Chapter 5

1. Strategic Capacity Planning for Products and Services Chapter 5

2. CAPACITY Key Points Refers to system’s potential to deliver goods/services over specified time interval Involves short and long-term considerations Long term relates to overall level of capacity Short term relates to variations in capacity reqs due to seasonal, random, or irregular fluctuations in demand Instructor Slides

3. What does excess capacity mean inOM terminology? Actual production < what is achievable/optimal –often relates to market demand Excess capacity is inefficient – causes manufacturers to incur extra costs or lose market share Instructor Slides

4. Capacity – Two Categories • Design Capacity • Effective Capacity Refers to the maximum designed service capacity or output rate. Effective capacity is design capacity minus personal and other allowances. Product and service factors affect capacity tremendously. Instructor Slides

5. Operations Strategy – Summary of Chapter 5 5-5 Capacity planning impacts all areas of the organization It determines the conditions under which operations will have to function 1) Flexibility allows an organization to be agile • It reduces the organization’s dependence on forecast accuracy and reliability • Many organizations utilize capacity cushions to achieve flexibility 2) Bottleneck management is one way by which organizations can enhance their effective capacities

6. Chapter 5 Summary 3) Capacity expansion strategies are important organizational considerations • Expand-early strategy • Wait-and-see strategy 4) Capacity contraction is sometimes necessary • Capacity disposal strategies become important under some conditions Instructor Slides

7. Importance of Capacity Planning Its objective is to reach an optimal level where production capabilities meet demand. Capacity includes equipment, space, and employee skills. What happens when capacity does not meet demand? 5-7

8. Capacity Planning involves… • Long term commitment of resources • Managers must recognize the broad effects of capacity decisions. They are complex and in this age of globalization, internet marketing, etc. becoming more so. Instructor Slides

9. Strategic Capacity Planning 5-9 • Strategies are designed to meet goals, so the goal is: To achieve a match between the long-term supply capabilities of an organization and the predicted level of long-term demand • Overcapacity operating costs that are too high • Undercapacity strained resources and possible loss of customers

10. Capacity Planning Questions 5-10 Key Questions: basically what, how and when - • What kind of capacity is needed? • How much is needed to match demand? • When is it needed?

11. How much will it cost? • What are the potential benefits and risks? • Are there sustainability issues? • Should capacity be changed all at once, or through several smaller changes • Can the supply chain handle the necessary changes? Instructor Slides

12. Defining & Measuring Capacity – Changes by Industry

13. Capacity Planning– Design & Efficacy 5-13 1) Design capacity • Maximum output rate or service capacity an operation, process, or facility is designed for 2) Effective capacity • Design capacity minus allowances such as personal time, maintenance, and scrap Actual output • Rate of output actually achieved--cannot exceed effective capacity

14. These formulae enable OMs to determine their operational efficiency: • Efficiency of operation = Actual Output/Effective Capacity x 100% Utilization = Actual Output/Design Capacity x 100% SEE PAGE 188-189 IN YOUR BOOK FOR AN EXAMPLE Instructor Slides

15. Understand P 189 • You will need to understand the formula given, and why it is important to understand constraints to effective capacity. • We will discuss it, but you need to study it. Instructor Slides

16. Defining and Measuring Capacity 5-16 • OMs measure capacity in units that do not require updating • Why is measuring capacity in dollars a problem? • Capacity, as discussed earlier Design capacity • The maximum output rate or service capacity an operation, process, or facility is designed for Effective capacity • Design capacity minus allowances such as personal time and maintenance

17. Measuring System Effectiveness 5-17 • Actual output • The rate of output actually achieved • It cannot exceed effective capacity • Efficiency • Utilization Measured as percentages EXAMPLE….

18. Example– Efficiency and Utilization 5-18 Design Capacity = 50 trucks per day Effective Capacity = 40 trucks per day Actual Output = 36 trucks per day

19. Determinants of Effective Capacity 5-19 Facilities Product and service factors Process factors Human factors Wait, there’s more!

20. Determinants of Effective Capacity: continued 5-20 Policy factors – e.g., “CA identifies possible carcinogen” Operational factors – e.g., “machine is down” Supply chain factors—e.g., “the stuff we use to product our product wasn’t delivered due to Midwest snowstorm!” External factors - MANY Remember, there are many internal and external factors that can affect capacity!

21. Strategy Formulation 5-21 Strategies are typically based on assumptions and predictions about: • Long-term demand patterns • Technological change • Competitor behavior

22. Capacity Cushion 5-22 • Capacity Cushion • Extra capacity used to offset demand uncertainty • Capacity cushion = 100% minus utilization (what you use) • Capacity cushion strategy • Organizations that have greater demand uncertainty typically have greater capacity cushion • Organizations that have standard products and services generally have greater capacity cushion (like paper towels)

23. Steps in Capacity Planning 5-23 • Estimate future capacity requirements • Evaluate existing capacity and facilities; identify gaps • Identify alternatives for meeting requirements • Conduct financial analyses • Assess key qualitative issues • Select the best alternative for the long term • Implement alternative chosen (Plan B) • Monitor results

24. Determine Capacity for a New Business! Making Important Decisions to Get Started - with Capacity Planning Instructor Slides

25. Forecasting Capacity Requirements 5-25 Long-term considerations relate to overall level of capacity requirements • Require forecasting demand over a time horizon and converting those needs into capacity requirements –what are the annual requirements? Short-term considerations relate to probable variations in capacity requirements • Less concerned with cycles and trends than with seasonal variations and other variations from average – weather is a good example – what are today’s, or this week’s requirements?

26. Service Capacity Planning 5-26 Service capacity planning can present a number of challenges related to: • The need to be near customers Convenience • The inability to store services Cannot store services for consumption later – except IT perhaps, but in Ops Mgt generally, YOU CANNOT STORE SERVICES • The degree of demand volatility Volume and timing of demand – e.g, landscapers in Chicago v Chico or Redding Time required to service individual customers – see above!

27. Demand Management Strategies 5-27 Here are some strategies used to offset capacity limitations and that are intended to achieve a closer match between supply and demand… • Pricing • Promotions • Discounts • Other tactics to shift demand from peak periods into slow periods – like putting out regular priced Christmas decorations in early October.

28. In-House or Outsource? 5-28 • Once capacity requirements are determined, the organization must decide whether to produce a good or service itself or outsource -- AKA Make or Buy Analysis Factors to consider: • Available capacity • Expertise – where will it come from if I don’t have it? • Quality considerations • The nature of demand • Cost • Risks

29. Ways to Develop Capacity Alternatives 5-29 • Design flexibility into systems • Take stage of life cycle into account • Take a “big-picture” approach to capacity changes • Prepare to deal with capacity “chunks” • Attempt to smooth capacity requirements • Identify the optimal operating level

30. Capacity Strategies – How To Handle? Pick One. 5-30 Leading • Build capacity in anticipation of future demand increases Following • Build capacity when demand exceeds current capacity Tracking • Similar to the following strategy, but adds capacity in relatively small increments to keep pace with increasing demand

31. Bottleneck Operation • Maximum output ratelimited by bottleneck 5-31 An operation in a sequence of operations whose capacity is lower than that of the other operations

32. Economies and Diseconomies of Scale 5-32 Economies of Scale – What are They? • If output rate is less than the optimal level, increasing the output rate results in decreasing average per unit costs – Push out fast, automatic decrease in per-unit cost – if you can do it • Diseconomies of Scale – What are These? If the output rate is more than the optimal level – if production is too fast--increasing the output rate results in increasing average per unit costs Let’s see why…

33. Economies of Scale 5-33 Reasons for economies of scale: • Fixed costs are spread over a larger number of units • Construction costs increase at a decreasing rate as facility size increases • Processing costs decrease due to standardization

34. Diseconomies of Scale – disrupting the balance 5-34 If the output rate is MORE than the optimal level, increasing the output rate results in increasing average per unit costs • Distribution costs increase due to traffic congestion and shipping from a centralized facility rather than multiple smaller facilities • Complexity increases costs • Inflexibility can be an issue • Additional levels of bureaucracy

35. Constraint Management 5-35 Something that limits the performance of a process or system in achieving its goals Categories • Market • Resource • Material • Financial • Knowledge or competency • Policy

36. Resolving Constraint Issues 5-36 • Identify the most pressing constraint • Change the operation to achieve maximum benefit, given the constraint • Make sure other portions of the process are supportive of the constraint • Explore and evaluate ways to overcome the constraint • Repeat the process until the constraint levels are at acceptable levels

37. Evaluating Alternatives 5-37 • Alternatives should be evaluated from varying perspectives • Economic • Is it economically feasible? • How much will it cost? • How soon can we have it? • What will operating and maintenance costs be? • What will its useful life be? • Will it be compatible with present personnel and present operations? • Non-economic • Public opinion

38. Evaluating Alternatives 5-38 • Techniques for Evaluating Alternatives • Cost-volume analysis • Financial analysis • Decision theory* • Waiting-line analysis • Simulation* - know they are most useful for “what-if” types of decisions

39. BASIC Financial Analysis Terms to Know… 5-39 • Cash flow • The difference between cash received from sales and other sources, and cash outflow for labor, material, overhead, and taxes • Present value • The sum, in current value, of all future cash flow of an investment proposal

40. Test yourself.. All of the following are true of Capacity decisionsexcept: a. they impact the ability of the organization to meet future demandsb. they affect operating costsc. they are a major determinant of initial, or start-up, costsd. are a major determinant of variable coste. they often involve long term commitment of resources. Instructor Slides