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Strategic Capacity Planning

The McGraw-Hill Companies, Inc., 2004

OB(ECT)*ES
Strategic Capacity Planning Defined Capacity Utilization & Best Operating Level Economies & Diseconomies of Scale The E perience C!rve Capacity "oc!s# "le i$ility & Planning Determining Capacity %e&!irements Decision Trees Capacity Utilization & Service '!ality
The McGraw-Hill Companies, Inc., 2004

Strategic Capacity Planning Defined

Capacity can $e defined as the a$ility to hold# receive# store# or accommodate Strategic capacity planning is an approach for determining the overall capacity level of capital intensive reso!rces# incl!ding facilities# e&!ipment# and overall la$or force size
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Capacity Utilization
Capacity used Capacity utilization rate = Best operating level
+here Capacity !sed

rate of o!tp!t act!ally achieved capacity for ,hich the process ,as designed
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Best operating level

Best Operating Level

E E ampleample-Engineers Engineersdesign designengines enginesand andassem$ly assem$lylines linesto to operate operateat atan anideal idealor or.$est .$estoperating operatinglevel/ level/to toma ma imize imize o!tp!t o!tp!tand andminimize minimize,are ,are

Average unit cost of output Underutilization Overutilization Best Operating Level

Volume

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E ample of Capacity Utilization

D!ring D!ring one one ,ee0 ,ee0 of of prod!ction# prod!ction# a a plant plant prod!ced prod!ced 12 12 !nits !nits of of a a prod!ct3 prod!ct3 )ts )ts historic historic highest highest or or $est $est !tilization !tilization recorded recorded ,as ,as 456 456 !nits !nits per per ,ee03 ,ee03 +hat +hat is is this this plant7s plant7s capacity capacity !tilization !tilization rate8 rate8

Answer: Answer:

Capacity Capacity Capacityutilization utilizationrate rate= = Capacityused used .. Best Best operating operating level level = =83/ 83/ !" !" =".#$ =".#$or or #$% #$%
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Economies & Diseconomies of Scale

cono!ies cono!ieso" o"#cale #caleand andt$e t$e %perience %perienceCurve Curvewor&ing wor&ing

Average unit cost of output

100-unit plant 200-unit plant 300-unit plant 400-unit plant

'isecono!ies 'isecono!ieso" o"#cale #calestart startwor&ing wor&ing Volume

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The E perience C!rve

As Asplants plantsproduce produce!ore !oreproducts( products(t$ey t$ey gain gaine%perience e%periencein int$e t$e)est )estproduction production !et$ods !et$odsand andreduce reducet$eir t$eircosts costsper perunit unit

Yesterday

Cost or price per unit

Today Tomorrow

&otal accumulated production of units

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Capacity "oc!s
The concept of the focused factor holds that prod!ction facilities ,or0 $est ,hen they foc!s on a fairly limited set of prod!ction o$9ectives Plants +ithin Plants :P+P; :from S0inner;

E tend foc!s concept to operating level

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Capacity "le i$ility

"le i$le plants

"le i$le processes

"le i$le ,or0ers

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Capacity Planning- Balance

Un$alanced Un$alancedstages stagesof ofprod!ction prod!ction

'nits per mont(

#tage 1 *(000

#tage 2 +(000

#tage 3 ,(000

Maintaining System a!an"e# $%t&%t o' one stage is t(e e)a"t in&%t re*%irements 'or t(e ne)t stage
Balanced Balancedstages stagesof ofprod!ction prod!ction

'nits per mont(

#tage 1 *(000

#tage 2 *(000

#tage 3 *(000
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Capacity Planning
"re&!ency of Capacity <dditions

E ternal So!rces of Capacity

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Determining Capacity %e&!irements

43 "orecast sales ,ithin each individ!al prod!ct line 53 Calc!late e&!ipment and la$or re&!irements to meet the forecasts 23 Pro9ect e&!ipment and la$or availa$ility over the planning horizon
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E ample of Capacity %e&!irements

A manufacturer produces t)o lines of mustard* +ancy +ine and ,eneric line. -ac( is sold in small and family.size plastic /ottles. &(e follo)ing ta/le s(o)s forecast demand for t(e ne0t four years.
Year# !anc !ine Sma!! +000s, -ami!y +000s, Generic Sma!! +000s, -ami!y +000s, 1 50 35 100 80 2 60 50 110 90 3 80 70 120 100 4 100 90 140 110

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E ample of Capacity %e&!irements :Contin!ed;- Prod!ct from a Capacity *ie,point

'!estion'!estion- <re <re ,e ,e really reallyprod!cing prod!cing t,o t,o different different types types of of m!stards m!stards from from the the standpoint standpoint of of capacity capacity re&!irements8 re&!irements8 <ns,er<ns,er- =o# =o# it7s it7s the the same same prod!ct prod!ct 9!st 9!st pac0aged pac0aged differently3 differently3

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E ample of Capacity %e&!irements :Contin!ed; - E&!ipment and La$or %e&!irements

Year# Sma!! +000s, -ami!y +000s, 1 150 115 2 170 140 3 200 170 4 240 200

Three 466#666 !nits>per>year machines are availa$le for small>$ottle prod!ction3 T,o operators re&!ired per machine. T,o 456#666 !nits>per>year machines are availa$le for family>sized>$ottle prod!ction3 Three operators re&!ired per machine3
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1uestion2 1uestion23(at 3(atare aret(e t(e4ear 4ear values valuesfor forcapacity* capacity*mac(ine* mac(ine* and andla/or5 la/or5

Year# Sma!! +000s, -ami!y +000s,

1 150 115

2 170 140

3 200 170

4 240 200

"mall Ma"(. /a&. 3000000 1a2or 6 !amil -si#e Ma"(. /a&. 2400000 1a2or 6 4?6#666@266#666A?6B <t 4 machine for 466#666# it "mall ta0es 43? machines for 4?6#666 3er"ent "a&a"ity %sed 50.004 Ma"(ine re*%irement 1.50 1a2or re*%irement 3.00 <t 5 operators for !amil -si#e 466#666# it ta0es 2 operators for 4?6#666 3er"ent "a&a"ity %sed 47.924 Ma"(ine re*%irement 0.96 1a2or re*%irement 2.88 The McGraw-Hill Companies, Inc., 2004

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1uestion2 1uestion23(at 3(atare aret(e t(evalues valuesfor forcolumns columns!* !*3 3and and6 6in int(e t(eta/le ta/le/elo)5 /elo)5

Year# Sma!! +000s, -ami!y +000s, "mall !amil -si#e "mall 3er"ent "a&a"ity %sed Ma"(ine re*%irement 1a2or re*%irement !amil -si#e 3er"ent "a&a"ity %sed Ma"(ine re*%irement 1a2or re*%irement

1 150 115 Ma"(. /a&. Ma"(. /a&.

2 170 140 3000000 2400000

3 200 170 1a2or 1a2or

4 240 200 6 6

50.004 56.674 1.50 1.70 3.00 3.40 47.924 58.334 0.96 1.17 2.88 3.50

66.674 2.00 4.00 70.834 1.42 4.25

80.004 2.40 4.80 83.334 1.67 5.00

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E ample of a Decision Tree Pro$lem

A Aglass glassfactory factoryspecializing specializingin incrystal crystalis ise0periencing e0periencinga a su/stantial su/stantial/ac7log* /ac7log*and andt(e t(efirm8s firm8smanagement managementis is considering consideringt(ree t(reecourses coursesof ofaction2 action2 A9 A9 Arrange Arrangefor forsu/contracting su/contracting B9 B9 Construct Constructne) ne) facilities facilities C9 C9 :o :onot(ing not(ing;no ;noc(ange9 c(ange9 &(e &(ecorrect correctc(oice c(oicedepends dependslargely largelyupon upondemand* demand*)(ic( )(ic( may may/e /elo)* lo)*medium* medium*or or(ig(. (ig(. By Byconsensus* consensus*management management estimates estimatest(e t(erespective respectivedemand demandpro/a/ilities pro/a/ilitiesas as". ". **".<* ".<* and and".6. ".6.

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E ample of a Decision Tree Pro$lem :Contin!ed;- The Payoff Ta$le

&(e &(e management management also also estimates estimates t(e t(e profits profits )(en )(en c(oosing c(oosing from from t(e t(e t(ree t(ree alternatives alternatives ;A* ;A* B* B* and and C9 C9 under under t(e t(e differing differing pro/a/le pro/a/le levels levels of of demand. demand. &(ese &(ese profits* profits* in in t(ousands t(ousands of of dollars dollars are are presented presented in in t(e t(e ta/le ta/le /elo)2 /elo)2

6 /

0.1 1ow 10 7120 20

0.5 Medi%m 50 25 40

0.4 5ig( 90 200 60

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E ample of a Decision Tree Pro$lem :Contin!ed;- Step 43 +e start $y dra,ing the three decisions
6

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E ample of Decision Tree Pro$lem :Contin!ed;- Step 53 <dd o!r possi$le states of nat!re# pro$a$ilities# and payoffs
5ig( demand +0.4, Medi%m demand +0.5, 1ow demand +0.1,

8909 8509 8109 82009 8259 781209 8609 8409 8209

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5ig( demand +0.4, Medi%m demand +0.5, 1ow demand +0.1,

5ig( demand +0.4, Medi%m demand +0.5, 1ow demand +0.1,

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E ample of Decision Tree Pro$lem :Contin!ed;- Step 23 Determine the e pected val!e of each decision
8629 8629
6 6
5ig( 5ig(demand demand+0.4, +0.4, Medi%m Medi%mdemand demand+0.5, +0.5, 1ow 1owdemand demand+0.1, +0.1,

8909 8909 8509 8509 8109 8109

:; <0.4+90,=0.5+50,=0.1+10,<8629 :;6 6<0.4+90,=0.5+50,=0.1+10,<8629

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E ample of Decision Tree Pro$lem :Contin!ed;- Step C3 Da0e decision

5ig( demand +0.4,

8629
6

Medi%m demand +0.5, 1ow demand +0.1, 5ig( demand +0.4, Medi%m demand +0.5, 1ow demand +0.1,

8909 8509 8109 82009 8259 781209 8609 8409 8209

880.59

5ig( demand +0.4,

8469

Medi%m demand +0.5, 1ow demand +0.1,

Alternative AlternativeB Bgenerates generatest(e t(egreatest greateste0pected e0pectedprofit* profit*so so our ourc(oice c(oiceis isB Bor orto toconstruct constructa ane) ne)facility facility
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Planning Service Capacity vs3 Dan!fact!ring Capacity

Time- Eoods can not $e stored for later !se and capacity m!st $e availa$le to provide a service ,hen it is needed Location- Service goods m!st $e at the c!stomer demand point and capacity m!st $e located near the c!stomer *olatility of Demand- D!ch greater than in man!fact!ring
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Capacity Utilization & Service '!ality

Best operating point is near F6B of capacity

"rom F6B to 466B of service capacity# ,hat do yo! thin0 happens to service &!ality8

The McGraw-Hill Companies, Inc., 2004