chapter 5: strategic capacity planning for products and...

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Islamic University of Gaza - Palestine

Assistant Prof. Abed Schokry

Operations and Productions Management

First Semester 2010 / 2011

Chapter 5: Strategic Capacity Planning for Products and Services


Learning Outcomes: Chapter 5

• After finishing this chapter, You should be able to:

– Explain the importance of capacity planning

– Discuss the ways of defining and measuring capacity

– Describe the determinants of effective capacity

– Discuss the major considerations related to developing capacity alternatives

– Briefly describe approaches that are useful for evaluating capacity alternatives

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Strategic Capacity Planning

• Capacity can be defined as the ability to hold, receive or store.

• Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size

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Capacity Planning

• Capacity

– The upper limit or ceiling on the load that an operating unit can handle

– Goal

• To achieve a match between the long-term supply capabilities of an organization and the predicted level of long-run demand


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Capacity Planning Questions

• Key Questions:

– What kind of capacity is needed?

– How much capacity is needed to match demand?

– When is it needed?

• Related Questions:

– 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?


Capacity planning methods

vary by industry or service - similar principles:

• long-term (yrs). Capacity strategy/policy needed (production sites, hotels/hospital (rooms & beds), warehouse space, lines/machinery, computer up-grades. Investment in new facilities etc.

• medium-term (mths) - forecast demand, schedule capacity to meet /balance it. MRP2 and MRP1 planning, machine scheduling, rotas. Levels of aggregation - plans to assign capacity.

• short-term - "now" responses. Detail revealed in action. Local staff expertise, flexibility & slack without upsetting aggregate plan/objectives.


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Capacity Decisions Are Strategic

• Capacity decisions

– impact the ability of the organization to meet future demands

– affect operating costs

– are a major determinant of initial cost

– often involve long-term commitment of resources

– can affect competitiveness

– affect the ease of management

– are more important and complex due to globalization

– need to be planned for in advance due to their consumption of financial and other resources


Measuring Capacity Examples

• There is no one best way to measure capacity

• Output measures like kegs per day are easier to understand

• With multiple products, inputs measures work better

Type of BusinessInput Measures of

Capacity

Output Measures

of Capacity

Car manufacturer Labor hours Cars per shift

Hospital Available beds Patients per month

Pizza parlor Labor hours Pizzas per day

Retail storeFloor space in

square feetRevenue per foot


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Defining and Measuring Capacity

• Measure capacity in units that do not require updating

– Why is measuring capacity in dollars problematic?

• Two useful definitions of capacity

– 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


Measuring System Effectiveness

• Actual output

– The rate of output actually achieved

– It cannot exceed effective capacity

• Efficiency

• Utilization

• Measured as percentages

capacity effective

output actualEfficiency =

capacitydesign

output actualnUtilizatio =


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Example in Computing Efficiency and Utilization

Given the information below, compute the efficiency and theutilization of the vehicle repair department

Design Capacity = 50 trucks per day

Effective Capacity = 40 trucks per day

Actual Output = 36 units per day

Efficiency = Actual OutputEffective Capacity

= 36 per units per day40 units per day

= 90%

Utilization = Actual OutputDesign Capacity

= 36 per units per day50 units per day

= 72%


Factors that determine effective capacity

A. Facilities• Design• Location

• Layout• Environment

B. Product/Service• Design• Product/Service Mix

C. Process

• Quantity capabilities• Quality capabilities

D. Human Factors

• Job content• Job design

• Training and experience

E. Operational

• Motivation• Compensation

• Learning rates• Absenteeism and labor turnover

F. External Factors

• Scheduling• Materials management

• Quality assurance• Maintenance policies

• Equipment breakdowns

• Product standards• Safety regulations

• Unions• Pollution control standards


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• Need to be near customers

– Capacity and location are closely tied

• Inability to store services

– Capacity must be matched with timing of demand

• Degree of volatility of demand

– Peak demand periods

Planning Service Capacity


In-House or Outsourcing

1. Available capacity

2. Expertise

3. Quality considerations

4. Nature of demand

5. Cost

6. Risk

Outsource: obtain a good or service from an external provider


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Developing Capacity Alternatives

1. Design flexibility into systems

2. Take stage of life cycle into account

3. Take a “big picture” approach to capacity changes

4. Prepare to deal with capacity “chunks” (mass)!

5. Try to smooth out capacity requirements

6. Identify the optimal operating level


Capacity Flexibility

• Flexible plants

• Flexible processes

• Flexible workers

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Bottleneck OperationFigure 5.1

Machine #2BottleneckOperation

Machine #1

Machine #3

Machine #4

10/hr

10/hr

10/hr

10/hr

30/hr

Bottleneck operation: An operationin a sequence of operations whosecapacity is lower than that of theother operations


Bottleneck Operation

Operation 120/hr.

Operation 210/hr.

Operation 315/hr.

10/hr.

Bottleneck

Maximum output ratelimited by bottleneck


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Economies and Diseconomies of Scale

• Economies of Scale

– If output rate is less than the optimal level, increasing the output rate results in decreasing average per unit costs

• Diseconomies of Scale

– If the output rate is more than the optimal level, increasing the output rate results in increasing average per unit costs


Economies & Diseconomies of Scale

100-unitplant

200-unitplant 300-unit

plant

400-unitplant

Volume

Averageunit costof output

Economies of Scale and the Learning Curve working

Diseconomies of Scale start working

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The Learning 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 orpriceper unit

Yesterday

Today

Tomorrow


Capacity Planning: Balance

Stage 1 Stage 2 Stage 3Unitsper

month

6,000 7,000 5,000

Unbalanced stages of production

Stage 1 Stage 2 Stage 3Unitsper

month

6,000 6,000 6,000

Balanced stages of production

Maintaining System Balance: Output of one stage is the exact input requirements for the next stage

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How Much Capacity Is Best?

• The Best Operating Level is the output than results in the lowest average unit cost

• Economies of Scale:

– Where the cost per unit of output drops as volume of output increases

– Spread the fixed costs of buildings & equipment over multiple units, allow bulk purchasing & handling of material

• Diseconomies of Scale:

– Where the cost per unit rises as volume increases

– Often caused by congestion (overwhelming the process with too much work-in-process) and scheduling complexity


Capacity Strategies

• 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 speed with increasing demand


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Capacity Cushion

• Capacity Cushion (reduce)

– Extra capacity used to offset demand uncertainty

– Capacity cushion = 100% - Utilization

– 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


Making Capacity Planning Decisions

• The three-step procedure for making capacity planning

decisions is as follows:

– Step 1: Identify Capacity Requirements

– Step 2: Develop Capacity Alternatives

– Step 3: Evaluate Capacity Alternatives


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Steps in Capacity Planning

1. Estimate future capacity requirements

2. Evaluate existing capacity and facilities; identify gaps

3. Identify alternatives for meeting requirements

4. Conduct financial analyses

5. Assess key qualitative issues

6. Select the best alternative for the long term

7. Implement alternative chosen

8. Monitor results


Calculating Processing Requirements

• Calculating processing requirements requires reasonably accurate demand forecasts, standard processing times, and available work time

horizon planning theduring available timeprocessing

horizon planning theduring product for demand

product for timeprocessing standard

machines required ofnumber

where

1

=

=

=

=

=∑

=

T

iD

ip

N

T

Dp

N

i

i

R

k

iii

R


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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 OperatingLevel

Averageunit costof output

Volume

Overutilization

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Best Operating Level and Size

• Alternative 1: Purchase one large facility, requiring one large

initial investment

• Alternative 2: Add capacity incrementally in smaller chunks as

needed


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Optimal Operating Level

OptimalOutput

Rate


Cost-Volume Relationships


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Operations Strategy

• Capacity planning impacts all areas of the organization

– It determines the conditions under which operations will have to function

– 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

– Bottleneck management is one way by which organizations can enhance their effective capacities

– Capacity expansion strategies are important organizational considerations• Expand-early strategy

• Wait-and-see strategy

– Capacity contraction is sometimes necessary• Capacity disposal strategies become important under these

conditions


End of Chapter 5


chapter 5: strategic capacity planning for products and...

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