1712209244514_IPPTChap005-Strategic-Capacity-Management.pptx

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1. STRATEGIC CAPACITY MANAGEMENT Chapter Five Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2. Learning Objectives LO5–1: Explain what capacity management is and why it is strategically important. LO5–2: Exemplify how to plan capacity. LO5–3: Evaluate capacity alternatives using decision trees. LO5–4: Compare capacity planning in services to capacity planning in manufacturing 5- 2

3. Economies of Scale Made of Steel The Economics of Very B ig S hips Economy of Container Ships A llows a T-shirt made in China to be sent to the Netherlands for just 2.5 cents. The Eleonora Maersk and the other seven ships in her class are among the largest ever built: A lmost 400 m long, or the length of four soccer fields , and another half-field across. The ships can carry 7,500 or so 40-foot containers, each of which can hold 70,000 T-shirts. On this voyage, the Eleonora was carrying supplies for Europe’s New Year celebrations: 1,850 tons of fireworks , including 30 tons of gunpowder. 5- 3

4. Capacity Management in Operations Capacity – the ability to hold, receive, store, or accommodate In business, viewed as the amount of output that a system is capable of achieving over a specific period of time Capacity management needs to consider both inputs and outputs 5- 4

5. Capacity Planning Time Durations 5- 5

6. Strategic Capacity Planning Determining the overall level of capacity-intensive resources that best supports the company’s long-range competitive strategy Facilities Equipment Labor force size 5- 6

7. Capacity Planning Concepts Capacity utilization rate – a measure of how close the firm is to its best possible operating level Economies of scale – the idea that as a planet gets larger and volume increases, the average cost per unit tends to drop Diseconomies of scale – at some point, the plant becomes too large and average cost per unit begins to increase 5- 7

8. Capacity Planning Concepts Capacity focus – the idea that a production facility works best when it is concentrated on a limited set of production objectives Focused factory or plant within a plant (PWP) concept Capacity flexibility – the ability to rapidly increase or decrease product levels or the ability to shift rapidly from one product or service to another Comes from the plant, processes, and workers or from strategies that use the capacity of other organizations 5- 8

9. Capacity Flexibility 5- 9

10. Considerations in Changing Capacity 5- 10

11. Frequent versus Infrequent Capacity Expansions 5- 11

12. Determining Capacity Requirements 5- 12

13. Example 5.1—Determining Capacity Requirements Stewart Company produces two flavors of salad dressing. Paul’s and Newman’s Each is available in bottles and single-serving bags. What are the capacity and labor requirements for the next five years? 5- 13

14. Determining Capacity Requirements Year 1 2 3 4 5 Paul’s Bottles (000s) 60 100 150 200 250 Plastic bags (000s) 100 200 300 400 500 Newman’s Bottles (000s) 75 85 95 97 98 Plastic bags (000s) 200 400 600 650 680 5- 14 Step 1: Use forecasting to predict sales for individual products

15. Determining Capacity Requirements     Bottling Operation Bagging Operation Year 1 2 3 4 5 Bottles (000s) 135 185 245 297 348 Plastic bags (000s) 300 600 900 1050 1180 Step 2: Calculate equipment and labor requirements 5- 15

16. Determining Capacity Requirements Year 1 2 3 4 5 Plastic Bag Operation Percentage capacity utilized 24 48 72 84 94 Machine requirement 1.2 2.4 3.6 4.2 4.7 Labor requirement 3.6 7.2 10.8 12.6 14.1 Bottle Operation Percentage capacity utilized 30 41 54 66 77 Machine requirement 0.9 1.23 1.62 1.98 2.31 Labor requirement 1.8 2.46 3.24 3.96 4.62 5- 16 Step 3: Project equipment and labor availabilities Excel: Capacity Requirements

17. Decision Trees for Capacity Analysis A decision tree is a schematic model of the sequence of steps in a problem – including the conditions and consequences of each step. Decision trees help analysts understand the problem and assist in identifying the best solution. Decision tree components include the following: Decision nodes – represented with squares Chance nodes – represented with circles Paths – links between nodes 5- 17

18. Example 5.2: Decision Trees The owner of Hackers Computer Store is evaluating three options – expand at current site, expand to a new site, do nothing. The decision process includes the following assumptions and conditions. Strong growth has a 55% probability New site cost is $210,000 Payoffs: strong growth = $195,000; weak growth = $115,000 Expanding current site cost is $87,000 (in either year 1 or 2) Payoffs: strong growth = $190,000; weak growth = $100,000 Do nothing Payoffs: strong growth = $170,000; weak growth = $105,000 5- 18

19. Example 5.2: Decision Trees Calculate the value of each alternative 5- 19

20. Example 5.2: Decision Trees Diagram the problem chronologically 5- 20 Decision Events Decision

21. Example 5.2: Decision Trees Calculate value of each branch 5- 21 $765,000 $365,000 $863,000 $413,000 $843,000 $850,000 $525,000

22. Example 5.2 Work backwards to calculate the value of each decision/event $765,000 $365,000 $863,000 $413,000 $843,000 $850,000 $525,000   $660,500 $703,750 Do nothing = $850,000 Do nothing = $703,750 Do nothing has higher value than expand, so choose to do nothing Do nothing has higher value than expand or move, so choose to do nothing 5- 22

23. Example 5.2: Decision Trees Decision tree analysis with net present value calculations 5- 23 Excel: Decision Trees

24. Planning Service Capacity 5- 24

25. Capacity Utilization and Service Quality The relationship between service capacity utilization and service quality is critical. Utilization is measured by the portion of time servers are busy. Optimal levels of utilization are context specific. Low rates are appropriate when the degree of uncertainty (in demand) is high and/or the stakes are high (e.g., emergency rooms, fire departments). Higher rates are possible for predictable services or those without extensive customer contact (e.g., commuter trains, postal sorting). 5- 25

26. Service Quality Rate of service utilization and service quality are directly linked. 5-26 Arrivals exceed services – many customers are never served Sufficient capacity to provide quality service Service quality declines – disruptions or high arrival levels lead to long wait times