Chapter 9 Strategic Capacity Planning

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Chapter 9Strategic Capacity Planning

• Strategic Capacity Planning Defined
• Capacity Utilization Best Operating Level
• Economies Diseconomies of Scale
• The Experience Curve
• Capacity Focus, Flexibility Planning
• Determining Capacity Requirements
• Capacity Utilization Service Quality

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Strategic Capacity PlanningDefined

• Capacity
• Strategic capacity planning is an approach for
  determining the

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Capacity Utilization

• Capacity utilization rate

• Capacity used
• rate of output actually achieved
• Best operating level
• capacity for which the process was designed

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Best Operating Level
Average unit cost of output
Underutilization
Overutilization
Volume
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Example of Capacity Utilization

• 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.
  What is this plants capacity utilization rate?
• Answer
• Capacity utilization rate Capacity used
  
• Best operating level

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Economies Diseconomies of Scale
Economies of Scale and the Experience Curve
working
Average unit cost of output
Volume
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The Experience Curve
As plants produce more products, they gain
experience in the best production methods and
reduce their costs per unit.
Cost or price per unit
Total accumulated production of units
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Capacity Focus

• The concept of the focused factory holds that
  production facilities work best
• Plants Within Plants (PWP) (from Skinner)
• Extend focus concept to operating level

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Capacity Flexibility

• Flexible plants -
• Flexible processes -
• Flexible workers -

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Capacity Planning
Units per month
6,000
7,000
4,500

• Maintaining System Balance -

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Capacity Planning

• Frequency of Capacity Additions -
• External Sources of Capacity -

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Determining Capacity Requirements

• Typical steps
• Forecast sales within each individual product
  line.
• Calculate equipment and labor requirements to
  meet the forecasts.
• Project equipment and labor availability over the
  planning horizon.

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Example of Capacity Requirements
A manufacturer produces two lines of mustard,
FancyFine and Generic line. Each is sold in
small and family-size plastic bottles. The
following table shows forecast demand for the
next four years.
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Example of Capacity Requirements The Product
from a Capacity Viewpoint

• Question Are we really producing two different
  types of mustards from the standpoint of capacity
  requirements?
• Answer

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Example of Capacity Requirements Equipment and
Labor Requirements
Three 100,000 units-per-year machines are
available for small-bottle production. Two
operators required per machine. Two 120,000
units-per-year machines are available for
family-sized-bottle production. Three operators
required per machine.
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Question What are the Year 1 values for
capacity, machine, and labor?
Year
1
2
3
4
Small (000s)
150
170
200
240
Family (000s)
115
140
170
200
Small
Mach. Cap.
300,000
Labor
6
Family-size
Mach. Cap.
240,000
Labor
6
Small
Percent capacity used
Machine requirement
Labor requirement
Family-size
Percent capacity used
Machine requirement
Labor requirement

• The McGraw-Hill Companies, Inc., 2000

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Question What are the values for columns 2, 3
and 4 in the table below?
Year
1
2
3
4
Small (000s)
150
170
200
240
Family (000s)
115
140
170
200
Small
Mach. Cap.
300,000
Labor
6
Family-size
Mach. Cap.
240,000
Labor
6
Small
Percent capacity used
Machine requirement
Labor requirement
Family-size
Percent capacity used
Machine requirement
Labor requirement

• The McGraw-Hill Companies, Inc., 2000

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Capacity Planning Process
Develop
Quantitative
Forecast
Alternative
Factors
Demand
Plans
(e.g., Cost)
Evaluate
Compute
Qualitative
Capacity
Rated
Factors
Plans
Capacity
(e.g., Skills)
Compute
Select Best
Implement
Needed
Capacity
Best Plan
Capacity
Plan
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Managing Existing Capacity
Capacity Management
Demand Management

• Vary staffing
• Change equipment processes
• Change methods
• Redesign the product for faster processing

• Vary prices
• Vary promotion
• Change lead times(e.g., backorders)
• Offer complementary products

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Planning Service Capacity

• Decision points
• Time -
• Location -
• Volatility of Demand -

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Capacity Utilization Service Quality

• Best operating point is near 70 of capacity -
• From 70 to 100 of service capacity, what do you
  think happens to service quality? -