Strategic Capacity Management

1
Strategic Capacity Management

• Dr. Ron Tibben-Lembke
• Operations Management

2
Ideal Capacity of a Process
50/hr
20/hr
10/hr
40/hr

• What is the capacity of the system?
• Should we add any capacity?
• How should we run the system?
• Where should we keep inventory?

3
Ideal Capacity of a Process
6 min
5 min
4 min
5 min

• What is the capacity of the system?

4
Productivity

• Productivity Outputs / Inputs
• Partial Output/Labor or Output/Capital
• Multifactor
• Output / (Labor Capital Energy )
• Total Measure
• Output / Inputs

5
Automotive Productivity

• Book Data
• Jaguar 14 cars/employee
• Volvo 29 cars/employee
• Mini 39 cars/employee

6
Growth of Service Economy
7
U.S. Productivity Gains

• Product Development team structure (Eg Chrysler
  Prowler, Boeing 777)
• Facilities improvements (less WIP, better
  quality, flexibility)
• Keiretsu-like supplier cooperation -- tight
  cooperation
• Strong, independent boards of directors

8
U. S. Productivity Gains

• Increased 1.37 per year 1990-95
• Increased 2.37 per year 1995-98
• Potential sources of productivity gains
• Capital investment (1.13)
• Labor Quality (0.25)
• Technological progress (0.99)
• Computers really are making us more
  productive.Source WSJ, 8/1/00, Further Gains in
  Productivity are Predicted, A2

9
US Productivity Growth
10
Improving Productivity

• Develop productivity measurements you cant
  improve what you cant measure
• Identify and Improve bottleneck operations first
• Establish goals, document and publicize
  improvements

11
U.S. Work and Productivity
Source International Labor Organization, 1999
12
What Would Henry Say?

• Ford introduced the 5 (per day) wage in 1914
• He introduced the 40 hour work week
• so people would have more time to buy
• It also meant more output 38 gt 210
• Now we know from our experience in changing from
  six to five days and back again that we can get
  at least as great production in five days as we
  can in six, and we shall probably get a greater,
  for the pressure will bring better methods.
• Crowther, Worlds Work, 1926

13
Forty Hour Week

• Ernst Abbe, Karl Zeiss optics
• 1896 as much done in 9 as in 8.

14
Marginal Output of Time

• As you work more hours, your productivity per
  hour goes down
• Eventually, it goes negative.

Chapman, 1909
15
Crunch Mode

• Ea_spouse 12/04
• Pre-crunch
• SO was working 7 13 91 per week!
• Maybe time off at 6pm Saturday
• 5k signing bonus, couldnt quit
• Class action April 06 14.9m
• Igda.org Why Crunch Mode Doesnt Work 6 Lessons

16
Learning Curves

• time/unit goes down consistently
• Down by 10 as output doubles
• We can use Logarithms to approximate this
• If you ever need this, email me, and we can talk
  as much as you want

17
Example 3.3

• Pauls 1 2 3 4 5
• Bottles 60 100 150 200 250
• Bags 100 200 300 400 500
• Newmans
• Bottles 75 85 95 97 98
• Bags 200 400 600 650 680

18
Example 3.3

• Bottles 135 185 245 297 348
• Bags 300 600 900 1,050 1,180
• 3 bottle machines 150k each/yr 450k
• 5 bag machines, 250k each/yr 1,250k

19
Example 3.3

• Bottles 135 185 245 297 348
• Machines 1 2 2 2 3
• Mach. usage 0.9 1.23 1.63 1.98 2.32
• Workers 1.8 2.46 3.27 3.96 4.64
• Bags 300 600 900 1,050 1,180
• Machines 2 3 4 5 5
• Mach Usage 1.2 2.4 3.6 4.2 4.7
• Workers 3.6 7.2 10.8 12.6 14.1

20
Capacity Tradeoffs
120,000 4-door cars
150,000 Two-door cars

• Can we make combinations in between?

21
How much do we have?

• We can only sustain so much effort.
• Best Operating Level
• Output level process designed for
• Lowest cost per unit
• Capacity utilization capacity used
• best
  operating level
• Hard to run gt 1.0 for long

22
Time Horizons

• Long-Range over a year acquiring, disposing of
  production resources
• Intermediate Range Monthly or quarterly plans,
  hiring, firing, layoffs
• Short Range less than a month, daily or weekly
  scheduling process, overtime, worker scheduling,
  etc.

23
Service Differences

• Arrival Rate very variable
• Cant store the products - yesterdays flight?
• Service times variable
• Serve me Right Now!
• Rates change quickly
• Schedule capacity in 10 minute intervals, not
  months
• How much capacity do we need?

24
Capacity Levels in Service
?100
Zone of non-service ?lt?
?70
Mean arrival rate, ?
Critical Zone
Zone of service
Mean service rate, ?
25
Adding Capacity

• Expensive to add capacity
• A few large expansions are cheaper (per unit)
  than many small additions
• Large expansions allow of clean sheet of paper
  thinking, re-design of processes
• Carry unused overhead for a long time
• May never be needed
• Small expansions may pave the cow path

26
Capacity Planning

• How much capacity should we add?
• Conservative Optimistic
• Forecast possible demand scenarios (Chapter 10)
• Determine capacity needed for likely levels
• Determine capacity cushion desired

27
Reengineering

• Business Process Reengineering (Hammer and
  Champy)
• Companies grow over time, adding plants, lines,
  facilities, etc.
• Growth may not end in optimal form
• Re-design processes from ground up

28
Capacity Sources

• In addition to expanding facilities
• Two or three shifts
• Outsourcing non-core activities
• Training or acquisition of faster equipment

29
Decision Trees

• Consider different possible decisions, and
  different possible outcomes
• Compute expected profits of each decision
• Choose decision with highest expected profits,
  work your way back up the tree.

30
Decision Trees Example 3.4, p.65

• Computer store thinks demand may grow.
• Expansion costs 87k, new site 210k, and would
  cost same if wait a year
• New site
• 55 chance of profits of 195k.
• 45 chance of 115k profits.
• Expand Current
• 55 chance of 190k profits
• 45 chance of 100k profits
• Wait and see- enlarge store next year if demand
  grows
• If high demand, 190k with expanded store
• If high demand, 170 with current store
• If weak demand, 105k with current store
• Find the expected profits over 5 years, choose
  best one.

31
Decision Trees

• Decision point
• Chance events
• Outcomes
• Calculate expected value of each chance event,
  starting at far right
• Working our way back toward the beginning,
  choosing highest expected outcome at each decision

32
Decision Trees
Strong Growth
Move
0.55
Weak Growth
0.45
Strong Growth
0.55
Hackers Computer Store
Expand
Weak Growth
0.45
Expand
Wait and See
Strong Growth
Do nothing
0.55
Weak Growth
0.45
33
Possible 5 year Revenues

• New, growth 1955 210 765
• New, low 1155 210 365
• Expand, growth 1905 87 863
• Expand, low 1005 87 413
• Wait, strong, expand 1701904-87843
• Wait, strong, do nothing 1705 850
• Wait, low, do nothing 1055 525

34
Decision Trees
Strong Growth
Move
0.55
Weak Growth
0.45
Strong Growth
0.55
Hackers Computer Store
Expand
Weak Growth
0.45
Expand
Wait and See
Strong Growth
Do nothing
0.55
Weak Growth
0.45
35
Making the Decision

• Starting at the far right, look at the Wait and
  See option. If demand is strong, we would
  obviously not expand.
• 850k is better than 843.
• Eliminate the Expand option

36
Decision Trees
Strong Growth
Move
0.55
Weak Growth
0.45
Strong Growth
0.55
Hackers Computer Store
Expand
Weak Growth
0.45
Expand
Wait and See
Strong Growth
Do nothing
0.55
Weak Growth
0.45
37
Expected Values

• Move
• 0.55 765 0.45365 585,000
• Wait and See
• 0.55850 0.45525 703,750
• Expand
• 0.55 863 0.45 413 660,500
• Highest expected value is to Wait and see, and
  either way, do nothing!

38
Decision Trees
585,000
Strong Growth
Move
0.55
Weak Growth
0.45
660,500
Strong Growth
0.55
Hackers Computer Store
Expand
Weak Growth
0.45
Expand
703,750
Wait and See
Strong Growth
Do nothing
0.55
Weak Growth
0.45
39
Other considerations

• Another criteria to use is to pick the one with
  the highest down side.
• Under this, do nothing still wins.
• We could also consider the expected value of the
  future cash streams.
• PV 100/(1r) 100/(1.16)86.27

40
Present Values - p.377

• At 16, Next year is worth 0.862
• (1rate)(-years)
• Year 2 0.743
• Year 3 0.641
• Year 4 0.552
• Year 5 0.476
• 195 per year for 5 years 195 (3.274)

41
Decision Tree-NPV
310,613
Strong Growth
Move
0.55
Weak Growth
0.45
402,507
Strong Growth
0.55
Hackers Computer Store
Expand
Weak Growth
0.45
Expand
460,857
Wait and See
Strong Growth
Do nothing
0.55
Weak Growth
0.45
42
Real Options

• Assess the value to me of being able to change my
  mind in the future
• Changed problem slightly -
• Reduced benefit doing nothing, high demand

43
Decision Trees
Strong
0.25
465,000
Move
0.75
Weak
Hackers Computer Store
Strong
0.25
533,000
Expand
Weak
0.75
Expand
604,500
0.25
Strong
Wait and See
Do nothing
Weak
0.75
598,750
Strong
0.25
Do Nothing
Weak
0.75
44
Real Options

• If we didnt have the wait and see option, we
  would Do Nothing.
• Option to wait and see is worth 5,750

604,500
Wait and See
5,750
598,750
Do Nothing
533,000
Expand
465,000
Move