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Week 4 - Capacity MGMT

This document provides an overview of capacity analysis and management strategies. It discusses measuring and determining capacity requirements at the strategic, intermediate, and short-term levels. It also covers economies and diseconomies of scale, strategies for growth like capacity lead and lag approaches, and operational strategies to increase capacity through techniques like line balancing and facility layout. Service capacity planning is noted to be more constrained due to time and location factors. The document aims to provide an understanding of key capacity management concepts.

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Henry Tian
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31 views35 pages

Week 4 - Capacity MGMT

This document provides an overview of capacity analysis and management strategies. It discusses measuring and determining capacity requirements at the strategic, intermediate, and short-term levels. It also covers economies and diseconomies of scale, strategies for growth like capacity lead and lag approaches, and operational strategies to increase capacity through techniques like line balancing and facility layout. Service capacity planning is noted to be more constrained due to time and location factors. The document aims to provide an understanding of key capacity management concepts.

Uploaded by

Henry Tian
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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COMMERCE 341

OPERATIONS MANAGEMENT
Capacity Analysis
Fall 2015
Geoff Pond

Agenda

Capacity Requirements
Measuring Capacity
Economies/Diseconomies of Scale
Strategies for Growth
Operational Strategies

Big Picture Look at the Capacity


Capacity is managed at many levels :
- Strategic/Long-term planning (years)
Sets the design capacity for the facility.
Facility size, equipment and labor size.
- Intermediate term planning (yearly, monthly,
quarterly)
Takes design capacity as the input.
Production planning new tools, subcontracting.
- Short term planning (days, weeks)
Making adjustments to eliminate the variance
between planned and actual output.
Fine tuning to improve output.

Measuring Capacity: It is all relative


Design Capacity
Idealistic
Perfect operating conditions
Maximum output
Effective Capacity
Realistic operating conditions (machine failures,
staff is sick, SCM, QM failures, etc.)

Capacity Management

Measuring Capacity: It is all relative


Capacity is a rate of output
How long can we maintain this output level?
Average Unit Cost
Best operating level
Level of capacity for which
the process was designed
Volume of output at which
average unit cost is minimized Best Operating Level

Capacity utilization rate

Volume

Capacity U sed
480 cars/day
Capacity U tilization Rate

96%
Best Operating Level 500 cars/day

Determining Capacity Requirements


Use forecasting techniques to predict sales for
individual products within each product line.
Calculate equipment and labour requirements to
meet product line forecasts.
Project labour and equipment availability over the
planning horizon.

Determining Capacity Requirements


Capacity Cushion

Best Operating Level


1
Capacity U sed

Design capacity 1200 units /year, Annual demand 1000 units/year


Capacity Utilization Rate

Capacity Cushion

Capacity Used
1000 cars/day

83%
Best Operating Level 1200 cars/day

Best Operating Level


1200 cars/day
1
1 17%
Capacity Used
1000 cars/day

Getting the jargon down


Stage
1
30s

10s

Stage
2
40s

Stage
3
30s

Cycle Time: 40 seconds (one unit completes production every


40 seconds)
Flow Time: 110 seconds (production time, from start to finish,
including buffers)
Operating Time: Available production time per day (be sure to
think about parallel lines)
Capacity Utilization: proportion of design capacity in use
Capacity Cushion: proportion of design capacity not being used

Capacity Management

Strategic Capacity Planning


Strategic capacity planning is an approach for
determining the overall capacity level of capital
intensive resources that best supports the companys
long-range competitive strategy.
- Involves serious capital investments.
- Decisions are irreversible in the short run.
- Defines the boundaries of the firms production
capabilities and overall competitiveness.

Strategic Issues - Economies / Diseconomies


of Scale
Total Cost = Raw Material + Operating Costs +
Capital Costs + Overhead Costs.
Average cost = Total cost / Total Output
Total Cost
2 x Capacity 2 x Equipment Cost
Neither the plant nor sales,
general and administrative
(SG&A).
Typically better utilization of
labour, R&D, IT, etc.
50

Volume
100

Maintaining the demand may require significant


discounts.

Economies of Scale
Bombardier CRJ200ER
50 seats
21 Million USD

Bombardier CRJ705
75 seats (50% increase)
29 Million USD (38%
increase)

Capacity Management

Diseconomies of Scale
What happens when we push an airliner beyond
capacity?

Delays, grumpy customers, lost customers, staff being pulled


away from core responsibilities, overtime costs,
subcontracting, etc

Capacity Management

Strategic Issues - Economies / Diseconomies


of Scale
Total Cost = Raw Material + Operating Costs + Capital
Costs + Overhead Costs.
Average cost = Total cost / Total Output

Average Cost

Capacity
1000
unit
facility

2000
unit
facility

3000
unit
facility

4000
unit
facility

Mini-Case
China Fabrication and Assembly (CFA) Part 1
Order qualifier product/service characteristic
required to remain viable in industry sector
Order winner competitive characteristic that
attracts customers to buy the firms product/service
Competitive Dimensions: Cost, Quality, Flexibility,
Delivery

Capacity Management

Strategies for Growth


Capacity Lead. In this case, an organizations capacity never falls
below the service or product demand. Improvements to capacity
always go beyond consumer demand (often in a step-wise fashion).
Consequently, consumer demand is always met and your customers
are left happy. Unfortunately, because the capacity is greater than the
consumer demand at virtually all times, there will be unused capacity,
waste, or slack in the process which can be expensive.
Capacity Lag. This is a very conservative strategy where increases
in capacity are only implemented after an increase in demand has
already been observed. Capacity increases are then implemented so
that demand is met but not further beyond that point. Therefore, the
capacity virtually always lags behind consumer demand in scenarios
of monotonically increasing demand.
Average Capacity. This is the middle ground. On average, a firms
capacity meets demand. The average is not below demand (as in a
capacity lag strategy) nor does it outpace demand (as in a capacity
lead strategy).

Capacity Management

Strategies for Growth

Lag (or Reactive)


Strategy
Forecast
Demand

Operating at capacity or
under capacity

Volume

Utilization remains high at


all times
Capacity
Growth

Time

Capacity Management

When would this be a good


strategy to use?

Strategies for Growth

Lead (or Anticipatory)


Strategy

Volume

Operating at capacity or
over capacity at all times
Capacity
Growth
Forecast
Demand

Time

Capacity Management

OT, subcontracting used to


supplement existing
capacity as needed

When would this be a good


strategy to use?

Strategies for Growth

Volume

Mixed Strategy

Capacity
Growth

Forecast
Demand
Mix of lead and lag.
Most typical of industry.

Time

Capacity Management

Strategies for Growth

Volume

Large Capacity
Increments

Few but substantial


investments in increased
capacity.

Capacity
Growth
Forecast
Demand

Time

Capacity Management

Can be higher risk.


Under-utilization is
accepted.

Strategies for Growth


Small Capacity
Increments

Volume

Forecast
Demand
Capacity
Growth

Few but substantial


investments in increased
capacity.
Can be higher risk.
Under-utilization is
accepted.

Time

Capacity Management

Service Industry
Capacity Lead anticipated growth
Lure customers away from other suppliers who are
constrained by capacity
Gain foothold in expanding market
Capacity Lag weak competition
Economic uncertainty
Great deal of uncertainty in forecasted demand

Capacity Management

Operational Strategies
Flowchart!
Buffers can be a good thing!
Blockages and starvation is bad,
look for them)
Line balancing!
Facility Layout

Capacity Management

bad, bad (so

Operational Strategies
How to increase capacity?
Split the task
Share the task
Parallel workstations
More skilled worker (training)
Overtime
Redesign
Process
Products

Capacity Management

Layout Strategies

Hall, R.W. (1987). Attaining Manufacturing Excellence, McGrawHill.

Capacity Management

Layout Strategies

Hall, R.W. (1987). Attaining Manufacturing Excellence, McGrawHill.

Capacity Management

Layout Strategies

Hall, R.W. (1987). Attaining Manufacturing Excellence, McGrawHill.

Capacity Management

Mini-case
Consider Part 2 of the in-class CFA case.

Capacity Management

All Levels - Flexibility


Capacity flexibility is the ability to rapidly change
(increase or decrease) production levels, or to shift
capacity from one product to another, such as being
able to produce different car models in a single
assembly line.
This involves:
- Flexible plants
- Flexible workers
- Better trained & higher paid
- Job expansion & job enrichment
Flexible processes & design
- Quick changeover
- Common parts / processes

Capacity Planning: Goods vs. Services


Services differ from goods in terms of:
1. Intangibility may not physically exist at all.
2. Higher customer interaction in production.
3. Higher variability in production depending on
customer needs.
4. Higher perishable and may be completely time
dependent.
5. Product specification is often defined in terms of 5
senses.

2
9

Service Capacity vs. Production Capacity


Capacity planning in service is generally more
constrained due to time and location requirements.
- Unlike goods, services cannot be stored so there
is no inventory to smooth demand, variance in
requests.
- Capacity must be available to produce service
when demanded.
- Unlike goods, customer (frequently) comes to
the service location which constrains location
choice.

Service Capacity
Capacity Utilization vs. Service Quality
Utilization = 100%
No service
Mean Arrival Rate
it
r
C

e
n
Zo
l
a
Utilization = 70%
ic

Service
Average Service Rate

Service Industry Know Your Customer!


United Airlines 737-800

Air Transat 737-800

Capacity Management

Ethics
Is it ethical to assign work such that a human
worker yields 100% utilization?
As part of capacity planning, the farming industry
maximizes the number of animals (pigs, chicken,
turkey, etc.) within a barn. As consumers, we all
enjoy the consequences in terms of lower costs. Is
there a limit?

Vancouver Sun
Capacity Management

In the next two weeks

Review Chapter 4
Try problems #10, 11, and 12.
Get working on those case studies (due 17-Oct)!
Read the supplement for Chapter 7 (available
online)

NO CLASS NEXT WEEK (offset for case competition)

Capacity Management

Service Industry
Capacity Lead anticipated growth
Lure customers away from other suppliers who are
constrained by capacity
Gain foothold in expanding market

Capacity Lag weak competition
Economic uncertainty
Great deal of uncertainty in forecasted demand

Introduction and Overview

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