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Strategic Capacity Management

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Chapter 3: Strategic Capacity ManagementWe will discuss …Strategic Capacity PlanningTwo Ways to Improve a ProcessCapacity UtilizationExample of Capacity UtilizationEconomies & Diseconomies of ScaleOther IssuesCapacity Planning: BalanceLittle’s LawExamplesSlide 12Capacity Analysis with BatchingSlide 14Slide 15ProblemProcess Utilization and Capacity UtilizationDecision TreesExample of a Decision Tree ProblemExample of a Decision Tree Problem (Continued): The Payoff TableExample of a Decision Tree Problem (Continued): Step 1. We start by drawing the three decisionsExample of Decision Tree Problem (Continued): Step 2. Add our possible states of nature, probabilities, and payoffsExample of Decision Tree Problem (Continued): Step 3. Determine the expected value of each decisionExample of Decision Tree Problem (Continued): Step 4. Make decisionProblem 2Slide 26Chapter 3: Strategic Capacity ManagementWe will discuss …What is capacity?The concept of process capacityCapacity utilizationEconomies and diseconomies of scaleCapacity balanceLittle's lawRelating inventory, flow time, and flow rateBatch sizes and capacityDecision TreesStrategic Capacity PlanningCapacitythe ability to hold, receive, store, or accommodate.measures can (as opposed to does)Strategic capacity planningapproach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size.Examples??Two Ways to Improve a ProcessReduce excess capacity at some step in the processLower the cost for the same output Use the capacity at an underutilized process step to increase the capacity at a bottleneckIncrease the output at the same costA bottleneck is the weakest linkProcess capacity = minimum {Res 1 capacity,. Res 2 capacity, …)Capacity UtilizationCapacity usedrate of output actually achieved Best operating levelcapacity for which the process was designedCapacity utilization rate = Capacity used / Best operating levelUnderutilizationBest OperatingLevelAvgunit costof outputVolume OverutilizationExample of Capacity UtilizationDuring one week of production, a plant produced 83 units of a product. Its historic highest or best utilization recorded was 120 units per week. What is this plant’s capacity utilization rate?During one week of production, a plant produced 83 units of a product. Its historic highest or best utilization recorded was 120 units per week. What is this plant’s capacity utilization rate?-Answer: Capacity utilization rate = Capacity used . Best operating level = 83/120 =0.69 or 69%-Answer: Capacity utilization rate = Capacity used . Best operating level = 83/120 =0.69 or 69%Economies & Diseconomies of Scale100-unitplant200-unitplant300-unitplant400-unitplantVolume Averageunit costof outputEconomies of Scale and the Experience Curve workingEconomies of Scale and the Experience Curve workingDiseconomies of Scale start workingDiseconomies of Scale start workingOther IssuesCapacity FocusThe concept of the focused factory holds that production facilities work best when they focus on a fairly limited set of production objectives Plants Within Plants (PWP) Extend focus concept to operating level Capacity FlexibilityFlexible processesFlexible workers Flexible plantsCapacity Planning: BalanceStage 1 Stage 2 Stage 3Unitspermonth6,000 7,000 5,000Unbalanced stages of productionUnbalanced stages of productionStage 1 Stage 2 Stage 3Unitspermonth6,000 6,000 6,000Balanced stages of productionBalanced stages of productionMaintaining System Balance: Output of one stage is the exact input requirements for the next stageWhat it is: Inventory (I) = Flow Rate (R) * Flow Time (T)Implications:• Out of the three performance measures (I,R,T), two can be chosen by management, the other is GIVEN by nature• Hold throughput (flow rate) constant: Reducing inventory = reducing flow timeLittle’s Law7:00 8:00 9:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:0011109876543210Flow TimeInventoryInventory=Cumulative Inflow – Cumulative OutflowCumulative InflowCumulative OutflowTimePatientsCan be used in analyzing capacity issues!ExamplesSuppose that from 12 to 1 p.m. 200 students per hour enter the GQ and each student is in the system for an average of 45 minutes. What is the average number of students in the GQ?Inventory = Flow Rate * Flow Time= 200 per hour * 45 minutes (= 0.75 hours)= 150 studentsIf ten students on average are waiting in line for sandwiches and each is in line for five minutes, on average, how many students are arrive each hour for sandwiches?Flow Rate = Inventory / Flow Time = 10 Students / 5 minutes = 0.083 hour= 120 students per hourAirline check-in data indicate from 9 to 10 a.m. 255 passengers checked in. Moreover, based on the number waiting in line, airport management found that on average, 35 people were waiting to check in. How long did the average passenger have to wait?Flow Time = Inventory / Flow Rate = 35 passengers / 255 passengers per hour = 0.137 hours= 8.24 minutesBatch of 12Batch of 60Batch of 120Batch of 300Time [minutes]60120 180240 300Set-up from Part A to Part BSet-up from Part B to Part AProduce Part A (1 box corresponds to 24 units = 12 scooters)Produce Part B (1 box corresponds to 12 units = 12 scooters)Production cycleProduction cycleThe Impact of Batch Size on Capacity• Capacity calculation:• Note: Capacity increases with batch size:• Note further: … and so does inventoryBatch SizeSet-up time + Batch-size*Time per unitCapacity given Batch Size=(in units/time)Capacity1/p00.050.10.150.20.250.30.350.40.450.5105090130170210250290330370410450490530570610650Batch SizeCapacity Analysis with BatchingData about set-up times and batching Set-up time, SProcess 1 Assembly process120 minutes-Per unit time, p 2 minutes/unit 3 minutes/unitCapacity (B=12) 0.0833 units/min 0.33 units/minuteCapacity (B=300) 0.4166 units/min 0.33 units/minuteBatch size = 12 Batch size = 300Setup120 0 120 0Batch size12 12 300 300Per unit2 3 2 3Capacity (per min)0.083 0.333 0.417 0.333Capacity (per hour)5 20 25 20Process Capacity (per hour)5 20Figure : Choosing a “good” batch size Batch size is too small, process capacity could be increased (set-up step is at the bottleneck)Batch size is too large, could be reduced with no negative impact on process capacity


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