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Strategic Capacity Planning

Supply Chain
Management
Capacity Planning

determining the overall capacity level


of capital intensive resources
 capacity planning and determining the
capacity constraints, determines the
requirements of other inputs for the
program
 Too much capacity can be as
problematic as too little.


Importance of Capacity Decisions

2.
3.
4.
5.
6.
7.
8.

Impacts ability to meet future demands


Affects operating costs
Major determinant of initial costs
Involves long-term commitment
Affects competitiveness
Affects ease of management
Globalization adds complexity
Impacts long range planning

In-House or Outsourcing
Outsource: obtain a good or service from an
external provider
1.
2.
3.
4.
5.
6.

Available capacity
Expertise
Quality considerations
Nature of demand
Cost
Risk

1.
2.
3.
4.
5.
6.
7.
8.

Estimate future capacity requirements


Evaluate existing capacity
Identify alternatives
Conduct financial analysis
Assess key qualitative issues
Select one alternative
Implement alternative chosen
Monitor results

Capacity planning and control


Measure aggregate capacity
and demand

Identify the alternative


capacity plans

Choose the most


appropriate capacity plan

Aggregated output

1.

Steps for Capacity Planning

Forecast demand

Estimate of current capacity

Time

Good forecasts are essential for effective


capacity planning
but so is an understanding of demand uncertainty, because it allows
you to judge the risks to service level

Operating equipment effectiveness (OEE)


A method of judging the effectiveness of how
operations equipment is used.

Only 5% chance of demand


being higher than this

Not worked
(unplanned)

Loading time

Distribution of demand

DEMAND

DEMAND

Total operating time

Only 5% chance of demand


being lower than this

When demand uncertainty is high, the risks to service level of underprovision of capacity are high

How capacity and demand are measured


Efficiency =

Actual output
Effective capacity

Breakdown
failure
Equipment
idling

Quality
losses

Performance rate = p
= net operating time/
total operating time

Quality rate = q
=valuable operating time/
net operating time

Quality
losses

Capacity cushion
Capacity Cushion
 The

amount of reserved capacity that a firm


maintains to handle sudden increases in
demand or temporary losses of production
capacity.

Avoidable loss
58 hours per
week

109 hours
per week

Utilization=

Set-up and
changeovers

Slow-running
equipment

Valuable
operating
time

Planned loss
of 59 hours

Effective
capacity
168 hours
per week

Speed
losses

TIME

TIME

Design
capacity

Net operating time

Availability
losses

Availability rate = a
= total operating time/
loading time

Actual output
51 hours per
week

Capacity Cushion = 1 - Utilization

Actual output
Design capacity

Efficiency/Utilization Example

Best Operating Level (Design Capacity)


Example:
Example:Engineers
Engineersdesign
designengines
enginesand
andassembly
assemblylines
linesto
to
operate
operateat
atan
anideal
idealor
orbest
bestoperating
operatinglevel
levelto
tomaximize
maximize
output
outputand
andminimize
minimize wear
wear

Design capacity = 50 trucks/day


Effective capacity = 40 trucks/day
Actual output = 36 units/day
Actual output

Efficiency =

36 units/day
= 90%

Effective capacity

40 units/ day

Average
unit cost
of output
Over-utilization

Underutilization

Utilization =

Actual output
Design capacity

36 units/day
50 units/day

Best Operating
Level

= 72%

Volume

Ways of reconciling capacity and demand

Demand
Capacity

Level capacity

Demand

Demand

Capacity

Capacity

Chase demand

Capacity Expansion Strategies

Demand
management

Capacity Expansion Strategies..

Capacity Expansion Strategies




1. Demand leading strategy (excess capacity)


2. Demand Trailing strategy (maximum capacity
utilization)
3. Demand matching strategy (Balanced capacity)
4. Steady expansion strategy (steady expansion)

Demand leading (excess capacity)


+ can accommodate new/unexpected
demand
+ can provide quick response and delivery
+ low overtime & subcontracting costs
- high cost of unused capacity
Note: + = advantages

- = disadvantages
Eg.:
Hotel industry (immediate need of rooms; if
substitute exists can lose sales), Furniture maker
(can people wait?), Restaurant, University

Demand trailing (maximum capacity


utilization)
minimizes facility & equipment costs
cannot accommodate new or unexpected demand
slow response at peak times
high overtime and/or subcontracting costs
often forced to add capacity at peaks of business
cycles
- Loose sales

Note: (+) => advantages


( - ) => disadvantages

Demand matching strategy


+ balances capacity & other costs
+ provides reliable service & responsiveness
- must be able to predict demand well or
have constant demand
Note: (+) => advantages
( - ) => disadvantages

Steady expansion strategy


+ do not have to outguess competitors
+ price risk from adding capacity during peak
demand is reduced

Recognizing Bottleneck
200

400

100

200
200

- excess capacity can result if long term


demand falls short of expectations

100
200

Note: (+) => advantages


( - ) => disadvantages

400

400

100

Increasing Capacity
Recognize Bottlenecks!


Minimizing Capacity Constraints

A bottleneck is an operation that has the


lowest effective capacity of any operation
in the process and thus limits the systems
output.

Weaving
2000 m/hr

Printing
2000 m/hr

Weaving
2000 m/hr

Outsource during peak periods


 Keep bottleneck resources busy
 Use overtime/ part-time employees as
short term option
 Consider long term capacity expansion


Bleaching etc. Printing


2000 m/hr
2000 m/hr

Bleaching etc.
1000 m/hr

Capacity Analysis
Breakeven Analysis
 Decision Tree
 Net Present Value
 Internal Rate of Return
 Etc.


Decision Tree
AAglass
glassfactory
factoryspecializing
specializinginincrystal
crystalisisexperiencing
experiencingaa
substantial
substantialbacklog,
backlog,and
andthe
thefirm's
firm'smanagement
managementisisconsidering
considering
three
threecourses
coursesof
ofaction:
action:
A)
A) Arrange
Arrangefor
forsubcontracting
subcontracting
B)
B) Construct
Constructnew
newfacilities
facilities
C)
C) Do
Donothing
nothing(no
(nochange)
change)
The
Thecorrect
correctchoice
choicedepends
dependslargely
largelyupon
upondemand,
demand,which
whichmay
may
be
below,
low,medium,
medium,or
orhigh.
high. By
Byconsensus,
consensus,management
management
estimates
estimatesthe
therespective
respectivedemand
demandprobabilities
probabilitiesas
as0.1,
0.1,0.5,
0.5,and
and
0.4.
0.4.

Example of a Decision Tree Problem (Continued):


The Payoff Table

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

A
B
C

0.1
Low
10
-120
20

0.5
Medium
50
25
40

0.4
High
90
200
60

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)

High demand (0.4)


Medium demand (0.5)

Low demand (0.1)

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

$90k
$50k
$10k
$200k
$25k
-$120k

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 3. Determine the expected value of each decision

$62k
$62k
AA

High
Highdemand
demand(0.4)
(0.4)
Medium
Mediumdemand
demand(0.5)
(0.5)
Low
Lowdemand
demand(0.1)
(0.1)

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

$60k
$40k
$20k

Example of Decision Tree Problem (Continued):

Capacity Planning- The End

Step 4. Make decision


High demand (0.4)
Medium demand (0.5)

$62k
A
B

$80.5k

Low demand (0.1)


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

$90k
$50k
$10k
$200k
$25k
-$120k

C
High demand (0.4)

$46k

Medium demand (0.5)


Low demand (0.1)

$60k
$40k
$20k

Alternative
Alternative BBgenerates
generatesthe
thegreatest
greatestexpected
expectedprofit,
profit,so
so
our
ourchoice
choiceis
isBBor
orto
toconstruct
constructaanew
newfacility
facility

$90k
$90k
$50k
$50k
$10k
$10k