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Chapter 11

Strategic Capacity Management

Strategic Capacity Planning Defined Capacity Utilization & Best Operating Level Economies & Diseconomies of Scale The Experience Curve Capacity Focus, Flexibility & Planning Determining Capacity Requirements Capacity Utilization & Service Quality

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Strategic Capacity PlanningDefined

Capacity:

Strategic capacity planning is an approach for determining the

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Capacity Utilization

Where Capacity used

– rate of output actually achieved Best operating level

– capacity for which the process was designed

rate nutilizatioCapacity

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Best Operating Level

Underutilization

Best OperatingLevel

Averageunit costof output

Volume

Overutilization

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Example of Capacity Utilization

During one week of production, a plant produced 83 units of a product. Its design capacity (best operating level) is 120 units per week. What is this plant’s capacity utilization rate?

Answer: Capacity utilization rate = Capacity used

Design Capacity = =

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Economies & Diseconomies of Scale

100-unitplant

200-unitplant 300-unit

plant

400-unitplant

Volume

Averageunit costof output

Economies of Scale and the Experience Curve working

Diseconomies of Scale start working

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The Experience Curve

Total accumulated production of units

Cost orpriceper unit

As plants produce more products, they gain experience in the best production methods and reduce their costs per unit.

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Capacity Focus

The concept of the focused factory holds that production facilities work best

Plants Within Plants (PWP) (from Skinner)– Extend focus concept to operating level

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Capacity Flexibility

Flexible plants -

Flexible processes -

Flexible workers -

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Capacity Planning: Balance

Stage 1 Stage 2 Stage 3Unitsper

month6,000 7,000 5,000

Stage 1 Stage 2 Stage 3Unitsper

month6,000 6,000 6,000

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

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Capacity Planning

Frequency of Capacity Additions -

-

External Sources of Capacity -

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Determining Capacity Requirements

Typical 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.

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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.

Year: 1 2 3 4FancyFine

Small (000s) 50 60 80 100Family (000s) 35 50 70 90Generic

Small (000s) 100 110 120 140Family (000s) 80 90 100 110

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Example of Capacity Requirements: The Product from a Capacity Viewpoint

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

Answer:

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Example of Capacity Requirements: Equipment and Labor Requirements

Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200

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.

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Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6Family-size Mach. Cap. 240,000 Labor 6

Small

Percent capacity usedMachine requirementLabor requirementFamily-size

Percent capacity usedMachine requirementLabor requirement

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

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Capacity Planning Process

ForecastDemand

ComputeNeededCapacity

DevelopAlternative

Plans

EvaluateCapacity

Plans

ComputeRated

Capacity

Select BestCapacity

Plan

ImplementBest Plan

QuantitativeFactors

(e.g., Cost)

QualitativeFactors

(e.g., Skills)

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Vary staffing Change equipment

& processes Change methods Redesign the product

for faster processing

Managing Existing Capacity

Capacity Management Vary prices Vary promotion Change lead times

(e.g., backorders) Offer complementary

products

Demand Management

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Planning Service vs. Manufacturing Capacity

Time:

Location:

Volatility of Demand:

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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? -