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Chapter 11

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  1. Chapter 11 Strategic Capacity Management

  2. Capacity Management in Operations • Capacity Planning Concepts • Capacity Planning • Planning Service Capacity OBJECTIVES

  3. Capacity Management in Operations • Capacity is the amount of output that a system is capable of achieving over a specific period of time • Strategic capacity planning is an approach for determining the overall capacity level of capital-intensive resources, including facilities, equipment, and overall labor force size

  4. Average unit cost of output Overutilization Underutilization Best Operating Level Volume Capacity Planning Concepts • Best operating level is the level of capacity for which the process was designed and thus is the volume of output at which average unit cost is minimized • Capacity utilization rate = Capacity used / Best operating level

  5. The basic notion of economies of scale is that as a plant gets larger and volume increases, the average cost per unit of output drops • At some point, the size of a plant becomes too large and diseconomies of scale become a problem • Experience curve is that as plants produce more, they gain experience in the best production methods, which reduces their cost of production in a predictable manner

  6. The Experience Curve

  7. Capacity Planning Determining Capacity Requirements is typically done according to the following steps 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 Example 11.1: The Steward Company produces two flavors of salad dressing: Paul’s and Newman’s. Each is available in bottles and plastic bags. Management would like to determine equipment and labor requirements for the next five years. See file example11-1.xls.

  8. Using Decision Trees to Evaluate Capacity Alternatives Example 11.2. In anticipation of sales growth in the next five years, the owner of Hackers’ Computer Store has three options: • Move to a new site • Expand current store • Do nothing The probability of strong growth is 0.55, and the probability of weak growth is 0.45. Which option should the owner take? See file example11-2.xls.

  9. Planning Service Capacity • Time: Unlike goods, service usually can not be stored for later use and capacity must be available to provide a service when it is needed • Location: In many cases, service must be at the customer demand point and capacity must be located near the customer • Volatility of Demand: Much greater than in manufacturing

  10. Capacity Utilization & Service Quality Best operating point is near 70% of capacity