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
During one
one week
week of
of production,
production, aa plant
plant produced
produced 83
83
units
units of
of aa product.
product. Its
Its historic
historic highest
highest or
or best
best
utilization
utilization recorded
recorded was
was 120
120 units
units per
per week.
week. What
What is
is
this
this plants
plants capacity
capacity utilization
utilization rate?
rate?

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

Economies & Diseconomies of Scale

Economies
Economiesof
ofScale
Scaleand
and the
theExperience
ExperienceCurve
Curve
working
working

Average
unit cost
of output

100-unit
plant

200-unit
plant

300-unit
plant

400-unit
plant

Diseconomies
Diseconomiesof
ofScale
Scalestart
startworking
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)

Extend focus concept to

operating level

Capacity Flexibility
Flexible processes
Flexible workers
Flexible plants

Capacity Planning: Balance

Unbalanced
Unbalanced stages
stages of
of production
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
Balanced stages
stages of
of production
production
Units
per
month

Stage 1

Stage 2

6,000

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
Cumulative
Inflow

10
9

Cumulative
Outflow

8
7

Flow Time

Inventory

5
4
3
2

Inventory=Cumulative Inflow Cumulative Outflow

1
0

7:00

8:00

9:00

10:00

11:00

12:00

13:00

14:00

15:00

Time
16:00

17:00

Can be used in analyzing capacity issues!

18:00

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 Rate = Inventory / Flow Time =

10 Students / 5 minutes = 0.083 hour
= 120 students per hour

Flow Time = Inventory / Flow Rate =

35 passengers / 255 passengers per
hour = 0.137 hours

= 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

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

300

Time [minutes]

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

1/p

Capacity 0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1

Note further: and so does inventory

650

610

570

530

490

450

410

370

330

290

250

210

170

130

90

10

50

0.05
Batch Size

Process 1

Assembly process

Set-up time, S

120 minutes

Per unit time, p

2 minutes/unit

3 minutes/unit

Capacity (B=12)

0.0833 units/min

0.33 units/minute

Capacity (B=300)

0.4166 units/min

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)

Batch size = 300

120

120

12

12

300

300

0.083

0.333

0.417

0.333

20

25

20

Process Capacity
(per hour)

20

Capacity
0.5

1/p

0.45
0.4
0.35
Capacity of slowest
step other than the one
requiring set-up

0.3
0.25
0.2
0.15
0.1
0.05

Batch size is too small,

process capacity could be
increased (set-up step is
at the bottleneck)

650

610

570

530

490

450

410

370

330

290

250

210

170

90

130

50

10

Batch Size

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

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

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

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

Example of a Decision Tree Problem (Continued):

The Payoff Table
The
Themanagement
managementalso
alsoestimates
estimatesthe
theprofits
profitswhen
whenchoosing
choosingfrom
fromthe
the
three
threealternatives
alternatives(A,
(A,B,
B,and
andC)
C)under
underthe
thediffering
differingprobable
probablelevels
levels
of
ofdemand.
demand. These
Theseprofits,
profits,in
inthousands
thousandsof
ofdollars
dollarsare
arepresented
presentedin
in
the
thetable
tablebelow:
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)

High demand (0.4)

Medium demand (0.5)

Low demand (0.1)

High demand (0.4)

Medium demand (0.5)
Low demand (0.1)

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

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)

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

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

$80.5k

Medium demand (0.5)

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

High demand (0.4)

$46k

Medium demand (0.5)

Low demand (0.1)

$90k
$50k
$10k

$200k
$25k
-$120k
$60k
$40k
$20k

Alternative
AlternativeBBgenerates
generatesthe
thegreatest
greatestexpected
expectedprofit,
profit,so
so
our
ourchoice
choiceisisBBor
orto
toconstruct
constructaanew
newfacility
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
L: .8
S: .2

9,000

9,000
9,000

10,000
Large

10,000
Need large

9,000

Exp

Exp
Trade-in

L: .8
S: .2

13,500

6,000

9,200

Small

11,500
Trade-in
Need large
L: .8
S: .2
10,000

4,000

11,500