Capacity Planning – Important Points – Summary – Krajewski – 12th Edition

Long-Term Capacity

  • Define long-term capacity and its relationship with economies and diseconomies of scale.
Capacity Timing and Sizing Strategies
  • Understand the main differences between the expansionist and wait-and-see capacity timing and sizing strategies.
A Systematic Approach to Long-Term Capacity Decisions
  • Identify a systematic four-step approach for determining long-term capacity requirements and associated cash flows.
Tools for Capacity Planning
  • Describe how the common tools for capacity planning such as waiting-line models, simulation, and decision trees assist in capacity decisions.

Chapter 4. CAPACITY PLANNING

Tesla Motors

Planning Long-Term Capacity

Long-term capacity plans deal with investments in new facilities and equipment at the organizational
level and require top management participation and approval because they are not easily reversed.These plans cover at least two years into the future, but construction lead times can sometimes be longer and result in longer planning time horizons.

Measures of Capacity and Utilization
Economies of Scale
Diseconomies of Scale

In general, capacity can be expressed in one of two ways: in terms of output measures or input measures.

Output measures of capacity are best utilized when applied to individual processes within the firm or when the firm provides a relatively small number of standardized services and products.

Input measures are generally used for low-volume, flexible processes, such as those associated with a custom furniture maker. In this case, the furniture maker might measure capacity in terms of inputs such as number of workstations or number of workers.
A concept known as economies of scale states that the average unit cost of a service or good can be reduced by increasing its output rate. Four principal reasons explain why economies of scale can drive costs down when output increases: (1) Fixed costs are spread over more units; (2) construction costs are reduced; (3) costs of purchased materials are cut; and (4) process advantages are found.
Bigger is not always better, however. At some point, a facility can become so large that diseconomies of scale set in; that is, the average cost per unit increases as the facility’s size increases. The reason is
that excessive size can bring complexity, loss of focus, and inefficiencies that raise the average unit
cost of a service or product.

Capacity Timing and Sizing Strategies

Sizing Capacity Cushions
Businesses find large cushions appropriate when demand varies.
Timing and Sizing Expansion
Linking Capacity and Other Decisions

Three dimensions of capacity strategy decisions: (1) sizing capacity cushions, (2) timing and sizing expansion, and (3) linking process capacity and  other operating decisions.

The capacity cushion is the amount of reserve capacity a process uses to handle sudden increases in demand or temporary losses of production capacity; it measures the amount by which the average utilization (in terms of total capacity) falls below 100 percent.

Capacity cushion, C = 100% – Average Utilization rate %

In the capital-intensive industries where machines can cost hundreds of millions of dollars each, cushions well under 10 percent are preferred. The less capital-intensive  industries 30 to 40% cushions are used. These industries begin to suffer customer-service problems when the cushion drops to  20 percent.
Two sides of range of strategies for expanding capacity: the expansionist strategy involves large, infrequent jumps in capacity, and the wait-and-see strategy  involves smaller, more frequent jumps.
Several factors favor the expansionist strategy. Big plant expansion can give economies of scale and a faster rate of learning if production increases, thus helping a firm reduce its costs and compete on price.

The conservative wait-and-see strategy is to expand in smaller increments,  such as debottlenecking,  use of overtime to meet increase in demand, temporary workers, subcontracting or outsourcing,  and the postponement of preventive maintenance on equipment to cater to increased demand and additions of smaller plants. Wait and see strategy is used when managers feel there is risk of overexpansion based on overly optimistic demand forecasts based on sharp increase in demand in the recent period, when obsolete technology has to be used in case of expansion decisions, or they suspect inaccuracies in understanding the competitors’ strategies.

Capacity decisions related to cushions and expansions have relations or links with process issues in internal operations and external supply chains. They have to be assessed and appropriate changes are to be done.

A Systematic Approach to Long-Term Capacity Decisions

Long-term decisions for capacity would typically include whether to add a new plant or warehouse or to reduce the number of existing ones, how many workstations a given department should have, or how many workers are needed to staff a given process.

Four steps of the systematic process

Step 1: Estimate Capacity Requirements

A process’s capacity requirement is  capacity  for some future time period to meet the forecasted demand of the firm’s customers (external or internal), given the firm’s desired capacity  cushion. The estimation or forecasting  of demand, productivity, competition, and technological change are to be made to estimate capacity requirement. Long-term capacity plans (big expansions) need to consider more future years (perhaps, a whole decade) than do short-term plans.

Step 2: Identify Gaps

A capacity gap in any process, operation or work center is any difference (positive or negative) between projected capacity requirements (M) and current capacity.

Step 3: Develop Alternatives

To solve any problem, managers have to develop alternatives. Search and creative processes are to be employed  to develop alternative plans to cope with projected gaps. A range of alternatives between the expansionist and wait-and-see strategies are to be developed.

Step 4: Evaluate the Alternatives

Quantitative evaluation:  Cash flows (outflows and inflows) are to be estimated  for each alternative over the forecast time horizon compared to the base case. . The operations manager is concerned here only with calculating the cash flows attributable to the project proposed as an alternative.

Qualitative evaluation: Qualitatively, the manager looks at how each alternative fits the overall capacity strategy and other aspects of the business not covered by the financial analysis. Of particular concern might be  competitive reaction. Qualitative factors must be assessed on the basis of judgment and experience.

Tools for Capacity Planning
Managerial Practice 4.1 Capacity Planning at PacifiCorp
Waiting-Line Models

Waiting-line models use probability distributions based on observations of working of the company facilities to provide estimates of average customer wait time, average length of waiting lines, and utilization of the work center for existing system and proposed alternatives. Managers can use this information to choose the most cost-effective capacity, balancing customer service and the cost of adding capacity.

Simulation

In case, required probability distributions based on observations of working of the company facilities cannot be estimated, the waiting-line model be analyzed with simulation based on frequency table data. . It can identify the process’s bottlenecks, surges in demand, resulting customer wait times and capacity utilization. .  Simulation packages include: found with Extend, Simprocess, ProModel, SimQuick and Witness.

Decision Trees

A decision tree can be particularly valuable for evaluating different capacity expansion alternatives
when demand is uncertain and sequential decisions are involved.

Learning Goals in Review
Video Case Gate Turnaround at Southwest Airlines
Case Fitness Plus, Part A

Index to Summaries of all Chapters of Krajewski’s Book

Operations Management – Krajewski – 12th Edition – Chapter Summaries – Important Points

Strategic Capacity Management – Operations Management Review Notes – Chase et al. Book

Operations Management – Chase et al. Book – Review Notes – List of Chapters

SUPPLEMENT B Waiting Lines
Structure of Waiting-Line Problems
Customer Population
The Service System
Priority Rule
Probability Distributions
Arrival Distribution
Service Time Distribution
Using Waiting-Line Models to Analyze Operations
Single-Server Model
Multiple-Server Model
Little’s Law
Finite-Source Model
Waiting Lines and Simulation
SimQuick
Decision Areas for Management
Learning Goals in Review 174