Strategic Capacity Planning

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Strategic Capacity Planning

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1. Strategic Capacity Planning Chapter 11

2. Strategic Capacity Planning Capacity The maximum level of output The amount of resource inputs available relative to output requirements at a particular time Capacity is the upper limit or ceiling on the load that an operating unit can handle.

3. Examples of Capacity Measures

4. Capacity Planning The basic questions in capacity planning are: What type of capacity is needed? How much is needed? When is it needed? How does productivity relate to capacity?

5. Two Capacity Strategies

6. Terminology Design capacity maximum obtainable output Effective capacity Maximum capacity given product mix, scheduling difficulties, and other doses of reality. Actual output rate of output actually achieved--cannot exceed effective capacity.

7. Capacity Utilization Capacity used rate of output actually achieved Best operating level capacity for which the process was designed (effective or maximum capacity)

8. Utilization--Example Best operating level = 120 units/week Actual output = 83 units/week Utilization = ?

9. Best Operating Level

10. Economies & Diseconomies of Scale

11. Evaluating Alternatives

12. Calculating Processing Requirements

13. Cost-Volume Relationships

14. Cost-Volume Relationships

15. Cost-Volume Relationships

16. Break-Even Problem with Step Fixed Costs

17. Break-Even Problem with Step Fixed Costs

18. Breakeven Analysis Breakeven quantity =

19. Breakeven example Thomas Manufacturing intends to increase capacity by overcoming a bottleneck operation through the addition of new equipment. Two vendors have presented proposals as follows: Proposal Fixed Costs Variable Costs A $ 50,000 $12 B $ 70,000 $10 The revenue for each product is $20 What is the breakeven quantity for each proposal?

20. Breakeven Solution BEQ =

21. Breakeven Analysis In the previous example, at what capacity would both plans incur the same cost?

22. The Experience Curve

23. Capacity Flexibility: Having the ability to respond rapidly to demand volume changes and product mix changes. Flexible plants Flexible processes Flexible workers

24. Capacity Bottlenecks

25. Capacity Planning Maintaining System Balance

26. Determining Capacity Requirements Forecast sales within each individual product line Calculate equipment and labor requirements to meet the forecasts Project equipment and labor availability over the planning horizon

27. Capacity Planning Process

28. Example--Capacity Requirements

29. Example of Capacity Requirements: The Product from a Capacity Viewpoint Question: Are we really producing two different types of ketchup from the standpoint of capacity requirements?

30. Example of Capacity Requirements: Equipment and Labor Requirements

33. Capacity Cushion

34. Large capacity cushion Required to handle uncertainty in demand service industries high level of uncertainty in demand (in terms of both volume and product-mix) to permit allowances for vacations, holidays, supply of materials delays, equipment breakdowns, etc. if subcontracting, overtime, or the cost of missed demand is very high

35. Sources of Uncertainty

36. Small capacity cushion Unused capacity still incurs the fixed costs highly capital intensive businesses time perishable capacity

38. Example: Target 5% Cushion

39. Capacity Example An automobile equipment supplier wishes to install a sufficient number of ovens to produce 400,000 good castings per year. The baking operation takes 2.0 minutes per casting, and management requires a capacity cushion of 5%. How many ovens will be required if each one is available for 1800 hours (of capacity) per year?

40. Solution Required system capacity = 400,000 good units per year Number of oven minutes required = 400,000 x 2 min/unit = 800,000 Number of oven minutes available/oven = (1800 hrs/oven) x(60 minutes/hour) (.9524) = 102,859 minutes/oven Number of ovens required = 800,000 min /102,859 min/oven = 7.8 or 8 ovens

41. How does Quality affect capacity? Suppose a three operation process is followed by an inspection. If the average proportion of defectives produced at operations 1, 2, and 3 are .04, .01, and .02 respectively, and if the demand is 200 units, then what is the required capacity for this operation?

42. Capacity requirements with Yield Loss Notation: di = avg. proportion of defective units at operation i n = number of operations in the production process M = order quantity (good units only or desired yield) B = avg. number of units at the start of the production process

43. Solution Desired yield = 200 Operation Defective rate 1 .04 2 .01 3 .02 (1) What is the capacity required?

44. Capacity and Quality Suppose we have a 6 process assembly line that must produce 1000 good products. Each process produces only 1% defects. How is capacity affected?

45. Decision Trees

46. Payoff Table

47. We start with our decisions...

48. Then add our possible states of nature, probabilities, and payoffs

49. Determine the expected value of each decision

50. Solution

51. Planning Service Capacity Time Location Volatility of Demand

52. Capacity Utilization & Service Quality Best operating point is near 70% of capacity From 70% to 100% of service capacity, what do you think happens to service quality? Why?

53. Capacity Expansion Strategies: Entrepreneurial Stage Shift resources to different tasks as needed Customer co-production

54. Capacity Planning Frequency of Capacity Additions External Sources of Capacity

55. Two Capacity Strategies

56. Advantages/Disadvantages of each strategy Expansionist • ahead of competition • risky if demand • no lost sales changes Wait-and-See • no unused capacity • rely on short- • easier to adapt to term options new technologies

57. Some Short-Term Capacity Options lease extra space temporarily authorize overtime staff second or third shift with temporary workers add weekend shifts alternate routings, using different work stations that may have excess capacity schedule longer runs to minimize capacity losses

58. Some Short-Term Capacity Options level output by building up inventory in slack season postpone preventive maintenance (risky) use multi-skilled workers to alleviate bottlenecks allow backorders to increase, extend due date promises, or have stock-outs. subcontract work

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