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Chapter 3 Strategic Capacity Management We 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 Trees Strategic 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 Examples size 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 cost A bottleneck is the weakest link Process capacity minimum Res 1 capacity Res 2 capacity Capacity Utilization Capacity utilization rate Capacity used Best operating level Capacity used rate of output actually achieved Best operating level capacity for which the process was designed Avg unit cost of output Underutilization Volume Overutilization Best Operating Level Example of Capacity Utilization During During one one week week of of production production aa plant plant produced produced 83 83 units units of of aa product product Its Its historic historic highest highest or or best best utilization utilization recorded recorded was was 120 120 units units per per week week What What is is this this plant s plant s capacity capacity utilization utilization rate rate Answer Answer Capacity Capacity Capacity utilization utilization rate rate Capacity used used Best Best operating operating level level 83 120 83 120 0 69 0 69 or or 69 69 Economies Diseconomies of Scale Economies Economies of of Scale Scale and and the the Experience Experience Curve Curve working working Average unit cost of output 100 unit plant 200 unit plant 300 unit plant 400 unit plant Diseconomies

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