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 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 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

Overutilization Best Operating Level

Volume

Example 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 plants capacity utilization rate?

Answer: Capacity utilization rate = Capacity used . Best operating level = 83/120 =0.69 or 69%

Economies & Diseconomies of Scale

Economies of Scale and the Experience Curve working

Average unit cost of output

100-unit plant

200-unit plant

300-unit plant

400-unit plant

Diseconomies of Scale start working

Volume

Other Issues
Capacity 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)
Capacity Flexibility Flexible processes

Flexible workers
Flexible plants

Extend focus concept to operating level

Capacity Planning: Balance

Unbalanced stages of production Units per month Stage 1 6,000 Stage 2 7,000 Stage 3 5,000

Maintaining System Balance: Output of one stage is the exact input requirements for the next stage Balanced stages of production Units per month Stage 1 6,000 Stage 2 6,000 Stage 3 6,000

Littles Law
What 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 time
Patients 11 10 9 8 7 6 5 4 3 2 1 0 7:00 Inventory=Cumulative Inflow Cumulative Outflow Time Flow Time Inventory Cumulative Inflow Cumulative Outflow

8:00

9:00

10:00

11:00

12:00

13:00

14:00

15:00

16:00

17:00

18:00

Can be used in analyzing capacity issues!

Examples
Suppose that from 12 to 1 p.m. 200 students per hour enter the GQ and Airline check-in data indicate from 9 each student is in the system for an to 10 a.m. 255 passengers checked average of 45 minutes. What is the in. Moreover, based on the number average number of students in the waiting in line, airport management GQ? found that on average, 35 people Inventory = Flow Rate * Flow Time = 200 per hour * 45 minutes (= 0.75 were waiting to check in. How long hours) did the average passenger have to = 150 students wait? 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 Time = Inventory / Flow Rate = 35 passengers / 255 passengers per hour = 0.137 hours

Flow Rate = Inventory / Flow Time = 10 Students / 5 minutes = 0.083 hour = 120 students per hour

= 8.24 minutes

The Impact of Batch Size on Capacity

Production cycle

Batch of 12 Production cycle

Batch of 60

Batch of 120

Batch of 300

60

120

180

240

300

Time [minutes]

Produce Part B (1 box corresponds to 12 units = 12 scooters) Set-up from Part A to Part B Produce Part A (1 box corresponds to 24 units = 12 scooters) Set-up from Part B to Part A

Number Produced in 720 Min Batch Size Part A Part B 12 60 60 60 180 180 120 240 240 300 300 300

Capacity Analysis with Batching

Capacity calculation:

Capacity given Batch Size=

(in units/time)

Batch Size Set-up time + Batch-size*Time per unit

Note: Capacity increases with batch size:

0.5 Capacity 0.45 0.4 0.35 0.3 0.25 0.2 1/p

0.15
0.1 0.05 250 290 330 370 450 490 530 570 130 170 210 410 610 650 50 90 0 10

Batch Size

Note further: and so does inventory

Process 1 Set-up time, S Per unit time, p Capacity (B=12) Capacity (B=300) 120 minutes 2 minutes/unit 0.0833 units/min 0.4166 units/min

Assembly process 3 minutes/unit 0.33 units/minute 0.33 units/minute

Data about set-up times and batching

Batch size = 12 Setup Batch size Per unit Capacity (per min) Capacity (per hour) Process Capacity (per hour) 5 120 12 2 0.083 5 0 12 3 0.333 20

Batch size = 300 120 300 2 0.417 25 20 0 300 3 0.333 20

Capacity 0.5 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 130 170 210 250 290 330 370 410 450 490 530 570 610 650 10 50 90 Batch Size Capacity of slowest step other than the one requiring set-up 1/p

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 (set-up is not at the bottleneck)

Figure : Choosing a good batch size

B/[S+B*p] = k implies that B = S*k / (1 p*k)

Problem
Act Time in min/part Setup Time in min STEP 1 1 20 STEP 2 2 0 STEP 3 1.5 0

Part a: What is the capacity for a batch size = 50?

part a Batch is: Capacity of Resource (parts/min) parts/hour (minutes/part) 50 0.714 0.500 0.667 42.9 30.0 40.0 1.4 2 1.5 Capacity is 0.5 parts/min or 30 parts/hour

Part b: For a batch size of 10, what is the bottleneck

part b Batch is: Capacity of Resource (parts/min) 10 0.333 0.500 0.667

Step 1 is bottleneck

What batch size should be chosen to smooth the flow?

Process Utilization and Capacity Utilization

Process Utilization = Flow Rate / Process Capacity
Example: Tom can process 100 forms per day and he actually processes 70 forms. Process utilization = ??

Utilization of resource = Flow rate / Capacity of resource

Process 400 items per hour Capacities of resources (items/hour):
Resource 1: 500 implies utilization of 80% Resource 2: 450 implies utilization of 89% Resource 3: 600 implies utilization of 67%

Bottleneck is the resource with the lowest capacity and the highest utilization
Bottleneck is ??

Decision Trees
Used to structure complex decision problems Use expected return criteria Consider probabilities of occurrence of events Use:
chance nodes (denoted by circles ) decision (or choice) nodes (denoted by squares)

Use a concept of folding back to arrive at the best policy

Example of a Decision Tree Problem

A glass factory specializing in crystal is experiencing a substantial backlog, and the firm's management is considering three courses of action: A) Arrange for subcontracting B) Construct new facilities C) Do nothing (no change) The correct choice depends largely upon demand, which may be low, medium, or high. By consensus, management estimates the respective demand probabilities as 0.1, 0.5, and 0.4.

Example of a Decision Tree Problem (Continued): The Payoff Table

The management also estimates the profits when choosing from the three alternatives (A, B, and C) under the differing probable levels of demand. These profits, in thousands of dollars are presented in the table below:

A B C

0.1 Low 10 -120 20

0.5 Medium 50 25 40

0.4 High 90 200 60

Example of a Decision Tree Problem (Continued): Step 1. We start by drawing the three decisions

A B C

Example of Decision Tree Problem (Continued): Step 2. Add our possible states of nature, probabilities, and payoffs

High demand (0.4) Medium demand (0.5)

Low demand (0.1)

$90k $50k $10k $200k $25k -$120k $60k $40k $20k

High demand (0.4)

B C

Medium demand (0.5) Low demand (0.1)

High demand (0.4)

Medium demand (0.5) Low demand (0.1)

Example of Decision Tree Problem (Continued): Step 3. Determine the expected value of each decision
High demand (0.4) Medium demand (0.5)

$62k
A

Low demand (0.1)

$90k $50k $10k

EVA=0.4(90)+0.5(50)+0.1(10)=$62k

Example of Decision Tree Problem (Continued): Step 4. Make decision

High demand (0.4)

$62k
A B C

Medium demand (0.5) Low demand (0.1) High demand (0.4) Medium demand (0.5)

$90k $50k $10k

$80.5k

Low demand (0.1)

High demand (0.4)

$200k $25k -$120k

$46k

Medium demand (0.5) Low demand (0.1)

$60k $40k $20k

Alternative B generates the greatest expected profit, so our choice is B or to construct a new facility

Problem 2
Owner of a small firm wants to purchase a PC for billing, payroll, client records Need small systems now -larger maybe later Alternatives: Small: No expansion capabilities @ $4000 Small: expansion @6000 Larger system @ $9000 After 3 years small systems can be traded in for a larger one @ $7500 Expanded @ $4000 Future demand is Likelihood of needing larger system later is 0.80 What system should he buy?

Problem 2
9,000 L: .8 S: .2 9,000 9,000 10,000 Large Need large 9,000 Exp 9,200 L: .8 S: .2 10,000 Exp Trade-in 6,000 13,500

Small Need large

11,500

Trade-in
L: .8 S: .2 10,000

11,500

4,000