Business operating management summary

Yuzhi Zhao

chapter10.pptx

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Capacity Management

COLLIER/EVANS

Operations + Supply Chain Management

LEARNING OUTCOMES

Explain the concept of capacity

Describe how to compute and use capacity measures

Describe long-term capacity expansion strategies

Describe short-term capacity adjustment strategies

Explain the principles and logic of the Theory of Constraints

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Capacity

LO 10-1

Capability of a manufacturing or service resource to accomplish its purpose over a specified time period

Viewed as maximum rate of output per unit of time or units of resource availability

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Exhibit 10.1

Examples of Short- and Long-Term Capacity Decisions

LO 10-1

Exhibit 10.1 Examples of Short- and Long-Term Capacity Decisions

Short-Term Capacity Decisions	Long-Term Capacity Decisions
Amount of overtime scheduled for the next week Number of emergency room nurses on call during a downtown festival weekend Number of call center workers to staff during the holiday season	Construction of a new manufacturing plant Expanding the size and number of beds in a hospital Number of branch banks to establish in a new market territory

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Economies and Diseconomies of Scale

LO 10-1

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Focused Factory

LO 10-1

Achieves economies of scale without extensive investments in facilities and capacity by focusing on:

Narrow range of goods or services

Target market segments

Dedicated processes

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Safety Capacity (or Capacity Cushion)

LO 10-2

Amount of capacity reserved for unanticipated events

Demand surges

Materials shortages

Equipment breakdowns

Average safety capacity (%)

= 100% − Average resource utilization (%)

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Exhibit 10.2

Demand versus Capacity Problem Structure

LO 10-2

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Work Order

LO 10-2

Specification of work to be performed for a customer or a client

Includes

Quantity to be produced

Processing requirements

Resources needed

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Capacity Measurement, Part 1

LO 10-2

Capacity required for one work order (Ci)

= Setup time (Si) + [Processing time (Pi) x order size (Qi)]

Where

Ci = Capacity requirements in units of time for work order i

Si = Setup or changeover time for work order i as a fixed amount that does not vary with volume

Pi = Processing time for each unit of work order i

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Capacity Measurement, Part 2

LO 10-2

Qi = Size of order i in number of units

Total capacity required

ΣCi = Σ[Si + (Pi x Qi)]

Resources used (capacity) = Utilization (U) × [service rate × number of servers]

Where

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Long-Term Capacity Planning

LO 10-3

Addresses the trade-off between the cost of capacity and the opportunity cost of not having adequate capacity

Complementary goods and services: Produced or delivered using the same resources available to the firm

Seasonal demand patterns of the resources are out of phase with each other

Balance seasonal demand cycles by using available excess capacity

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Exhibit 10.6

Capacity Expansion Options

LO 10-3

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Short-Term Capacity Management

LO 10-4

Approaches

Adjusting short-term capacity levels

Shifting and stimulating demand

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Adjusting Short-Term Capacity Levels

LO 10-4

Add or share equipment

Sell unused capacity

Change labor capacity and schedules

Change labor skill mix

Shift work to slack periods

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Shifting and Stimulating Demand

LO 10-4

Vary the price of goods or services

Provide customers with information

Advertising and promotion

Add peripheral goods and/or services

Provide reservations

Reservation: Promise to provide a good or service at some future time and place

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Revenue Management System (RMS)

LO 10-4

Consists of dynamic methods to:

Forecast demand

Allocate perishable assets across market segments

Decide when to overbook and by how much

Determine what price to charge different customer (price) classes

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Theory of Constraints (TOC)

LO 10-5

Focuses on increasing total process throughput by maximizing the utilization of bottleneck work activities and workstations

Throughput: Amount of money generated per time period through actual sales

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Constraint

LO 10-5

Anything that limits an organization from moving toward or achieving its goal

Physical constraint: Associated with the capacity of a resource

Bottleneck (BN) work activity: Effectively limits the capacity of the entire process

Nonbottleneck (NBN) work activity: One in which idle capacity exists

Nonphysical constraint: Associated with the environment or organization

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Exhibit 10.7

Basic Principles of the Theory of Constraints

LO 10-5

EXHIBIT 10.7 Basic Principles of the Theory of Constraints

Nonbottleneck Management Principles

Bottleneck Management Principles

Move jobs through nonbottleneck workstations as fast as possible until the job reaches the bottleneck workstation. At nonbottleneck workstations, idle time is acceptable if there is no work to do, and therefore resource utilizations may be low. Use smaller order {also called lot or transfer batches) sizes at nonbottleneck workstations to keep work flowing to the bottleneck resources and eventually to the marketplace to generate sales. An hour lost at a nonbottleneck resource has no effect on total process or factory output and incurs no real cost.

Only the bottleneck workstations are critical to achieving process and factory objectives and should be scheduled first. An hour lost at a bottleneck resource is an hour lost for the entire process or factory output. Work-in-process buffer inventory should be placed in front of bottlenecks to maximize resource utilization at the bottleneck. Use large order sizes at bottleneck workstations to minimize setup time and maximize resource utilization. Bottleneck workstations should work at all times to maximize throughput and resource utilization so as to generate cash from sales and achieve the company's goal

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KEY TERMS

Capacity

Economies of scale

Diseconomies of scale

Focused factory

Safety capacity (or capacity cushion)

Work order

Complementary goods and services

Reservation

Revenue management system (RMS)

Theory of Constraints

Throughput

Constraint

Physical constraint

Bottleneck (BN) work activity

Nonbottleneck (NBN) work activity

Nonphysical constraint

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SUMMARY

Capacity is the capability of a manufacturing or service system to accomplish its purpose over a specified time period

Long-term capacity planning involves adjusting short-term capacity levels and shifting and stimulating demand

Utilization of bottleneck work activities and workstations helps increase the total process throughput

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4LTR Press

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