Answer the following questions
SCM 304 Principles of Supply Chain Management
Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
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Managing Capacity
Chapter 6
1
You will learn
Explain what capacity is, how firms measure capacity, and the difference between theoretical and rated capacity.
Describe three different capacity strategies: lead, lag, and match.
Apply a wide variety of analytical tools for choosing between capacity alternatives, including expected value and break-even analysis, decision trees, and learning curves.
Introduction (1 of 2)
Strategic decisions that managers face about capacity:
How much capacity do we need?
When do we need it?
What form should the capacity take?
Source: managementstudyguide.com
Introduction (2 of 2)
Important points about capacity:
Capacity can take many different forms
capacity planning is an important activity in both service and manufacturing organizations.
While there are many quantitative tools to help managers make informed capacity decisions, there is some degree of risk inherent in nearly all such decisions.
Capacity (1 of 4)
Capacity – The capability of a worker, a machine, a workcenter, a plant, or an organization to produce output in a time period.
© 2016 APICS Dictionary
Capacity decisions that managers face:
How capacity is measured?
Which factors affect capacity?
The impact of the supply chain on the organization’s effective capacity.
Capacity (2 of 4)
In order to evaluate the organization’s resources to see if they are adequate to meet the current or future demand:
Measuring of Capacity
Theoretical capacity – The maximum output capability, allowing for no adjustments for preventive maintenance, unplanned downtime, or the like.
Rated capacity – The long-term, expected output capability of a resource or system.
© 2016 APICS Dictionary
Capacity (3 of 4)
Table 6.1 Examples of Capacity in Different Organizations
| Organization | Capacity Measure | Factors Affecting Capacity |
| Law firm | Billable hours available each Month | Number of lawyers and paralegals; education and skill levels; supporting software |
| Textile-spinning plant | Spinning hours per shift; number of spindles produced per week | Number of machines running; quality of raw materials; maintenance |
| Automatic car wash | Cars per hour | Availability of water and chemicals; reliability of the car wash (Is it frequently down for repairs?) |
| Airline | (Seats) × (miles flown) | Number of jets, pilots, and terminals |
Capacity (4 of 4)
Factors that Affect Capacity
Many factors affect capacity and many assumptions must be made
Example: capacity for an assembly plan
Number of lines used
Number of shifts operating
Number of temporary workers used
Number of public storage facilities used
Product variations
Conformance quality
Quality improvement
Three Common Capacity Strategies (1 of 2)
Question: how quickly to increase capacity to accommodate expected growth in demand?
Three strategies for timing capacity expansions
Lead capacity strategy – capacity is added in anticipation of demand.
Lag capacity strategy – capacity is added only after demand has materialized.
Match capacity strategy –strikes a balance between the lead and lag capacity strategies by avoiding periods of high under or overutilization.
Three Common Capacity Strategies (2 of 2)
Figure 6.1 When to Add Capacity: Lead, Lag, and Match Strategies
Methods of Evaluating Capacity Alternatives (1 of 8)
Various choices to meet the capacity needs: building their own facilities or leasing capacity from other firms.
Factors to evaluating capacity alternatives
Cost
Demand Considerations
Expected Value
Decision Trees
Break-Even Analysis
Learning Curves
Methods of Evaluating Capacity Alternatives (2 of 8)
Cost
Fixed costs – The expenses an organization incurs regardless of the level of business activity.
Variable costs – Expenses directly tied to the level of business activity.
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Example 6.1 – Ellison Seafood Company (1 of 4)
Ellison Seafood Company ships fresh seafood to customers in a nearby city. The logistics manager has identified three shipping alternatives:
Common Carrier
Contract Carrier
Leasing own refrigerated trucks
Example 6.1 – Ellison Seafood Company (2 of 4)
Table 6.2 Capacity Alternatives and Costs
| Blank | Common Carrier | Contract Carrier | Leasing |
| Fixed cost | None | $5,000 | $21,000 |
| Variable cost | $750 | $300 | $50 |
Figure 6.2 Total Cost of Three Capacity Alternatives, Ellison Seafood Company
Example 6.1 – Ellison Seafood Company (3 of 4)
Figure 6.3 Total Cost per Shipment of Three Capacity Alternatives
Example 6.1 – Ellison Seafood Company (4 of 4)
Table 6.3 Total Cost of Three Capacity Alternatives at Different Demand Levels
| Total Cost Equation | 15 Shipments (Low Demand) | 40 Shipments (Medium Demand) | 75 Shipments (High Demand) |
| Common carrier: $0 + $750X | $11,250 | $30,000 | $56,250 |
| Contract carrier: $5,000 + $300X | $9,500 | $17,000 | $27,500 |
| Leasing: $21,000 + $50X | $21,750 | $23,000 | $24,750 |
Methods of Evaluating Capacity Alternatives (3 of 8)
Demand Consideration
Managers must know about the expected demand levels.
Otherwise, how will they know which capacity alternative will provide the best financial result?
Demand forecasting is needed - develop multiple estimates of demand that capture a range of possibilities
Methods of Evaluating Capacity Alternatives (4 of 8)
Expected value – A calculation that summarizes the expected costs, revenues, or profits of a capacity alternative, based on several demand levels, each of which has a different probability.
The major steps of the expected value approach are as follows:
Identify several different demand-level scenarios. These scenarios intent is to approximate the range of possible outcomes.
Assign a probability to each demand-level scenario.
Calculate the expected value of each alternative. The equation is:
Example 6.2 – Ellison Seafood Company (1 of 2)
Suppose Ellison Seafood wants to know the expected cost of one of the options, contracting. The management has identified some potential demand scenarios and assigned probabilities to each.
| Low demand | → | 30 shipments per year |
| Medium demand | → | 50 shipments per year |
| High demand | → | 80 shipments per year |
| Low demand | → | 30 shipments per year | → | 25% |
| Medium demand | → | 50 shipments per year | → | 60% |
| High demand | → | 80 shipments per year | → | 15% |
| blank | blank | Total | blank | 100% |
Example 6.2 – Ellison Seafood Company (2 of 2)
Methods of Evaluating Capacity Alternatives (5 of 8)
Decision tree – A visual tool that decision makers use to evaluate capacity decisions and to enable users to see the interrelationships between decisions and possible outcomes.
Draw the tree from left to right starting with a decision point or an outcome point and develop branches from there.
Represent decision points with squares.
Represent outcome points with circles.
For expected value problems, calculate the financial results for each of the smaller branches and move backward by calculating weighted averages for the branches based on their probabilities
Example 6.3 – Ellison Seafood Company
Figure 6.4 Decision Tree for Transportation Decision
Methods of Evaluating Capacity Alternatives (6 of 8)
Break-even analysis
Break-even point – The volume level for a business at which total revenues cover total costs.
Example 6.4 – Ellison’s Seafood Company
Ellison makes a $1,000 profit on each shipment before transportation costs are considered.
What is the break-even point for each shipping option?
Methods of Evaluating Capacity Alternatives (7 of 8)
Learning curve theory – A body of theory based on applied statistics which suggests that productivity levels can improve at a predictable rate as people and even systems “learn” to do tasks more efficiently.
For every doubling of cumulative output, there is a set percentage reduction in the amount of inputs required.
Example 6.5 – Service Call Center (1 of 2)
A video game producer has hired a new service technician to handle customer calls. The time it takes the new service technician to help the first, second, fourth, and eighth callers and the resulting productivity figures are shown below:
Learning Rate 4/5 = 80% or .80
| Call | Time for Call | Productivity |
| 1 | 5.00 minutes | 0.20 calls per minute |
| 2 | 4.00 minutes | 0.25 calls per minute |
| 4 | 3.20 minutes | 0.31 calls per minute |
| 8 | 2.56 minutes | 0.39 calls per minute |
Example 6.5 – Service Call Center (2 of 2)
Estimate the time it will take her to handle her 25th call:
Figure 6.6 Eighty Percent Learning Curve for Service Technician
Methods of Evaluating Capacity Alternatives (8 of 8)
Other Considerations:
The strategic importance of an activity to a firm
The desired degree of managerial control.
The need for flexibility.
Understanding and Analyzing Process Capacity (1 of 6)
Theory of Constraints – An approach to visualizing and managing capacity which recognizes that nearly all products and services are created through a series of linked processes, and in every case, there is at least one process step that limits throughput for the entire chain.
Figure 6.7 Throughput of a “Pipeline” is Determined by the Smallest “Pipe”
Understanding and Analyzing Process Capacity (2 of 6)
Figure 6.8 Throughput is Controlled by the Constraint, Process 3
Understanding and Analyzing Process Capacity (3 of 6)
Theory of Constraints
Identify the constraint
Exploit the constraint
Subordinate everything to the constraint
Elevate the constraint
Find the new constraints and repeat the steps
Example 6.6 – Tracy’s Hair Salon (1 of 4)
Tracy’s Hair Salon follows a three-step process in serving its customers.
First the customer is shampooed, next a stylist cuts and styles the customer’s hair. Finally, the customer pays $25 to the cashier.
There is one shampooer, one stylist, and one cashier.
Table 6.5 Capacity and Cost Data for Workers at Tracy’s Hair Salon
| blank | Shampoo | Cut and Style | Collect Money |
| Average processing time per customer | 10 minutes | 15 minutes | 3 minutes |
| Effective capacity per worker | 6 per hour | 4 per hour | 20 per hour |
| Labor cost per worker | $15 per hour | $20 per hour | $10 per hour |
Example 6.6 – Tracy’s Hair Salon (2 of 4)
Current Process
Figure 6.9 Tracy’s Hair Salon, Current Process
Example 6.6 – Tracy’s Hair Salon (3 of 4)
Adding a Second Stylist
Figure 6.10 Tracy’s Hair Salon, Adding a Second Stylist
Example 6.6 – Tracy’s Hair Salon (4 of 4)
Adding One Shampooer and Two Stylists
Figure 6.11 Tracy’s Hair Salon, Adding One Shampooer and Two Stylists
Understanding and Analyzing Process Capacity (4 of 6)
Waiting Line Theory – A body of theory based on applied statistics that helps managers evaluate the relationship between capacity decisions and important performance issues such as waiting times and line lengths.
Figure 6.12 Single-Channel, Single-Phase System
Understanding and Analyzing Process Capacity (5 of 6)
Waiting Line Concerns at a Drive-up Window:
What percentage of the time will the server be busy?
On average, how long will a customer have to wait in line? How long will the customer be in the system (i.e., waiting and being served) ?
On average, how many customers will be in line?
How will these averages be affected by the arrival rate of customers and the service rate of the drive-up window personnel?
Understanding and Analyzing Process Capacity (6 of 6)
Arrivals: The probability of n arrivals in T time periods
Service Times: Assume that they will be constant or vary. When varying they use a specific distribution
Queuing Theory
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