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Capacity Planning: Long-Term & Short-Term

This presentation explores:

– The nature of strategic capacity planning

– Capacity terminology

– Determining capacity requirements

– Decision trees

– Service capacity planning ....

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Strategic Capacity Planning Capacity

– The amount of resource inputs available relative to output requirements at a particular time

Strategic Capacity Planning (Long-Range) ....

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Planning Time Frames Long range - more than 1 year and involves top

management e.g. buildings, facilities, specialized equipment

Intermediate range - 6 to 18 months: monthly/quarterly plans; capacity varied by hiring, firing, tool improvement, etc.

Short range - less than I month: overtime, transfers, routings, etc.

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Best Operating Level

Underutilization Over Utilization

Best OperatingLevel

Averageunit costof output

Volume ....

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Capacity Utilization (does not account for operating efficiency)

Design capacity– maximum obtainable output

Capacity used– rate of output actually achieved ....

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Utilization--Example Design capacity = 120 units/week

Actual output = 83 units/week

Utilization = ? ....

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Economies of Scale & Long-term Capacity Planning

100-unitplant

200-unitplant 300-unit

plant

400-unitplant

Volume

Averageunit costof output

....

•Economy of Scale combined with Experience Curve could be a competitive strategy

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The Experience Curve

Total accumulated production of units

Cost orpriceper unit

....

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Capacity Utilization Rate Defined

Cap utilization Rate = Cap. Used / Best Optg Level

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How to Plan for Long-Term Capacity Flexibility

Flexible plants - minimal changeover time between product lines.

Flexible processes - flexible manufacturing systems and easy setup of manufacturing equipment; able to realize economies of scope

Flexible workers - cross training; vertical job enlargement (also called job enrichment as opposed to job enlargement).

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Strategic Capacity Planning Decisions continued ..

Frequency of Capacity Additions - need balance between frequent and infrequent capacity additions

External Sources of Capacity - possible in manufacturing (e.g. chemicals and energy) but easier in service industries (e.g. banking, airline, healthcare).

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Timing of Capacity Increments

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Determining Capacity Requirements 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--Capacity Requirements

A manufacturer produces two lines of ketchup, FancyFine and a Generic line. Each is sold in small and family-size plastic bottles – differentiator here, is size of bottles.

The following table shows forecast demand for the next four years.

Year: 1 2 3 4FancyFine

Small (000s) 50 60 80 100Family (000s) 35 50 70 90Generic

Small (000s) 100 110 120 140Family (000s) 80 90 100 110

....

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The Product from a Capacity Viewpoint Are we really producing two different types of

ketchup from the standpoint of capacity requirements - (if the two brands are manufactured on same identical production lines)? ....

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Equipment and Labor Requirements

Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200

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.

....

Year: 1 2 3 4Small (000s) 150 170 200 240Family (000s) 115 140 170 200

Small Mach. Cap. 300,000 Labor 6Family-size Mach. Cap. 240,000 Labor 6

Small

Percent capacity used 50.00%Machine requirement 1.50Labor requirement 3.00Family-size

Percent capacity used 47.92%Machine requirement 0.96Labor requirement 2.88

Exercise: Fill in the blanks for periods 2-4. ....

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Capabilities and the Location Decision Often driven by short-term considerations

– wage rates– exchange rates

Better approach is to consider how location impacts development of long-term capabilities

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Long-term Capacity Location: Six Step Process

Identify Sources of Value Identify Capabilities Needed Assess Implications of Location Decision on

Development of Capabilities Identify Potential Locations Evaluate Locations Develop Strategy for Building Network of

Locations

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Stage 1: Regional-International

Minimize transportation costs and provide acceptable service

Proper supply of labor Wage rates Unions (right-to-work laws) Regional taxes, regulations, trade barriers Political stability

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Stage 2: Community

Availability of acceptable sites Local government attitudes Regulations, zoning, taxes, labor supply Tax Incentives Community’s attitude Amenities

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Breakeven Location Model

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Locating Pure Service Organizations

Recipient to Facility– facility utilization– travel distance per citizen– travel distance per visit

Facility to Recipient

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Tools for Location Decisions: Decision TreesA 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 ranks the respective probabilities as .10, .50, and .40. A cost analysis that reveals the effects upon costs is shown in the following table.

....

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Payoff Table

0.1 0.5 0.4Low Medium High

A 10 50 90B -120 25 200C 20 40 60

....

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We start with our decisions...

A

B

C

....

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Then add our possible states of nature, probabilities, and payoffs

High demand (.4)

Medium demand (.5)

Low demand (.1)

High demand (.4)

Medium demand (.5)

Low demand (.1)

A

B

CHigh demand (.4)

Medium demand (.5)

Low demand (.1)

$90k$50k

$10k

$200k$25k

-$120k

$60k$40k

$20k

....

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Determine the expected value of each decisionHigh demand (.4)

Medium demand (.5)

Low demand (.1)

A

$90k$50k

$10k

EVA=.4(90)+.5(50)+.1(10)=$62k

$62k

Exercise: Complete the decision tree analysis.

....

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Planning Service Capacity Time - capacity cannot be stored.

Location - near customer

Volatility of Demand - much higher and difficult to plan for; e.g. how do restaurants and airlines plan for this?

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Capacity Utilization & Service Quality

Best operating point is near 70% of capacity

From 70% to 100% of service capacity (also called critical zones), what do you think happens to service quality? Why?

Context specific tradeoff - predictable services(e.g. commuter trains, mail sorting operations) should plan for 100% utilization rate while higher risk services (hospitals emergencies, fire services) should expect lower operating utilization rates.

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Capacity Expansion Strategies:Entrepreneurial Stage

Shift resources to different tasks as needed

Customer co-production - self-serve stands for all or some food items

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Capacity Expansion Strategies: Multi-site Rationalization Stage

Add services to existing site

Duplicate existing services at additional sites

Do both ....

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Capacity Expansion Strategies: Growth Stage

“Bermuda Triangle” of operational complexity– Management difficulty exceeds management ability

New capacity management challenges– Need for fresh ideas– Need to upgrade older facilities ....

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Capacity Expansion Strategies: Maturity Stage

Focus on operational efficiencies

Remodeling and replacement

Service modification

– Duplication across entire service system ....

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Learning Curves Underlying Principles of Learning Curves

Plotting Learning Curves

Learning

From Learning Curves to Performance Improvement

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Underlying Principles of Learning Curves1. Each time you perform a task it takes less time than

the last time you performed the same task

2. The extent of task time decreases over time

3. The reduction in time will follow a predictable pattern

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Learning Curves

% learning Rate(90% , 80%) - is used to denote a given exponential Learning Curve(L.C.)

– Yx = Kxn

– Y = hrs. to produce x unit; K = hrs to produce unit 1– x = Unit number – n = log b/log 2 where b = learning percent– logarithmic plot,.

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Organizational learning - Differences in Performance (L.C.) due to

position on the curve employee involvement in operations improvement

activities (cost, quality, etc.) existence of standards

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Typical Pattern of Learning and Forgetting

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Plotting Learning Curves

Initial Manufacturing Cost: $100/unit

90% Learning Curve: $100$90$81$73$66$59$53$48$43

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Plotting Learning Curves

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90

100

1 3 5 7 9

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Unit number

Pro

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ctio

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ost

($) 90 % Learning Curve

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Learning Individual Learning

Organizational Learning

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From Learning Curves to Performance Improvement

Proper selection of workers.

Proper training.

Motivation.

Work specialization.

Do one or very few jobs at a time.

Provide quick and easy access for help.

Allow workers to help redesign their tasks.

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Estimating Learning Curves Before start of production run, use:

– industry standard; paying attention to differences and/or similarities in startup costs

Limited Start-up– use simple exponential curve e.g. labor for unit two/labor

for unit one With Historical data - production

– use statistical analysis; plot data on log/log graph and determine LC with

regression analysis or other curve fitting methodology.

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Short Term Capacity Planning

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Bottlenecks in Sequential Operations

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Efficiency and Output Increase when Machines are Being Added

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Product and Service Flows

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Process Flow Map for a Service

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The Theory of Constraints

Balance the flows not capacities throughout the shop

The utilization of a nonbottleneck is determined by other constraints in the system, such as the bottlenecks

Utilization is not the same as activation An hour lost at a bottleneck is an hour lost

for the whole shop

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The Theory of Constraints continued

An hour saved at a nonbottleneck is a mirage The bottlenecks govern the shop throughput and

WIP inventories The transfer batch size need not be the same as the

process batch size

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The Theory of Constraints concluded

Process batch size should be variable, not fixed A shop schedule should be set by examining all the

shop constraints simultaneously

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Implementing the Theory of Constraints Identify the System’s Constraints Exploit the Constraint Subordinate all else to the Constraint Elevate the Constraint If Constraint is no Longer a Bottleneck, Find the

Next Constraint and Repeat the Steps.

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Relationship between Capacity and Scheduling

Capacity is oriented toward the acquisition of productive resources

Scheduling related to the timing of the use of resources