1. 1
Strategic Capacity Management

2. 2
OBJECTIVES

Strategic Capacity Planning Defined

Capacity Utilization & Best Operating Level

The Experience Curve

Capacity Focus, Flexibility & Planning

Determining Capacity Requirements

Decision Trees

Capacity Utilization & Service Quality

3. Strategic Capacity
Planning

Capacity can be defined as the ability to
hold, receive, store, or accommodate

Strategic capacity planning is an
approach for determining the overall
capacity level of capital intensive
resources, including facilities,
equipment, and overall labor force size
3

4. 4
Capacity Utilization
Capacity used
Capacity utilization rate =
Best operating level


Where
Capacity used
–

rate of output actually achieved
Best operating level
–
capacity for which the process was designed

5. 5
Best Operating Level
Example: Engineers design engines and assembly lines to
Example: Engineers design engines and assembly lines to
operate at an ideal or “best operating level” to maximize
operate at an ideal or “best operating level” to maximize
output and minimize ware
output and minimize ware
Average
unit cost
of output
Underutilization
Overutilization
Best Operating
Level
Volume

6. Example of Capacity
Utilization
 During one week of production, a plant
 During one week of production, a plant
produced 83 units of a product. Its
produced 83 units of a product. Its
historic highest or best utilization
historic highest or best utilization
recorded was 120 units per week. What
recorded was 120 units per week. What
is this plant’s capacity utilization rate?
is this plant’s capacity utilization rate?
•
•
Answer:
Answer:
Capacity utilization rate =
Capacity used ..
Capacity utilization rate =
Capacity used
Best operating level
Best operating level
= 83/120
= 83/120
=0.69 or 69%
=0.69 or 69%
6

7. The
Experience
Curve
7
As plants produce more products, they
As plants produce more products, they
gain experience in the best production
gain experience in the best production
methods and reduce their costs per unit
methods and reduce their costs per unit
Yesterday
Cost or
price
per unit
Today
Tomorrow
Total accumulated production of units

8. 8
Average Labour hrs required
Learning curve technique

Learning Curve
30
25
20
15
10
5
20
40
60
80
100
Units Produced
120
140
160
Definition: The more often a worker does a particular type of job, the lesser time it takes to
do the same job
(Explanatory note: The per unit cost of production of a new item decreases as additional units of that
product are manufactured)

9. 9
Capacity Flexibility

Flexible plants

Flexible processes

Flexible workers

10. Capacity Planning:
Balance
10
Unbalanced stages of production
Unbalanced stages of production
Units
per
month
Stage 1
Stage 2
6,000
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
Balanced stages of production
Units
per
month
Stage 1
Stage 2
6,000
6,000
Stage 3
6,000

11. 11
Capacity Planning

Frequency of Capacity Additions

External Sources of Capacity

12. Determining Capacity
Requirements

1. Forecast sales within each
individual product line

2. Calculate equipment and labor
requirements to meet the forecasts

3. Project equipment and labor
availability over the planning
horizon
12

13. 13
Planning Service Capacity Vs.
Manufacturing Capacity

Time: Goods can not be stored for later use
and capacity must be available to provide a
service when it is needed

Location: Service goods must be at the
customer demand point and capacity must be
located near the customer

Volatility of Demand: Much greater than in
manufacturing

14. 14
Question Bowl
The objective of Strategic Capacity
Planning is to provide an approach
for determining the overall capacity
level of which of the following?
a. Facilities
b. Equipment
c. Labor force size
d. All of the above
e. None of the above
Answer: d. All of the above

15. 15
Question Bowl
To improve the Capacity Utilization Rate we can
do which of the following?
a.
Reduce “capacity used”
b.
Increase “capacity used”
c.
Increase “best operating level”
d.
All of the above
e.
None of the above
Answer: b. Increase “capacity used” (This
increases the numerator in the Capacity
Utilization Rate ratio, which is desirable.)

16. 16
Question Bowl
When we talk about Capacity Flexibility which
of the following types of flexibility are
included?
a. Plants
b. Processes
c. Workers
d. All of the above
e. None of the above
Answer: d. All of the above

17. 17
Question Bowl
When adding capacity to existing operations which of
the following are considerations that should be
included in the planning effort?
a.
Maintaining system balance
b.
Frequency of additions
c.
External sources
d.
All of the above
e.
None of the above
Answer: d. All of the above

18. 18
Question Bowl
Which of the following is a term used to describe
the difference between projected capacity
requirements and the actual capacity
requirements?
a.
Capacity cushion
b.
Capacity utilization
c.
Capacity utilization rate
d.
All of the above
e.
None of the above
Answer: a. Capacity cushion

19. 19
Question Bowl
In determining capacity requirements we must do
which of the following?
a.
Address the demands for individual product lines
b.
Address the demands for individual plants
c.
Allocate production throughout the plant network
d.
All of the above
e.
None of the above
Answer: d. All of the above

20. 20
Question Bowl
In a Decision Tree problem used to evaluate
capacity alternatives we need which of the
following as prerequisite information?
a.
Expect values of payoffs
b.
Payoff values
c.
A tree
d.
All of the above
e.
None of the above
Answer: b. Payoff
values (Expected
values are what is
computed, not
prerequisite to the
analysis.)