plants (PWP)y
Extend focus concept to operating levely Isolation of various processes within the plant.
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Capacity Flexibility
Ability to rapidly increase or decrease production levels or to shiftproduction capacity quickly from one product or service to another
y Flexible plants : zero-changeover-time plant. Usingmovable equipment, knockdown walls and easily
accessible and re-routable utilities.
y Flexible processes
y Flexible workers: having multiple skills and abilityto switch quickly from one kind of task to another
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Capacity Planning: Balance
Maintaining System Balance: Output of one stage isthe exact input requirements for the next stage
Stage 1 Stage 2 Stage 3Units
per
month6,000 7,000 5,000
Unbalanced stages of production
Stage 1 Stage 2 Stage 3Unitsper
month6,000 6,000 6,000
Balanced stages of production
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Capacity Planning
y
Frequency of Capacity Additions: Two types of cost:the cost of upgrading too frequently and that ofupgrading too infrequently. Upgrading capacity toofrequently is expensive. Upgrading capacity tooinfrequently is also expensive.
y External Sources of Capacity: In some cases, it may
not be cheaper to add capacity at all, but rather to useexisting external source of capacity. Two strategies are:Outsourcing and sharing Capacity.
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Determining Capacity Requirements
y 1. Forecast sales within each individualproduct line
y 2. Calculate equipment and laborrequirements to meet the forecasts
y3. Project equipment and labor availabilityover the planning horizon
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Capacity Decisionsy Capacity
y maximum capability toproduce
y rated capacity is theoreticaly effective capacity includes
efficiency and utilization
y Capacity utilizationy percent of available time
spent working
y Capacity efficiencyy how well a machine or
worker performs comparedto a standard output level
y Capacity load
y standard hours of workassigned to a facility
y Capacity load percenty ratio of load to capacity
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Capacity Expansion Strategies
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Capacity Decisions (cont.)y Capacity increase depends on
y volume and certainty of anticipated demand
y strategic objectives
y costs of expansion and operation
y Best operating level
y % of capacity utilization that minimizes unit costs
y Capacity cushiony % of capacity held in reserve for unexpected
occurrences
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Economies of Scaley it costs less per unit to produce high levels of
output
y fixed costs can be spread over a larger number of unitsy production or operating costs do not increase linearly
with output levels
y quantity discounts are available for material purchases
y operating efficiency increases as workers gainexperience
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Diseconomies of Scaley Occur above a certain level of output
y Diseconomies of Distribution
y Diseconomies of Bureaucracy
y Diseconomies ofConfusion
y Diseconomies of Vulnerability
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Best Operating Level for a Hotel
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Diseconomies of Confusion
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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 subcontractingB) 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.
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Example of a Decision Tree Problem (Continued): The
PayoffTable
0.1 0.5 0.4
Low Medium High
A 10 50 90
B -120 25 200
C 20 40 60
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
Rupees are presented in the table below:
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Example of a Decision Tree Problem (Continued): Step 1. We start by
drawing th
e th
ree decisions
A
B
C
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Ex
ample of DecisionTree Problem (Continued): Step 2. Add ourpossible states of nature, probabilities, and payoffs
A
B
C
High demand (0.4)
Medium demand (0.5)
Low demand (0.1)
Rs90k
Rs50k
Rs10kHigh demand (0.4)
Medium demand (0.5)
Low demand (0.1)
Rs200k
Rs25k
-Rs120k
High demand (0.4)
Medium demand (0.5)
Low demand (0.1)
Rs60k
Rs40k
Rs20k
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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)
A
Rs90k
Rs50k
Rs10k
EVA=0.4(90)+0.5(50)+0.1(10)=Rs62k
Rs62k
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Example of Decision Tree Problem (Continued): Step 4.
Make decision
High demand (0.4)
Medium demand (0.5)
Low demand (0.1)
High demand (0.4)
Medium demand (0.5)
Low demand (0.1)
A
B
C
High demand (0.4)Medium demand (0.5)
Low demand (0.1)
Rs90k
Rs50k
Rs10k
Rs200kRs25k
-Rs120k
Rs60kRs40k
Rs20k
Rs62k
Rs80.5k
Rs46k
Alternative B generates the greatest expected profit, so
our choice is B or to construct a new facility
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Planning Service Capacity vs. Manufacturing
Capacity
y Time: Goods can not be stored for lateruse and capacity must be available to
provide a service when it is neededy Location: Service goods must be at the
customer demand point and capacitymust be located near the customer
yVolatility of Demand: Much greater thanin manufacturing
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Capacity Utilization &
Service Quality
y Best operating point is near 70% ofcapacity from 70% to 100% of service
capacity, what do you think happens toservice quality? It Declines Drastically.
y If it is below 40% some of the customerswill never be served as the line build upmay be too high .