Strategic Capacity Management

Strategic Capacity Planning

• Capacity can be defined as the ability to hold, receive, store, or accommodate
• Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size

Capacity Utilization

Where

Capacity used

rate of output actually achieved 

Best operating level

capacity for which the process was designed

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.

Example of Capacity Utilization

During one week of production, a plant produced 83 units of a product.  Its historic highest or best utilization recorded was 120 units per week.  What is this plant’s capacity utilization rate?

Answer: 

Capacity utilization rate =      Capacity used    .    = 83/120

                        Best operating level      =0.69 or 69%

Economies & Diseconomies of Scale

     

  

The Learning Curve

Capacity Focus

• The concept of the focused factory holds that production facilities work best when they focus on a fairly limited set of production objectives
• Plants Within Plants (PWP) 

       -Extend focus concept to operating level   

Capacity Flexibility

• Flexible plants 
• Flexible processes
• Flexible workers  

Capacity Planning: Balance

Capacity Planning

• Frequency of Capacity Additions
• External Sources of Capacity 

Determining Capacity Requirements

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 of Capacity Requirements

     

A manufacturer produces two lines of mustard, FancyFine and Generic line.  Each is sold in small and family-size plastic bottles. 

The following table shows forecast demand for the next four years.

Example of Capacity Requirements (Continued): Product from a Capacity Viewpoint

Question: Are we really producing two different types of mustards from the standpoint of capacity requirements?

Answer: No, it’s the same product just packaged differently.  

Example of Capacity Requirements (Continued) : Equipment and Labor Requirements

• Three 100,000 units-per-year machines are available for small-bottle production.  Two operators required per machine.
• Two 120,000 units-per-year machines are available for family-sized-bottle production.  Three operators required per machine.

Question: What are the Year 1 values for capacity, machine, and labor?

Question: What are the values for columns 2, 3 and 4 in the table below?

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 subcontracting

B)  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.    

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 dollars are presented in the table below: 

Step 1. We start by drawing the three decisions

Step 2. Add our possible states of nature, probabilities, and payoffs

Step 3. Determine the expected value of each decision

Step 4. Make decision

Alternative B generates the greatest expected profit, so our choice is B or to construct a new facility.

Planning Service Capacity vs. Manufacturing Capacity

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