CHAPTER 10 CAPACITY MANAGEMENT DAVID A. COLLIER AND JAMES R. EVANS. OM, Ch. 10 Capacity Management 2009 South-Western, a part of Cengage Learning

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1 OM CHAPTER 10 CAPACITY MANAGEMENT DAVID A. COLLIER AND JAMES R. EVANS 1

2 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 LO3 LO4 LO5 Describe how to compute and use capacity measures. Describe long-term capacity expansion strategies. Describe short-term capacity adjustment strategies. Explain the principles and logic of the Theory of Constraints. 2

3 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.) 3

4 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. 4

5 Understanding Capacity The resources available to the organization facilities, equipment, and labor how 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: 1. As the maximum rate of output per unit of time, or 2. As units of resource availability. 5

6 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 6

7 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? 7

8 Exhibit 10.1 Examples of Short- and Long-Term Capacity Decisions 8

9 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. 9

10 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. 10

11 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] 11

12 Exhibit 10.2 The Demand versus Capacity Problem Structure 12

13 Capacity Measurement in Job Shops In a job shop, setup time can be a substantial part of total system capacity. Capacity Required (C i ) = Setup Time (S i ) + [Processing Time (P i ) x Order Size (Q i )] = S i + [(P i )(Q i )] [10.2] 13

14 Capacity Measurement in Job Shops Solved Problem: Ham s 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. 14

15 Exhibit 10.3 Dental Office Procedures and Times for Today 15

16 Exhibit 10.4 Dental Office Demand-Capacity Analysis *Example computation: C = (S i + P i Q i ) = = 210 minutes, assuming a setup for each patient. 16

17 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 organization what products and services it offers. 17

18 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

19 Exhibit 10.5 Seasonal Demand and Complementary Goods or Services 19

20 Chapter 10 Capacity Expansion Options Long-Term Capacity Strategies Four basic strategies for expanding capacity over some fixed time horizon: 1. One large capacity increase (Exhibit 10.6a). 2. Small capacity increases that match average demand (Exhibit 10.6b). 3. Small capacity increases that lead demand (Exhibit 10.6c). 4. Small capacity increases that lag demand (Exhibit 10.6d). 20

21 Exhibit 10.6 Capacity Expansion Options 21

22 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 22

23 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. 23

24 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. 24

25 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). 25

26 Exhibit 10.7 Basic Principles of the Theory of Constraints 26