Chapter 5

51
Chapter Five
McGraw-Hill/Irwin Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
52
Copyright 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
LO51: Explain what capacity management is
and why it is strategically important.
LO52: Exemplify how to plan capacity.
LO53: Evaluate capacity alternatives using

decision trees.
LO54: Compare capacity planning in services

to capacity planning in manufacturing
53
The Economics of Very Big Ships
Economy of Container Ships
Allows a T-shirt made in China to be sent to the
Netherlands for just 2.5 cents.
The Eleonora Maersk and the other seven ships in her
class are among the largest ever built:
Almost 400 m long, or the length of four soccer fields,
and another half-field across.
The ships can carry 7,500 or so 40-foot containers, each
of which can hold 70,000 T-shirts.
On this voyage, the Eleonora was carrying supplies
for Europes New Year celebrations: 1,850 tons of
fireworks, including 30 tons of gunpowder.
54
Capacity the ability to hold, receive,
store, or accommodate
In business, viewed as the amount of

output that a system is capable of
achieving over a specific period of time
Capacity management needs to consider

both inputs and outputs
55
Long range
Greater than one year
Intermediate range
Monthly or quarterly plans covering the next 6 to

18 months
Short range
Less than one month
56
Determining the overall level of
capacity-intensive resources that best
supports the companys long-range
competitive strategy
Facilities
Equipment
Labor force size
57
Capacity utilization rate a measure of how
close the firm is to its best possible operating
level
Economies of scale the idea that as a planet

gets larger and volume increases, the average
cost per unit tends to drop
Diseconomies of scale at some point, the plant
becomes too large and average cost per unit
begins to increase
58
Capacity focus the idea that a production
facility works best when it is concentrated on a
limited set of production objectives
Focused factory or plant within a plant (PWP)
concept
Capacity flexibility the ability to rapidly
increase or decrease product levels or the ability
to shift rapidly from one product or service to
another
Comes from the plant, processes, and workers or
from strategies that use the capacity of other
organizations
59
Flexible Ability to quickly adapt to change
Plants Zero-changeover time
Flexible Flexible manufacturing systems

Processes Simple, easily set up equipment
Flexible Ability to switch from one kind of

task to another quickly
Workers Multiple skills (cross training)
510
Maintaining System Balance
Similar capacities desired at each operation

Manage bottleneck operations
Frequency of Capacity Additions
Cost of upgrading too frequently

Cost of upgrading too infrequently
External Sources of Capacity
Outsourcing
Sharing capacity
Decreasing Capacity
Temporary reductions
Permanent reductions
511
512
Project labor and
Use forecasting Calculate labor
equipment
to predict sales and equipment
availability over
for individual requirements to
the planning
products meet forecasts
horizon
513
Stewart Company produces two flavors
of salad dressing.
Pauls and Newmans
Each is available in bottles and single-

serving bags.
What are the capacity and labor

requirements for the next five years?
514
Step 1: Use forecasting to predict Year
sales for individual products 1 2 3 4 5
Bottles (000s) 60 100 150 200 250
Pauls
Plastic bags (000s) 100 200 300 400 500
Bottles (000s) 75 85 95 97 98
Newmans
Plastic bags (000s) 200 400 600 650 680
515
Step 2: Calculate equipment Year
and labor requirements 1 2 3 4 5
Bottles (000s) 135 185 245 297 348
Plastic bags (000s) 300 600 900 1050 1180
Bottling Operation Bagging Operation

516
Step 3: Project equipment Year
and labor availabilities 1 2 3 4 5
Percentage capacity
utilized 24 48 72 84 94
Plastic Bag
Operation Machine requirement 1.2 2.4 3.6 4.2 4.7
Labor requirement 3.6 7.2 10.8 12.6 14.1
Percentage capacity
utilized 30 41 54 66 77
Bottle
Operation Machine requirement 0.9 1.23 1.62 1.98 2.31
Labor requirement 1.8 2.46 3.24 3.96 4.62
For the Excel template visit

www.mhhe.com/sie-chase14e
Excel: Capacity
Requirements 517
A decision tree is a schematic model of the
sequence of steps in a problem including the
conditions and consequences of each step.
Decision trees help analysts understand the
problem and assist in identifying the best
solution.
Decision tree components include the following:
Decision nodes represented with squares
Chance nodes represented with circles
Paths links between nodes
518
The owner of Hackers Computer Store is evaluating
three options expand at current site, expand to a new
site, do nothing.
The decision process includes the following assumptions
and conditions.
Strong growth has a 55% probability
New site cost is $210,000
Payoffs: strong growth = $195,000; weak growth =
$115,000
Expanding current site cost is $87,000 (in either year 1 or 2)
$100,000
Do nothing
$105,000
519
Calculate the value of each alternative
520
Decision
Events
Decision
Diagram the problem chronologically
521
Calculate value of each branch
$765,000
$365,000
$863,000
$413,000
$843,000
$850,000
$525,000
522
Work backwards to calculate the value of each
decision/event
$765,000
$365,000
Do nothing has higher
value than expand, so
$660,500 $863,000
choose to do nothing
$413,000
Do nothing = $703,750
$843,000
Do nothing has higher Do nothing = $850,000
$703,750
value than expand or $850,000
move, so choose to do
nothing $525,000
523
Decision tree analysis with net present value
calculations
Excel: Decision
Trees
For the Excel template visit
www.mhhe.com/sie-chase14e
524
Manufacturing Service
Capacity Capacity
Capacity must be available
Goods can be stored for later
when service is needed
use.
cannot be stored.
Goods can be shipped to Service must be available at

other locations. customer demand point.
Volatility of demand is Much higher volatility is

relatively low. typical.
525
The relationship between service capacity
utilization and service quality is critical.
Utilization is measured by the portion of time
servers are busy.
Optimal levels of utilization are context specific.

Low rates are appropriate when the degree of
uncertainty (in demand) is high and/or the stakes
are high (e.g., emergency rooms, fire departments).
Higher rates are possible for predictable services or
those without extensive customer contact (e.g.,
commuter trains, postal sorting).
526
Rate of service utilization and service quality
are directly linked. Service quality
declines disruptions
Arrivals exceed or high arrival levels
services many lead to long wait times
customers are never
served
Sufficient capacity to
provide quality
service
527

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51

LO52: Exemplify how to plan capacity.

LO53: Evaluate capacity alternatives using

LO54: Compare capacity planning in services

In business, viewed as the amount of

Capacity management needs to consider

Greater than one year

Monthly or quarterly plans covering the next 6 to

Less than one month

Economies of scale the idea that as a planet

Flexible Flexible manufacturing systems

Flexible Ability to switch from one kind of

Similar capacities desired at each operation

Frequency of Capacity Additions

Cost of upgrading too frequently

External Sources of Capacity

Each is available in bottles and single-

What are the capacity and labor

Bottling Operation Bagging Operation

For the Excel template visit

Goods can be shipped to Service must be available at

Volatility of demand is Much higher volatility is

Optimal levels of utilization are context specific.

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