Midterm Exam Notes
Strategic Capacity Planning for Products and Services
Capacity Planning- refers to an upper limit or ceiling on the load that an organization can handle. Capacity needs include: equipment, space, and employee skills.
Goals: achieve match between long-term supply capabilities and the predicted level of long-term demand.
Overcapacity: causes operating costs that are too high
Undercapacity: causes strained resources and possible loss of customers.
Key Questions in Capacity Planning:
What kind is needed? Types: Input capacity/ Output capacity
How much is needed to match demand?
When is it needed?
How much will it cost, how will it be funded, what is the expected ROI
Benefits & Risks
Are there Sustainability issues that need to be addressed?
Timeline of change, all at once? Small changes (“Hedge their bets”)?
Can Supply Chain handle it?
Capacity Decisions are Important because:
Availability: ability to meet demand for products/goods and services
Operating cost: minimized when capacity and demand match
Initial (installation) cost: greater the capacity, greater the cost (subject to economies of scale)
Long term commitment of resources: difficult/costly to modify (especially if excess capacity is reduced)
Competitiveness: A available capacity or ability to quickly expand allows quicker delivery and can be barriers to entry
Globalization of markets: Complicates capacity decisions
Globalization Supplies: is also a capacity challenge
Capacity takes time to build: and resources (financial and others) and planning to build...more important, it takes time...so likelihood of mismatch with demand is greater
Is not a one time decision:
Defining & Measuring Capacity
Select a measure of capacity that does not require updating, such as measure of availability inputs
Units of outputs, where there is multiple products
Design capacity: The maximum output rate or service capacity an operation, process, or facility is designed for. (Under Ideal conditions)
Capital utilization- the ratio of actual output to design capacity
Utilization = Actual Output / Effective capacity
Effective capacity: Design Capacity - allowances such as personal time and maintenance. (real, always less than design because of changing product mix, maintenance, equipment, lunch breaks, problems in scheduling…
Actual Output- cannot exceed effective capacity because of machine breakdowns, shortages, quality problems, as well as factors outside the control.
Efficiency = Actual Output / Effective capacity
*Key to improving Capacity utilization is to increase effective capacity by correcting quality problems, maintain good equipment in good condition, fully trained employees, and fully utilizing bottleneck equipment.
Determinants of Effective Capacity
Design: Size and provision for expansion
Location: transportation cost, labor supply, energy sources
Product and Service Factors:
Design: the more uniform the output the more opportunities for standardization of methods and materials
Product or Service mix: consider different items will have different rates of output
Quality Capabilities: if it does not meet standards rate of output will be slowed
Training and experience
Absenteeism and labor turnover
Mgmt Policy: overtime or second or third shifts
Supply chain factors
Pollution control standards
3 Primary Strategies:
Leading - builds capacity in anticipation of future demand increases. Best option if capacity increases involve a long lead time.
Following -builds capacity when demand exceeds current capacity.
Tracking - adds capacity in relatively small increments to keep pace with increasing demand
Assumptions & Predictions about long-term demand patterns, tech changes & competitors behavior
Growth rate and variability:
Cost of building & operating facilities of different sizes
Rate & direction of technological innovation
Likely behavior of competitors
Availability of capital & other inputs
Capacity Cushion or buffer- Extra capacity used to offset demand uncertainty. Capacity cushion = capacity –expected demand
By how much and when:
Optimistic or Lead Strategy: Build & they will come
Pessimistic or Lag strategy: wait & See
Steps in Capacity Planning Process
Estimate future capacity requirements
Evaluate existing capacity and facilities and identify gaps.
Identify alternatives for meeting requirements
Conduct financial analyses of each alternative
Assess key qualitative issues for each alternative
Select the alternative to pursue that will be best in the long term.
Implement the selected alternative
Forecasting Capacity Requirements
Overall level of capacity: facility size
Forecast the demand over a time horizon and then convert those forecasts into capacity requirements
Cycles and Trends:
Identify the trends: how long will it lasts, slope of the trend, appropriate length of the cycles and the amplitude of the cycles (deviation from average)
Short term considerations:
(Variability): seasonal, Random, & irregular fluctuations in demand. Resulting in a strain on meeting demand or in an idle capacity
Probable variations in capacity requirements created by such things as seasonal,
When time intervals are too short to have seasonal variations the analysis can often describe the variations by probability distributions such as normal, uniform, or poisson distribution. Ex. The amount of coffee served at a luncheonette by a normal distribution with a certain mean and standard deviation.
Manufacturing systems are more likely to experience less variations because of typical isolation from customers and uniform nature of production.
Analyzing service systems: useful to use waiting line models and simulation models.
Irregular variations: are the most troublesome. Impossible to predict. Since they are created by such diverse forces as major equipment breakdowns, freak storms, foreign political turmoil.
Marketing can supply: customer contracts, demographic analyses, and forecasts
In-house- or outsourceOnce capacity is determined. Organization must determine to do the product or service in house or outsource. (Outsource/ Offshore/ Near Shore/ Rear Shore)
Reasons To Outsource:
Not enough capacity
Higher quality from specialist firms
The nature of demand: Fluctuating or small orders
Not Cost effective in-house
Reasons NOT To Outsource:
You may Risks (Control of operations, intellectual property, liability, & Quality)
Prepare to deal with capacity “chunks”
Capacity changes in chunks so there will be excess/shortage even as capacity is being changed
Developing Capacity Strategies
Design Flexibility into systems
If future expansion of a restaurant seems likely, water lines, power hook ups, and waste disposal lines can be put in place initially so if expansion becomes a reality, modification to the existing structure can be minimized.
Take Stage of life cycle into account
Introduction- difficult to know market size
Growth- increasing output require increasing capacity therefore increasing investment and complexity.
Maturity- Size of market levels off
Decline Phase- decline demand causes underutilization of capacity, eliminate excess capacity or introduce new products/services
Take a “big-picture” systems approach to capacity changes. Increasing rooms in a hotel, look at the big picture, like increased demand in parking, entertainment, food, suppliers…
Bottleneck Operation- An unbalanced system in suppliers, transporters, distributors is the existence of a bottleneck operation. It is an operation in a sequence of operations whose capacity is lower than that of the other operations. A consequence, the capacity of the bottleneck limits the system capacity.
Smooth Capacity required by “complementary products” Products with complementary demand patterns. Identify products that offset each other such as demand for water skis and demand for snow skis.
Identify the optimal operating level
Economies of scale: If output is less than the optimal level increasing the output rate will result in decreasing average unit cost.
Reasons for economies of scale:
Fixed cost over many units
Construction costs increase at a slower rate
Diseconomies of scale- if output is increased beyond the optimal level, average unit cost would become increasingly larger.
Traffic congestion leads to increase on distribution costs
Increased complexity increases costs, and control communication are problematic
Inflexibility and bureaucracy slows work down and change orders
Process Selection & Facility Layout
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