Capacity Strategy

Issues in Capacity Strategy:

Overall Capacity at different levels

tactical, operational levels)

(strategic,

Number of sites Size of facilities at sites When to change capacity How much to change capacity Location of capacity

Issues in Capacity Strategy

Why is capacity strategy important?

Market Requirements: Without an appropriate capacity strategy, operations will always be struggling to supply markets in a competitive manner Operations Resource: Getting capacity strategy right is the starting point for developing competitive operations
It deals with often expensive physical assets, one

doesnt get too many chances to get it right.

Nor is capacity a straightforward issue. Two similar

operations with similar levels of overall capacity can, in reality, be very different in how they deploy their capacity.

Why is capacity strategy important?

Capacity strategy decisions affect all the significant measures of operations success; costs, service, revenue, return on assets, working capital, future capabilities and the overall image of the business.
NUMBER OF SITES CAPACITY OF EACH SITE LOCATION OF EACH SITE What performance measures will all these decisions have a major impact on? Costs Revenues Cash requirements Service levels

ALLOCATION OF TASKS TO SITES

LONG-TERM CAPACITY CHANGE STRATEGY

1. Overall capacity at different Levels

Level
Strategic capacity decisions Medium-term capacity decisions

Time Scale
Months-years

Typical Decisions
Building; facilities; Process technology Aggregate number of persons; degree of subcontracted resource Staff assignment to a machine

Key Questions
How much capacity do we need in total To what extent do we keep capacity level or fluctuate capacity levels? Which resources are to be allocated to what tasks?

Span of decision
All parts of the process

Weeks-months

Business-site

Short-term capacity decisions

Hours-Weeks

Site department

Some factors influencing the overall level of capacity

Availability of capital Cost structure of capacity increment Overall level of MARKET capacity REQUIREMENTS Uncertainty of future demand Flexibility of capacity provisions Consequences of over/undersupply Forecast level of demand Changes in future demand

OPERATIONS RESOURCES

Economies of scale

Cost structure: Cost, volume, profit illustration

12 10 Costs / Revenue ($)

8
6 4

Cost

Revenue

2
0 0 2 4 6 Volume in thousands of units 8 10 Forecast demand = 9,000 units 12

(a)

Economies of scale: Unit cost curve

Unit cost (total cost / volume)

8 6 4 2 0 0 1 2 4 3 Volume in thousands of units 5 6 Nominal capacity limit

Unit cost curve

(b)

Unit cost (total cost/volume)

8 6 4 2 0 0 1 2 4 3 Volume in thousands of units 5 6 Diseconomies of scale kick in

Expanding physical capacity in advance of effective capacity can bring greater returns in the longer term

Flexibility of capacity expansion:

Physical capacity of facilities

Demand

Effective capacity

Time

Expanding physical capacity in advance of effective capacity can bring greater returns in the longer term
Cash flow with extended physical capacity

Cash flow with two identical capacity increments

Time

2. Some factors influencing the number and size of sites

Economies of scale OPERATIONS RESOURCES Supply costs Size and MARKET number of sites REQUIREMENTS

Required service level

Geographical distribution of demand

Number and size of facilities

Capacity configuration Fixed cost Transportation Delivery lead cost time (indicator of service level)

One large centralized facility

Several smaller facility geographically dispersed

Low

High

High

High

Low

Low

3a. Some factors influencing the timing of capacity change

Lead-time of capacity change Forecast level of demand Competitor activity OPERATIONS RESOURCES Economies of scale Required level of service Overall level of MARKET capacity REQUIREMENTS Uncertainty of future demand

Ability to cope with change

Capacity planning with certain forecasts and capacity introduction

Output Planned capacity Forecast demand

Time Capacity increment 1 Capacity increment 2 Capacity increment 3 Capacity increment 4

3b. Magnitude of Capacity Change: Capacity plans for meeting demand using either 800- or 400-unit capacity plants
2,400 2,000 1,600 1,200 800 400

Capacity plan using 800-unit plants

Capacity plan using 400-unit plants Demand

Volume (Units / week)

Time

3b. Magnitude of Capacity Change: Smaller-scale capacity increments allow the capacity plan to be adjusted to accommodate changes in demand
2,400 2,000 Volume (Units/week) 1,600 1,200 800 400

Capacity plan using 800-unit plants

Capacity plan using 400-unit plants Forecast demand Actual demand

Time

3. The three generic options for capacity increments..

Demand Capacity

Time Time Demand Capacity

Time Demand Capacity

Time

Rarely does each stage of a supply chain have perfectly balanced capacity because of different optimum capacity increments
Parts manufacture Current capacity = 1,010 units Required new capacity = 1,800 units Operating cost Operating cost Assembly plant Current capacity = 1,000 units Required new capacity = 1,800 units Warehouse Current capacity = 900 units Required new capacity = 1,800 units Operating cost Distribution Current capacity = 1,100 units Required new capacity = 1,800 units Operating cost

800 units

600 units

Capacity increment

Capacity increment

Capacity increment

Capacity increment

4. Some factors influencing the location of sites

Resource costs Land and facilities investment OPERATIONS RESOURCES Resource availability Community factors Image of location Location of sites Required service level

MARKET REQUIREMENTS

Suitability of site

The cost breakdown of a shirt made in various countries and sold in France
France Portugal Turkey Thailand 11.43 11.43 11.13 10.82 10.37 9.60 0 2 4 8 6 10 Cost in euros 12 14 16 Labour Transport Fabric Supplies Customs duties 15.55 14.33

Morocco
Romania China Myanmar

Source: Slack, N., Chambers, S. and Johnston, R. (2007) Operations Management,

5th edn. Harlow: financial Times Prentice Hall.