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3 Capacity Planning
3 Capacity Planning
CAPACITY PLANNING
Introduction
Capacity can be defined as the maximum
output rate that can be achieved by a
facility.
The facility may be an
entire organization,
a division, or
only one machine.
Introduction
Planning for capacity in a company is
usually performed at two levels, each
corresponding to either
strategic or
tactical decisions.
The first level of capacity decisions is strategic
and long-term in nature.
This is where a company decides what
investments in new facilities and equipment it
should make.
Introduction
Because these decisions are strategic in
nature, the company will have to live with them
for a long time.
Also,
they
require
large
capital
expenditures and will have a great impact
on the companys ability to conduct business.
The second level of capacity decisions is
more tactical in nature, focusing on shortterm issues that include planning of workforce,
inventories, and day-to-day use of machines.
1.
1.
2.
than capacity.
2.
3.
3.
Advantages/Disadvantages
Advantages
Capacityleading
Strategy
Disadvantages
Advantages/Disadvantages
Advantages
Capacitylagging
Strategy
Disadvantages
Advantages/Disadvantages
Smoothingwithinventories
Strategy
Advantages
Disadvantages
Measuring Capacity
Measuring Capacity
Although our definition of capacity seems
simple, there is no one way to measure it.
people
have
different
interpretations of what capacity means, and
the units of measurement are often very
different.
Different
Measuring Capacity
Type Of Business
Input Measures Of
Capacity
Output Measures Of
Capacity
Car Manufacturer
Labour hours
Hospital
Number of patients
Pizza shop
Retail store
Electricity company
Generator size
Megawatts of
electricity generated
Measuring Capacity
Note that each business can measure capacity
in different ways and that capacity can be
measured using either inputs or outputs.
Output measures, such as the number of cars
per shift, are easier to understand.
However, they do not work well when a
company produces many different kinds of
products.
Measuring Capacity
For example, if a television factory produces
only one basic model, the weekly capacity could
be described as 2000 televisions.
A government office may have the capacity to
print and post 500,000 tax forms per week.
In each case, an output capacity measure is the
most appropriate measure because the output
from the operation does not vary in its nature.
Measuring Capacity
But when a much wider range of outputs places
varying demands on the process, output
measures of capacity are less useful.
Here input capacity measures are frequently
used to define capacity.
For example, the hospital measures its capacity
in terms of its input resources (say beds),
because there is not a clear relationship
between the number of beds it has and the
number of patients it treats.
1. Design capacity
2. Effective capacity
1.
Design capacity
conditions.
2.
Effective capacity
Measuring Effectiveness of
Capacity Use
Regardless of how much capacity we have, we
also need to measure how well we are
utilizing it.
Capacity utilization simply tells us how much of
our capacity we are actually using.
Certainly there would be a big difference if we
were using 50%of our capacity, meaning our
facilities, space, labour, and equipment, rather
than 90%.
Capacity Considerations
Capacity utilization can simply be computed as
the ratio of actual output over capacity:
Utilization =
Capacity Considerations
However, since we have two capacity measures,
we can measure utilization relative to either
design or effective capacity
Utilizationeffective =
Utilizationdesign =
actual output
effective capacity
actual output
design capacity
Example
In the bakery example, we have established that
design capacity is 30 cakes per day and
effective capacity is 20 cakes per day. Currently,
the bakery is producing 27 cakes per day. What
is the bakerys capacity utilization relative to
both design and effective capacity?
Expanding Capacity
When expanding capacity, management has to
choose between one of the following two
alternatives:
1. Purchase one large facility, requiring
one large initial investment.
2. Add capacity incrementally in smaller
chunks as needed.
Expanding Capacity
Units
One Step
Expansion
Incremental
Expansion
Time
Expanding Capacity
The first alternative means that we would
have a large amount of excess
capacity in the beginning and that our initial
costs would be high.
We would also run the risk that demand might
not materialize and we would be left with
unused overcapacity.
Expanding Capacity
Our best operating level is much higher
with this alternative, enabling us to operate
more efficiently when meeting higher
demand.
Our costs would be lower in the long run,
since one large construction project typically
costs less than many smaller construction
projects due to startup costs.
Thus, alternative 1 provides greater rewards but
is more risky.
Expanding Capacity
Alternative 2 is less risky but does not offer the
same opportunities and flexibility.
It is up to management to weigh the risks
versus the rewards in selecting an
alternative.
Capacity Considerations
We have seen that changing capacity is not as
simple as acquiring the right amount of
capacity to exactly match our needs.
The reason is that capacity is purchased in
discrete chunks.
Also, capacity decisions are long term and
strategic in nature.
Capacity Considerations
Some of the important implications of capacity
that a company needs to consider when
changing its capacity are:
1.
2.
3.
4.
Economies of Scale
Diseconomies of Scale
Focused Factories
Subcontractor Networks
1. Economies of Scale
Every production facility has a volume of output
that results in the lowest average unit cost.
This is called the facilitys best operating
level .
1. Economies of Scale
Economies of Scale
Diseconomies of Scale
Output Produced in Units
1. Economies of Scale
The reason is that when a large amount of
goods is produced, the costs of production are
spread over that large volume.
These costs include the fixed costs of
buildings and facilities, the costs of materials,
and processing costs.
The more units are produced, the larger the
number of units over which costs can be
spreadthat is, the greater the economies
of scale .
1. Economies of Scale
The concept of economies of scale is
very well known.
It basically states that the average cost of a
unit produced is reduced when the
amount of output is increased.
You use the concept of economies of scale in
your daily life.
Suppose you decide to make cookies in your
kitchen. Think about the cost per cookie if you
make only five cookies.
1. Economies of Scale
There would be a great deal of effort
getting the ingredients, mixing the dough,
shaping the cookiesall for only five cookies.
2. Diseconomies of Scale
What if you continued to increase the
number of cookies you chose to produce?
For a while, making a few more cookies would
not require much additional effort.
However, after a certain point there would
be so much material that the kitchen would
become congested.
You might have to get someone to help
because there was more work than one
2. Diseconomies of Scale
You might have to make cookies longer than
expected, and the cleanup job might be
much more difficult.
You would be experiencing diseconomies
of scale .
2. Diseconomies of Scale
Operating a facility close to its best operating
level is clearly important because of the impact
on costs.
However, we have to keep in mind that
2. Diseconomies of Scale
In our cookie example, we can see that the
number of cookies comfortably produced by
one person in a small kitchen would be
much lower than the number produced by
three persons in a large kitchen.
Figure shows how best operating level varies
between facilities of different sizes.
2. Diseconomies of Scale
Small
Medium
Large
3. Focused Factories
The concept of the focused factory holds that a
production facility works best when it focuses
on a fairly limited set of production objectives.
This means, for example, that a firm should
not expect to excel in every aspect of
manufacturing performance: cost, quality,
delivery speed and reliability, changes in
demand, and flexibility to adapt to new
products.
3. Focused Factories
Rather, it should select a limited set of tasks
that contribute
objectives.
the
most
to
corporate
3. Focused Factories
In this case, the company has made a tradeoff between quality and price.
3. Focused Factories
One way that large facilities with multiple products
can address the issue of trade-offs is using the
concept of plant-within-a-plant (PWP),
introduced by well-known Harvard professor
Wickham Skinner.
The PWP concept suggests that different areas of
a facility be dedicated to different products with
different competitive priorities.
These areas should be physically separated
from one another and should even have their
own separate workforce.
3. Focused Factories
As the term suggests, there are multiple plants
within one plant, allowing a company to
produce different products that compete on
different priorities.
For example, hospitals use PWP to achieve
specialization or focus in a particular area, such
as the cardiac unit, radiology, surgery, or
pharmacy.
4. Subcontractor Networks
Another alternative to having a large
production facility is to develop a large
network of subcontractors and suppliers who
perform a number of tasks.
This is one of the fastest-growing trends today.
Companies are realizing that to be successful in
todays market, they need to focus on their
core capabilitiesfor example, by hiring
third parties or subcontractors to take over
tasks that the company does not need to
perform itself.
4. Subcontractor Networks
Companies such as American Airlines and
Procter & Gamble have hired outside firms
to manage noncritical inventories.
Also, many companies are contracting with
suppliers to perform tasks that they used to
perform themselves.
A good example is in the area of quality
management.
Historically, companies performed quality
checks on goods received from suppliers.
4. Subcontractor Networks
Today, suppliers and manufacturers work
together to achieve the same quality standards,
and much of the quality checking of incoming
materials is performed at the suppliers site.
Another example can be seen in the auto
industry, where manufacturers are placing
more responsibility on suppliers to perform
tasks such as design of packaging and
transportation of goods.
4. Subcontractor Networks
more responsibility on
subcontractors and suppliers, a
By
placing
events.
a)Forecasting Capacity
b)Capacity Cushions
c) Strategic Implications
1.a.
Forecasting Capacity
1.a.
Forecasting Capacity
1.a.
Forecasting Capacity
1.b.
Capacity Cushions
1.b.
Capacity Cushions
1.c.
Strategic Implications
1.c.
Strategic Implications
decision.
The other alternatives require deciding
whether to purchase one large facility now or
add capacity incrementally, as discussed earlier
in the slides.
He has also
alternative:
estimated
profits
for
each
Expand
$200,000
2
Dont Expand
Low Demand (0.3)
$80,000
$300,000
$50,000
$150,000
Expand
$200,000
2
$200,000
Dont Expand
Low Demand (0.3)
$80,000
$300,000
$50,000
$150,000
Decision Trees Q 1
The owner of Hackers Computer Store is
considering what to do with his business over
the next five years. Sales growth over the past
couple of years has been good, but sales could
grow substantially if a major electronics firm is
built in his area as proposed. Hackers owner
sees three options. The first is to enlarge his
current store, the second is to locate at a new
site, and the third is to simply wait and do
nothing.
Decision Trees Q 1
The decision to expand or move would take
little time, and, therefore, the store would not
lose revenue. If nothing were done the first year
and strong growth occurred, then the decision
to expand would be reconsidered. Waiting
longer than one year would allow competition
to move in and would make expansion no
longer feasible.
Decision Trees Q 1
The assumptions and conditions are as follows:
a) Strong growth as a result of the increased population
of computer fanatics from the new electronics firm has
a 55 percent probability.
b) Strong growth with a new site would give annual
returns of $195,000 per year. Weak growth with a new
site would mean annual returns of $115,000.
c) Strong growth with an expansion would give annual
returns of $190,000 per year. Weak growth with an
expansion would mean annual returns of $100,000.
d) At the existing store with no changes, there would be
returns of $170,000 per year if there is strong growth
and $105,000 per year if growth is weak.
Decision Trees Q 1
e) Expansion at the current site would cost $87,000.
f) The move to the new site would cost $210,000.
g) If growth is strong and the existing site is enlarged
during the second year, the cost would still be
$87,000.
h) Operating costs for all options are equal
R - MC
Move
R (Revenue)
Weak Growth (0.45)
R - MC
MC (Move Cost)
EC (Expand Cost)
R - EC
Expand
1
Weak Growth (0.45)
R - EC
Expand
2
Do
Nothing
Do
Nothing
R - EC
Decision Trees Q 1
ALTERNATIVE
Move to new location, strong growth
Move to new location, weak growth
Expand store, strong growth
Expand store, weak growth
Do nothing now, strong growth,
expand next year
Do nothing now, strong growth, do
not expand next year
Do nothing now, weak growth
REVENUE $
195,000 5 = 975000
COST $
210,000
VALUE $
765,000
Decision Trees Q 1
ALTERNATIVE
REVENUE $
COST $
VALUE $
195,000 5 = 975000
210,000
765,000
115,000 5 = 575000
210,000
365,000
190,000 5 = 950000
87,000
863,000
100,000 5 = 500000
87,000
413,000
170,000 1 +
190,000 4
87,000
843,000
170,000 5 = 850000
850,000
105,000 5 = 525000
525,000
= 930000
765,000
Move
R (Revenue)
Weak Growth (0.45)
365,000
MC (Move Cost)
EC (Expand Cost)
863,000
Expand
1
Weak Growth (0.45)
413,000
Expand
2
Do
Nothing
Do
Nothing
843,000
525,000
850,000