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Capacity Planning: Long-Term & Short-Term. This presentation explores: The nature of strategic capacity planning Capacity terminology Determining capacity requirements Decision trees Service capacity planning. Strategic Capacity Planning. Capacity

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capacity planning long term short term
Capacity Planning: Long-Term & Short-Term
  • This presentation explores:
    • The nature of strategic capacity planning
    • Capacity terminology
    • Determining capacity requirements
    • Decision trees
    • Service capacity planning ....
strategic capacity planning
Strategic Capacity Planning
  • Capacity
    • The amount of resource inputs available relative to output requirements at a particular time
  • Strategic Capacity Planning (Long-Range) ....
planning time frames
Planning Time Frames
  • Long range - more than 1 year and involves top management e.g. buildings, facilities, specialized equipment
  • Intermediate range - 6 to 18 months: monthly/quarterly plans; capacity varied by hiring, firing, tool improvement, etc.
  • Short range - less than I month: overtime, transfers, routings, etc.
best operating level
Best Operating Level

Average

unit cost

of output

Underutilization

Over Utilization

Best Operating

Level

Volume

....

capacity utilization does not account for operating efficiency
Capacity Utilization (does not account for operating efficiency)
  • Design capacity
    • maximum obtainable output
  • Capacity used
    • rate of output actually achieved ....
utilization example
Utilization--Example
  • Design capacity = 120 units/week
  • Actual output = 83 units/week
  • Utilization = ? ....
economies of scale long term capacity planning
Economies of Scale & Long-term Capacity Planning
  • Economy of Scale combined with Experience Curve could be a
  • competitive strategy

100-unit

plant

Average

unit cost

of output

200-unit

plant

400-unit

plant

300-unit

plant

Volume

....

the experience curve
The Experience Curve

Cost or

price

per unit

Total accumulated production of units

....

capacity utilization rate defined
Capacity Utilization Rate Defined
  • Cap utilization Rate = Cap. Used / Best Optg Level
how to plan for long term capacity flexibility
How to Plan for Long-Term Capacity Flexibility
  • Flexible plants - minimal changeover time between product lines.
  • Flexible processes - flexible manufacturing systems and easy setup of manufacturing equipment; able to realize economies of scope
  • Flexible workers - cross training; vertical job enlargement (also called job enrichment as opposed to job enlargement).
strategic capacity planning decisions continued
Strategic Capacity Planning Decisions continued ..
  • Frequency of Capacity Additions - need balance between frequent and infrequent capacity additions
  • External Sources of Capacity - possible in manufacturing (e.g. chemicals and energy) but easier in service industries (e.g. banking, airline, healthcare).
determining capacity requirements steps
Determining Capacity Requirements Steps ...
  • 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 ....
example capacity requirements
Example--Capacity Requirements

A manufacturer produces two lines of ketchup, FancyFine and a Generic line. Each is sold in small and family-size plastic bottles – differentiator here, is size of bottles.

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

....

the product from a capacity viewpoint
The Product from a Capacity Viewpoint
  • Are we really producing two different types of ketchup from the standpoint of capacity requirements - (if the two brands are manufactured on same identical production lines)? ....
equipment and labor requirements
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.

....

capabilities and the location decision
Capabilities and the Location Decision
  • Often driven by short-term considerations
    • wage rates
    • exchange rates
  • Better approach is to consider how location impacts development of long-term capabilities
long term capacity location six step process
Long-term Capacity Location: Six Step Process
  • Identify Sources of Value
  • Identify Capabilities Needed
  • Assess Implications of Location Decision on Development of Capabilities
  • Identify Potential Locations
  • Evaluate Locations
  • Develop Strategy for Building Network of Locations
stage 1 regional international
Stage 1: Regional-International
  • Minimize transportation costs and provide acceptable service
  • Proper supply of labor
  • Wage rates
  • Unions (right-to-work laws)
  • Regional taxes, regulations, trade barriers
  • Political stability
stage 2 community
Stage 2: Community
  • Availability of acceptable sites
  • Local government attitudes
  • Regulations, zoning, taxes, labor supply
  • Tax Incentives
  • Community’s attitude
  • Amenities
locating pure service organizations
Locating Pure Service Organizations
  • Recipient to Facility
    • facility utilization
    • travel distance per citizen
    • travel distance per visit
  • Facility to Recipient
tools for location decisions decision trees
Tools for Location Decisions: Decision Trees

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 ranks the respective probabilities as .10, .50, and .40. A cost analysis that reveals the effects upon costs is shown in the following table.

....

then add our possible states of nature probabilities and payoffs
Then add our possible states of nature, probabilities, and payoffs

$90k

High demand (.4)

$50k

Medium demand (.5)

$10k

Low demand (.1)

A

$200k

High demand (.4)

$25k

B

Medium demand (.5)

-$120k

Low demand (.1)

C

$60k

High demand (.4)

$40k

Medium demand (.5)

$20k

Low demand (.1)

....

determine the expected value of each decision
Determine the expected value of each decision

High demand (.4)

Medium demand (.5)

Low demand (.1)

$90k

$50k

$62k

$10k

A

EVA=.4(90)+.5(50)+.1(10)=$62k

Exercise: Complete the decision tree analysis.

....

planning service capacity
Planning Service Capacity
  • Time - capacity cannot be stored.
  • Location - near customer
  • Volatility of Demand- much higher and difficult to plan for; e.g. how do restaurants and airlines plan for this?
capacity utilization service quality
Capacity Utilization & Service Quality
  • Best operating point is near 70% of capacity
  • From 70% to 100% of service capacity (also called critical zones), what do you think happens to service quality? Why?
  • Context specific tradeoff - predictable services(e.g. commuter trains, mail sorting operations) should plan for 100% utilization rate while higher risk services (hospitals emergencies, fire services) should expect lower operating utilization rates.
capacity expansion strategies entrepreneurial stage
Capacity Expansion Strategies:Entrepreneurial Stage
  • Shift resources to different tasks as needed
  • Customer co-production - self-serve stands for all or some food items
capacity expansion strategies multi site rationalization stage
Capacity Expansion Strategies: Multi-site Rationalization Stage
  • Add services to existing site
  • Duplicate existing services at additional sites
  • Do both ....
capacity expansion strategies growth stage
Capacity Expansion Strategies: Growth Stage
  • “Bermuda Triangle” of operational complexity
    • Management difficulty exceeds management ability
  • New capacity management challenges
    • Need for fresh ideas
    • Need to upgrade older facilities ....
capacity expansion strategies maturity stage
Capacity Expansion Strategies: Maturity Stage
  • Focus on operational efficiencies
  • Remodeling and replacement
  • Service modification
    • Duplication across entire service system ....
learning curves
Learning Curves
  • Underlying Principles of Learning Curves
  • Plotting Learning Curves
  • Learning
  • From Learning Curves to Performance Improvement

2

underlying principles of learning curves
Underlying Principles of Learning Curves

1. Each time you perform a task it takes less time than the last time you performed the same task

2. The extent of task time decreases over time

3. The reduction in time will follow a predictable pattern

3

learning curves1
Learning Curves
  • % learning Rate(90% , 80%) - is used to denote a given exponential Learning Curve(L.C.)
    • Yx = Kxn
    • Y = hrs. to produce x unit; K = hrs to produce unit 1
    • x = Unit number
    • n = log b/log 2 where b = learning percent
    • logarithmic plot,.
organizational learning differences in performance l c due to
Organizational learning - Differences in Performance (L.C.) due to
  • position on the curve
  • employee involvement in operations improvement activities (cost, quality, etc.)
  • existence of standards
plotting learning curves
Plotting Learning Curves

Initial Manufacturing Cost: $100/unit

90% Learning Curve:

4

plotting learning curves1
Plotting Learning Curves

100

90

80

90 % Learning Curve

70

60

50

Production Cost ($)

40

30

20

10

0

1

3

5

7

9

11

13

15

17

19

21

23

25

27

29

31

33

35

37

39

Unit number

5

learning
Learning
  • Individual Learning
  • Organizational Learning

6

from learning curves to performance improvement
From Learning Curves to Performance Improvement
  • Proper selection of workers.
  • Proper training.
  • Motivation.
  • Work specialization.
  • Do one or very few jobs at a time.
  • Provide quick and easy access for help.
  • Allow workers to help redesign their tasks.

7

estimating learning curves
Estimating Learning Curves
  • Before start of production run, use:
    • industry standard; paying attention to differences and/or similarities in startup costs
  • Limited Start-up
    • use simple exponential curve e.g. labor for unit two/labor for unit one
  • With Historical data - production
    • use statistical analysis; plot data on log/log graph and determine LC with regression analysis or other curve fitting methodology.
the theory of constraints
The Theory of Constraints
  • Balance the flows not capacities throughout the shop
  • The utilization of a nonbottleneck is determined by other constraints in the system, such as the bottlenecks
  • Utilization is not the same as activation
  • An hour lost at a bottleneck is an hour lost for the whole shop
the theory of constraints continued
The Theory of Constraints continued
  • An hour saved at a nonbottleneck is a mirage
  • The bottlenecks govern the shop throughput and WIP inventories
  • The transfer batch size need not be the same as the process batch size
the theory of constraints concluded
The Theory of Constraints concluded
  • Process batch size should be variable, not fixed
  • A shop schedule should be set by examining all the shop constraints simultaneously
implementing the theory of constraints
Implementing the Theory of Constraints
  • Identify the System’s Constraints
  • Exploit the Constraint
  • Subordinate all else to the Constraint
  • Elevate the Constraint
  • If Constraint is no Longer a Bottleneck, Find the Next Constraint and Repeat the Steps.
relationship between capacity and scheduling
Relationship between Capacity and Scheduling
  • Capacity is oriented toward the acquisition of productive resources
  • Scheduling related to the timing of the use of resources