5. Strategic Capacity Management

Strategic Capacity Planning

• Definition: Determining the overall capacity level of capital-intensive resources, including facilities, equipment, and labor force size.

Capacity Utilization

• Capacity utilization rate =
  
  

  • Capacity used: Rate of output actually achieved.

  • Best operating level: Capacity for which the process was designed.

Example:

During one week of production, a plant produced 83 units of a product. Its historic highest or best utilization recorded was 120 units per week.

Q: What is this plant’s capacity utilization rate?

• A: Capacity utilization rate = Capacity used / Best operation level

  • 83/120

  • 0.69 or 69%
    
    

Economies and Diseconomies of Scale

• Economies of Scale: As plant volume increases, the average unit cost of output decreases.

• Diseconomies of Scale: As plant volume increases beyond a certain point, the average unit cost of output increases.

The Experience Curve (Learning Curve)

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

Capacity Focus

• Focused Factory: Production facilities work best when they concentrate on a limited set of production objectives.

• Plants Within Plants (PWP): Extends the focus concept to the operating level.

Capacity Flexibility

• Flexible Plants: Adaptable to different products or changing demand.

• Flexible Processes: Use adjustable equipment to handle a variety of products.

• Flexible Workers: Employees capable of performing multiple tasks.

Capacity Planning

• Frequency of Capacity Additions:

• External Sources of Capacity

Determining Capacity Requirements

1. Forecast sales within each individual product line.

2. Calculate equipment and labor requirements to meet the forecasts.

3. Project equipment and labor availability over the planning horizon.

*Example: A manufacturer produces FancyFine and Generic mustard in small and family-size bottles. The forecast demand for the next four years is as follows (in thousands):

• The product is essentially the same but packaged differently.

• Equipment and Labor Requirements (in thousands)

• Three machines available for small-bottle production (100,000 units per year each), requiring two operators per machine.

• Two machines available for family-size bottle production (120,000 units per year each), requiring three operators per machine.

Decision Trees

• Scenario: A glass factory is backlogged and considering three options:

  • A) Arrange for subcontracting

  • B) Construct new facilities

  • C) Do nothing

• The decision depends on demand, which may be low, medium, or high, with respective probabilities of 0.1, 0.5, and 0.4.

  
  

  Payoff Table (in thousands of dollars):

• Steps:

  1. Draw the three decisions (A, B, C).

  2. Add possible states of nature, probabilities, and payoffs.

  3. Determine the expected value of each decision. $EVA = \sum (Probability \times Payoff)$

     • For decision A: $(0.1 \times 10) + (0.5 \times 50) + (0.4 \times 90) = 62$ ($62k)

  4. Make decision based on the highest expected value.

Planning Service Capacity vs. Manufacturing Capacity

• Time: Goods cannot be stored for later use and capacity must be available to provide a service when it’s needed

• Location: Services must be at the customer demand point and capacity must be located near the customer

• Volatility of Demand: Greater than in manufacturing.

Capacity Utilization and Service Quality

• Best operating point is near 70% of capacity.