Wk4 Capacity PLG

Strategic Capacity Planning
Capacity the Issue

The fundamental problem of operations management is balancing capacity and demand
How much and when should capacity be added? What type of capacity should be added? Where should additional capacity be added?
Capacity denotes in general the extent of availability of these Capacity Planning resources for use by various processes It also denotes the maximum output of products and services one can achieve using these resources
Capacity planning is a systematic approach to:
Estimate the amount of capacity required, Evaluation of alternative methods of augmenting capacity Devise methods to use capacity effectively
Capacity planning is important. It has a significant impact on the cost of operation of the system due to large fixed costs associated with capacity Economies of scale is an concept in economics related to capacity
Economies of Scale
An illustration
Average unit cost of output
2000 units 2000 per units month
per month 5000 units per month 10,000 units per month
Units of output
Capacity Strategy
A capacity strategy is a long range plan that details how a firm will satisfy the demand of its goods and services. Greenfield expansion Mergers and acquisitions Debottlenecking
Issues
Flexibility: with regard to product, volume, mix Make-or-Buy: Vendoring, long-term identity Basic Capacity Calculations: stand-alone capacities and
congestion effects (e.g., blocking)
Capacity terminologies
Design Capacity
Maximum output per unit of time that the process can
achieve under ideal conditions
Actual or Operating Capacity

Average actual output per unit of time over the
immediate past periods.
Capacity terminologies (contd.)

Capacity Utilization a measure of the degree to which a system is used: (capacity used / design capacity) Capacity Cushion the difference between projected requirements and actual capacity Bottleneck Capacity Effective throughput of the system through the bottleneck process
Paradigm shift.
The Japanese way ..
Capacity = work + waste
The different wastes could be because of operations, defects, materials, labour etc.
An illustration
Source of waste Waste due to human resources Waste due to materials Waste due to operations Waste due to start up Waste due to equipment Amount (Rs. Lacs) 19.55 215.27 14.71 52.35 128.96
Total of the above Divisional turnover
430.84 1359.03
Waste as a percentage of turn over
31.70%
10
Insights
Managing capacity is a very strategic issue for all firms
Manage both capacity and demand

Manage demand through forecasting, pricing, advertising
11
Capacity Augmentation strategies
12
A Systematic Approach to Capacity Strategy

Estimate future capacity requirements. Identify gaps by comparing requirements with available capacity. Develop alternative plans for filling the gaps. Evaluate each alternative, both qualitatively and quantitatively and make a final choice.
Estimate Capacity Requirements

Forecasts of demand Productivity Competition Technological developments
Strategic Capacity Planning at Intel

Every nine months a new fabrication facility is added to its operations Factories are built about two years in advance of needing them
Deters rivals from entering the business and blocks them from gaining a toehold
15
Overcapacity NOW
Automotive Communication Airlines Consumer electronics Chronic overcapacity almost always results in price erosion.
Overcapacity - Auto Industry

Worldwide demand is for 50 million, capacity is for 74 million. Excess capacity is one of the driving forces behind mergers. Most of the overcapacity is in Southeast Asia. If a company waits until demand equals capacity, it may miss the market.
Source: Fortune, December 1997
Manufacturing Planning and Control

Marketing Planning Strategic Planning Financial Planning
Resource Planning
Aggregate Production Planning
Demand Management
Master Production Schedule (MPS)
Rough-Cut Capacity Planning (RCCP)
Material Requirements Planning (MRP)
Capacity Requirements Planning
Production Activity Control
Capacity Control
Managing Capacity
Disaggregate the capacity management problems Example: Resource requirements planning -- check the production plan in aggregate units. Rough cut capacity planning -- check the master schedule in shop hours. Capacity requirements planning -- check the materials plan in shop hours.
Short and Long-Term Capacity Management

Short-Term:
overtime, floating labor, added shifts sub-contracting workforce supplements (e.g., temps)
Intermediate Term:
efficiency improvements product re-design marketing emphasis
Long-Term:
equipment additions facility expansions workforce policies (e.g., long-term hiring)
CONCLUSION
Capacity decisions have a strategic impact on the competitiveness of the manufacturing operation. Look at utilization vs. performance.
Reducing variability can sometimes have similar logistical effects as adding capacity.
The End

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Strategic Capacity Planning

Capacity the Issue

congestion effects (e.g., blocking)

achieve under ideal conditions

Actual or Operating Capacity

immediate past periods.

Capacity terminologies (contd.)

Total of the above Divisional turnover

Waste as a percentage of turn over

Manage both capacity and demand

Capacity Augmentation strategies

A Systematic Approach to Capacity Strategy

Estimate Capacity Requirements

Strategic Capacity Planning at Intel

Overcapacity - Auto Industry

Manufacturing Planning and Control

Aggregate Production Planning

Master Production Schedule (MPS)

Rough-Cut Capacity Planning (RCCP)

Material Requirements Planning (MRP)

Capacity Requirements Planning

Production Activity Control

Short and Long-Term Capacity Management

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