CAPACITY MANAGEMENT

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OM
CHAPTER 10
CAPACITY MANAGEMENT
DAVID A. COLLIER AND JAMES R. EVANS
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Chapter 10 Learning Outcomes
l e a r n i n g o u t c o m e s
LO1 Explain the concept of capacity. LO2
Describe how to compute and use capacity
measures. LO3 Describe long-term capacity
expansion strategies. LO4 Describe short-term
capacity adjustment strategies. LO5 Explain the
principles and logic of the Theory of
Constraints.
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Chapter 10 Capacity Management
he Airbus A380 is the largest
plane ever built with 555 seats. With
some modest redesign, such as extending the
length of the plane, it could carry
as many as 800 airline passengers. The pieces of
the plane are so big, such as the
cockpit, tail, wings, and cabin sections that the
factories must be reconfigured. The European
Consortium that builds the Airbus must make and
transport these parts, some weighing 100 tons
each, among many countries such as Spain,
Britain, France, and Germany. Not only must
factory capacity and scale be upsized, the
elaborate transportation system to move these
parts among European factories must also be
changed. At a maximum speed of 15 miles per
hour, the trip to Toulouse, France, from the
seaport of Bordeaux takes three days. The French
government has redone the entire 159-mile route,
including 18 miles of new bypass routes around
five towns, to handle the six giant truck
trailers that carry these manufactured parts.
What do you think? What other capacity issues
should airlines consider in addition to the
number of seats on a plane? (Think of your own
experiences.)
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Chapter 10 Capacity Management
Understanding Capacity Capacity is the capability
of a manufacturing or service resource such as a
facility, process, workstation, or piece of
equipment to accomplish its purpose over a
specified time period.
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Chapter 10 Capacity Management

• Understanding Capacity
• The resources available to the organizationfacili
  ties, equipment, and laborhow they are
  organized, and their efficiency as determined by
  specific work methods and procedures determine
  capacity.
• Capacity can be viewed in one of two ways
• As the maximum rate of output per unit of time,
  or
• As units of resource availability.

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Chapter 10 Capacity Management
Solved Problem An automobile transmission-assembly
factory normally operates two shifts per day,
five days per week. During each shift, 400
transmissions can be completed under ideal
conditions. What is the capacity of this
factory?
Capacity (2 shifts/day)(5 days/week)(400
tranmissions/shift)(4 weeks/month)
16,000 transmissions/month
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Chapter 10 Capacity Management

• Typical capacity issues to address include
• Can the facility, process, or equipment
  accommodate new goods and services and adapt to
  changing demand for existing goods and services?
• How large should facility, process, or equipment
  capacity be?
• When should capacity changes take place?

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Exhibit 10.1
Examples of Short- and Long-Term Capacity
Decisions
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Chapter 10 Capacity Management
Understanding Capacity Economies of scale are
achieved when the average unit cost of a good or
service decreases as the capacity and/or volume
of throughput increases. Diseconomies of scale
occur when the average unit cost of the good or
service begins to increase as the capacity and/or
volume of throughput increases.
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Chapter 10 Capacity Management
Understanding Capacity A focused factory is a way
to achieve economies of scale without extensive
investments in facilities and capacity by
focusing on a narrow range of goods or services,
target market segments, and/or dedicated
processes to maximize efficiency and
effectiveness.
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Chapter 10 Capacity Management
Understanding Capacity Safety capacity (often
called the capacity cushion) is an amount of
capacity reserved for unanticipated events, such
as demand surges, materials shortages, and
equipment breakdowns. Average safety capacity ()
100 - Average resource utilization 10.1
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Exhibit 10.2
The Demand versus Capacity Problem Structure
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Chapter 10 Capacity Management

• Capacity Measurement in Job Shops
• In a job shop, setup time can be a substantial
  part of total system capacity.
• Capacity Required (Ci) Setup Time (Si)
  Processing Time (Pi) x Order Size (Qi)
• Si (Pi)(Qi )
• 10.2

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Chapter 10 Capacity Management

• Capacity Measurement in Job Shops
• Solved Problem Hams Dental Office (Exhibits
  10.3 and 10.4) illustrates these calculations
  using a dental procedure mix.
• Setup times normally represent a substantial
  percentage of the total capacity of most job
  shops. Every effort must be made to reduce setup
  time to the lowest possible amount so as to free
  up capacity for creating output.

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Exhibit 10.3
Dental Office Procedures and Times for Today
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Exhibit 10.4
Dental Office Demand-Capacity Analysis
Example computation C å(Si Pi Qi) 15
2 90 2 210 minutes, assuming a setup for
each patient.
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Chapter 10 Capacity Management

• Long-Term Capacity Strategies
• In developing a long-range capacity plan, a firm
  must make the basic economic trade-off between
  the cost of capacity and the opportunity cost of
  not having adequate capacity.
• Long-term capacity planning must be closely tied
  to the strategic direction of the
  organizationwhat products and services it offers.

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Chapter 10 Long-Term Capacity Strategies

• Long-Term Capacity Strategies
• Complementary goods and services can be produced
  or delivered using the same resources available
  to the firm, but whose seasonal demand patterns
  are out of phase with each other.
• Complementary goods or services balance seasonal
  demand cycles and therefore use the excess
  capacity available, as illustrated in Exhibit
  10.5.

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Exhibit 10.5
Seasonal Demand and Complementary Goods or
Services
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Chapter 10 Capacity Expansion Options
Long-Term Capacity Strategies Four basic
strategies for expanding capacity over some fixed
time horizon

• One large capacity increase (Exhibit 10.6a).
• Small capacity increases that match average
  demand (Exhibit 10.6b).
• Small capacity increases that lead demand
  (Exhibit 10.6c).
• Small capacity increases that lag demand (Exhibit
  10.6d).

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Capacity Expansion Options
Exhibit 10.6
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Chapter 10 Short-Term Capacity Management
Short-term capacity adjustments to capacity might
include

• Add or share equipment lease equipment as needed
  or set up a partnership arrangement with capacity
  sharing. Examples mainframe computers, CAT
  scanner, farm equipment.
• Sell unused capacity sell idle capacity to
  outside buyers and even competitors. Examples
  computing capacity, perishable hotel rooms.
• Change labor capacity and schedules short term
  changes in work force levels. Examples
  overtime, extra shifts, temporary employees,
  outsourcing.
• Change labor skill mix hiring the right people.
• Shift work to slack periods

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Chapter 10 Capacity Management
Managing Capacity by Shifting and Stimulating
Demand

• Vary the price of goods or services price is the
  most powerful way to influence demand.
• Provide customers information best times to call
  or visit.
• Advertising and promotion a vital role on
  influencing demand promotions are strategically
  distributed to increase demand during periods of
  low sales or excess capacity.
• Add peripheral goods and/or services change
  demand during slack periods.
• Provide reservations a promise to provide a good
  or service at some future time and place.

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Chapter 10 Capacity Management

• Theory of Constraints
• The Theory of Constraints (TOC) is a set of
  principles that focuses on increasing total
  process throughput by maximizing the utilization
  of all bottleneck work activities and
  workstations.
• Throughput amount of money generated per time
  period through actual sales.
• Constraint anything that limits an organization
  from moving toward or achieving its goal.

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Chapter 10 Capacity Management

• Theory of Constraints
• A physical constraint is associated with the
  capacity of a resource (e.g., machine, employee).
• A bottleneck work activity is one that
  effectively limits capacity of the entire
  process.
• A nonbottleneck work activity is one in which
  idle capacity exists.
• A nonphysical constraint is environmental or
  organizational (e.g., low product demand or an
  inefficient management policy or procedure).

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Exhibit 10.7
Basic Principles of the Theory of Constraints