Chapter 3: Strategic Capacity Management

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Chapter 3 Strategic Capacity Management

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We will discuss

• What is capacity?
• The concept of process capacity
• Capacity utilization
• Economies and diseconomies of scale
• Capacity balance
• Little's law
• Relating inventory, flow time, and flow rate
• Batch sizes and capacity
• Decision Trees

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Strategic Capacity Planning

• Capacity
• the ability to hold, receive, store, or
  accommodate.
• measures can (as opposed to does)
• Strategic capacity planning
• approach for determining the overall capacity
  level of capital intensive resources, including
  facilities, equipment, and overall labor force
  size.

Examples??
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Two Ways to Improve a Process

• Reduce excess capacity at some step in the
  process
• Lower the cost for the same output
• Use the capacity at an underutilized process
  step to increase the capacity at a bottleneck
• Increase the output at the same cost

A bottleneck is the weakest link Process capacity
minimum Res 1 capacity,. Res 2 capacity, )
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Capacity Utilization
Capacity utilization rate Capacity used / Best
operating level

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

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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
• 83/120
• 0.69 or 69

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Economies Diseconomies of Scale
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Other Issues

• Capacity Focus
• The concept of the focused factory holds that
  production facilities work best when they focus
  on a fairly limited set of production objectives
  Plants Within Plants (PWP)
• Extend focus concept to operating level

• Capacity Flexibility
• Flexible processes
• Flexible workers
• Flexible plants

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Capacity Planning Balance
Unbalanced stages of production
Units per month
6,000
7,000
5,000

• Maintaining System Balance Output of one stage
  is the exact input requirements for the next
  stage

Balanced stages of production
Units per month
6,000
6,000
6,000
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Littles Law

• What it is Inventory (I) Flow Rate (R)
  Flow Time (T)
• Implications
• Out of the three performance measures (I,R,T),
  two can be chosen by management, the other is
  GIVEN by nature
• Hold throughput (flow rate) constant Reducing
  inventory reducing flow time

Can be used in analyzing capacity issues!
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Examples

• Suppose that from 12 to 1 p.m. 200 students per
  hour enter the GQ and each student is in the
  system for an average of 45 minutes. What is the
  average number of students in the GQ?
• Inventory Flow Rate Flow Time
• 200 per hour 45 minutes ( 0.75 hours)
• 150 students
• If ten students on average are waiting in line
  for sandwiches and each is in line for five
  minutes, on average, how many students are arrive
  each hour for sandwiches?
• Flow Rate Inventory / Flow Time 10 Students /
  5 minutes 0.083 hour
• 120 students per hour

• Airline check-in data indicate from 9 to 10 a.m.
  255 passengers checked in. Moreover, based on the
  number waiting in line, airport management found
  that on average, 35 people were waiting to check
  in. How long did the average passenger have to
  wait?
• Flow Time Inventory / Flow Rate 35 passengers
  / 255 passengers per hour 0.137 hours
• 8.24 minutes

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The Impact of Batch Size on Capacity
Production cycle
Batch of 12
Production cycle
Batch of 60
Batch of 120
Batch of 300
Time minutes
60
240
300
120
180
Produce Part B (1 box corresponds to 12 units
12 scooters)
Set-up from Part A to Part B
Produce Part A (1 box corresponds to 24 units
12 scooters)
Set-up from Part B to Part A
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Capacity Analysis with Batching

• Capacity calculation
• Note Capacity increases with batch
  size
• Note further and so does inventory

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B/SBp k implies that B Sk / (1 pk)
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Problem

• Part a What is the capacity for a batch size
  50?
• Part b For a batch size of 10, what is the
  bottleneck

What batch size should be chosen to smooth the
flow?
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Process Utilization and Capacity Utilization

• Process Utilization Flow Rate / Process
  Capacity
• Example Tom can process 100 forms per day and
  he actually processes 70 forms.
• Process utilization ??
• Utilization of resource Flow rate / Capacity of
  resource
• Process 400 items per hour
• Capacities of resources (items/hour)
• Resource 1 500 implies utilization of 80
• Resource 2 450 implies utilization of 89
• Resource 3 600 implies utilization of 67
• Bottleneck is the resource with the lowest
  capacity and the highest utilization
• Bottleneck is ??

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Decision Trees

• Used to structure complex decision problems
• Use expected return criteria
• Consider probabilities of occurrence of events
• Use
• chance nodes (denoted by circles )
• decision (or choice) nodes (denoted by squares)
• Use a concept of folding back to arrive at the
  best policy

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Example of a Decision Tree Problem
A glass factory specializing in crystal is
experiencing a substantial backlog, and the
firm's management is considering three courses of
action A) Arrange for subcontracting B)
Construct new facilities C) Do nothing (no
change) The correct choice depends largely upon
demand, which may be low, medium, or high. By
consensus, management estimates the respective
demand probabilities as 0.1, 0.5, and 0.4.
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Example of a Decision Tree Problem (Continued)
The Payoff Table
The management also estimates the profits when
choosing from the three alternatives (A, B, and
C) under the differing probable levels of demand.
These profits, in thousands of dollars are
presented in the table below
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Example of a Decision Tree Problem (Continued)
Step 1. We start by drawing the three decisions
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Example of Decision Tree Problem (Continued)
Step 2. Add our possible states of nature,
probabilities, and payoffs
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Example of Decision Tree Problem (Continued)
Step 3. Determine the expected value of each
decision
90k
50k
62k
10k
A
EVA0.4(90)0.5(50)0.1(10)62k
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Example of Decision Tree Problem (Continued)
Step 4. Make decision
62k
80.5k
46k
Alternative B generates the greatest expected
profit, so our choice is B or to construct a new
facility
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Problem 2

• Owner of a small firm wants to purchase a PC for
  billing, payroll, client records
• Need small systems now -- larger maybe later
• Alternatives
• Small No expansion capabilities _at_ 4000
• Small expansion _at_6000
• Larger system _at_ 9000

• After 3 years small systems can
• be traded in for a larger one _at_ 7500
• Expanded _at_ 4000
• Future demand is
• Likelihood of needing larger system later is 0.80
• What system should he buy?

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Problem 2