1 om3 chapter 10 capacity management © 2012 cengage learning. all rights reserved. may not be...

1OM3 Chapter 10  Capacity Management© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CAPACITY MANAGEMENT

CHAPTER 10

DAVID A. COLLIER AND JAMES R. EVANS

2OM3 Chapter 10  Capacity Management© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 10 CAPACITY MANAGEMENT

LO1 Explain the concept of capacity.

LO2 Describe how to compute and use capacity measures.

LO3 Describe long-term capacity expansion strategies.

LO4 Describe short-term capacity adjustment strategies.

LO5 Explain the principles and logic of the Theory of Constraints.

3OM3 Chapter 10  Capacity Management© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 10 CAPACITY MANAGEMENT

if there’s a downside to selling a product users

can’t live without, it’s that customers tend to be unforgiving when something goes wrong. That’s a lesson BlackBerry maker Research In Motion (RIM) Ltd., based in Waterloo, Ontario, learned in 2008 after the company’s popular wireless email service failed for about three hours—the second large-scale service disruption in less than a year—leaving so-called “Crackberry addicts” running for their desktop computers to read messages. Reports suggested the outage was related to RIM’s efforts to expand capacity at its central operating center as its subscriber base increased at the rate of one million new users every three months.

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CHAPTER 10 CAPACITY MANAGEMENT

Critics argue that RIM is more susceptible to major service failures because of its centralized network architecture. RIM designs servers that relay email from a company’s own server to a network operating center, where it is then handed off to a wireless carrier and beamed to a subscriber’s device. The advantage of such a centralized setup is that it gives RIM more control over the system and its security, even during an interruption. The downside, however, is that a major problem at the operating center such as inadequate server and backup capacity threatens to cascade throughout the entire system, turning a localized issue into a continent-wide mess.

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CHAPTER 10 CAPACITY MANAGEMENT

Have you ever experienced problems with a service because of inadequate labor or equipment capacity?

What do you think?

6OM3 Chapter 10  Capacity Management© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 10 CAPACITY MANAGEMENT

Understanding Capacity

• Capacity is the capability of a manufacturing or service resource such as a facility, process, workstation, or piece of equipment to accomplish its purpose over a specified time period.

7OM3 Chapter 10  Capacity Management© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 10 CAPACITY MANAGEMENT

Understanding Capacity

Capacity is determined by the resources available to the organization—facilities, equipment, and labor—how they are organized, and their efficiency as determined by specific work methods.

Capacity can be viewed in one of two ways:1. As the maximum rate of output per unit of

time, or2. As units of resource availability.

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CHAPTER 10 CAPACITY MANAGEMENT

Key Capacity Issues

• Can the facility, process, or equipment accommodate new goods and services and adapt to changing demand for existing goods and services?

• How large should facility, process, or equipment capacity be?

• When should capacity changes take place?

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CHAPTER 10 CAPACITY MANAGEMENT

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

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CHAPTER 10 CAPACITY MANAGEMENT

11OM3 Chapter 10  Capacity Management© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 10 CAPACITY MANAGEMENT

Solved Problem

An automobile transmission-assembly factory normally operates two shifts per day, five days per week. During each shift, 400 transmissions can be completed under ideal conditions. What is the capacity of this factory?Capacity = (2 shifts/day)(5 days/week) X

(400 tranmissions/shift) X (4 weeks/month)= 16,000 transmissions/month

12OM3 Chapter 10  Capacity Management© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 10 CAPACITY MANAGEMENT

Understanding Capacity

• Economies of scale are achieved when the average unit cost of a good or service decreases as the capacity and/or volume of throughput increases.

• Diseconomies of scale occur when the average unit cost of the good or service begins to increase as the capacity and/or volume of throughput increases.

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CHAPTER 10 CAPACITY MANAGEMENT

Understanding Capacity

• A focused factory is a way to achieve economies of scale without extensive investments in facilities and capacity by focusing on a narrow range of goods or services, target market segments, and/or dedicated processes to maximize efficiency and effectiveness.

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CHAPTER 10 CAPACITY MANAGEMENT

Capacity Measurement in Operations

• Safety capacity (often called the capacity cushion) is an amount of capacity reserved for unanticipated events, such as demand surges, materials shortages, and equipment breakdowns.Average safety capacity (%) = 100% − Average resource utilization % [10.1]

15OM3 Chapter 10  Capacity Management© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 10 CAPACITY MANAGEMENT

Exhibit 10.2 The Demand versus Capacity Problem Structure

16OM3 Chapter 10  Capacity Management© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 10 CAPACITY MANAGEMENT

Capacity Measurement in Job Shops

• In a job shop, setup time can be a substantial part of total system capacity.

Capacity Required (Ci) = Setup Time (Si) + [Processing Time (Pi) x Order Size (Qi)]= Si + [(Pi)(Qi )] [10.2]

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CHAPTER 10 CAPACITY MANAGEMENT

Exhibit 10.3 Dental Office Procedures and Times for Today

Solved Problem

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CHAPTER 10 CAPACITY MANAGEMENT

*Example computation:

C = å(Si + Pi × Qi) = 15 + 15 + (90 × 2) = 210 minutes, assuming a setup for each patient.

Solved ProblemExhibit 10.4 Dental Office Demand-Capacity Analysis

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CHAPTER 10 CAPACITY MANAGEMENT

Solved Problem

• A total of 610 minutes of work are scheduled during a 480-minute workday.

• Capacity shortage of 130 minutes.

• 21.3% of capacity used to set up and change over dental procedures.

• If setup times could be reduced by 50%, the capacity shortage would be only 65 minutes, requiring only one hour of overtime.

20OM3 Chapter 10  Capacity Management© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 10 CAPACITY MANAGEMENT

Long-Term Capacity Strategies

• Complementary goods and services can be produced or delivered using the same resources available to the firm, but whose seasonal demand patterns are out of phase with each other.

• Complementary goods or services balance seasonal demand cycles and therefore use the excess capacity available (see Exhibit 10.5).

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CHAPTER 10 CAPACITY MANAGEMENT

Exhibit 10.5 Seasonal Demand and Complementary Goods or Services

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CHAPTER 10 CAPACITY MANAGEMENT

23OM3 Chapter 10  Capacity Management© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 10 CAPACITY MANAGEMENT

Long-Term Capacity Strategies

• Capacity expansion strategies require determining: - Amount- Timing- Form of capacity changes.

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CHAPTER 10 CAPACITY MANAGEMENT

Long-Term Capacity Strategies

Four basic strategies:

1. One large capacity increase (Exhibit 10.6a).2. Small capacity increases that match

average demand (Exhibit 10.6b).3. Small capacity increases that lead demand

(Exhibit 10.6c).4. Small capacity increases that lag demand

(Exhibit 10.6d).

25OM3 Chapter 10  Capacity Management© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 10 CAPACITY MANAGEMENT

Exhibit 10.6 Capacity Expansion Options

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CHAPTER 10 CAPACITY MANAGEMENT

Short-Term Capacity Management

Adjust Short-Term Capacity Levels • Add or share equipment: Lease equipment as needed

or set up a partnership arrangement with capacity sharing. (Examples: Mainframe computers, CAT scanner, farm equipment)

• Sell unused capacity: Sell idle capacity to outside buyers and even competitors. (Examples: Computing capacity, perishable hotel rooms)

• Change labor capacity and schedules: Short-term changes in work force levels. (Examples: Overtime, extra shifts, temporary employees, outsourcing)

• Change labor skill mix: Hire the right people; cross-training.

• Shift work to slack periods (Example: Build up inventory during slack times and hold for peak demand times)

27OM3 Chapter 10  Capacity Management© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 10 CAPACITY MANAGEMENT

Short-Term Capacity Management

Shift and Stimulate Demand• Vary the price of goods or services (Examples:

Cheaper hotel rates on weekends; sales of overstocks)

• Provide customers with information (Example: Automated messages with best times to call or visit)

• Advertising and promotion (Examples: After-holiday sales, manufacturer or service coupons)

• Add peripheral goods and/or services (Examples: Movie theater rentals at off-peak times, extended service hours)

• Provide reservations: A promise to provide a good or service at some future time and place. (Examples: Hotels, airlines, surgeries)

28OM3 Chapter 10  Capacity Management© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 10 CAPACITY MANAGEMENT

Short Term Capacity Management

Revenue Management Systems• A revenue management system (RMS)

consists of dynamic methods to forecast demand, allocate perishable assets across market segments, decide when to overbook and by how much, and determine what price to charge different customer (price) classes.

• Examples: Managing overbooking in airlines, hotels, and cruise lines (yield management).

29OM3 Chapter 10  Capacity Management© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 10 CAPACITY MANAGEMENT

30OM3 Chapter 10  Capacity Management© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 10 CAPACITY MANAGEMENT

Theory of Constraints

The Theory of Constraints (TOC) is a set of principles that focuses on increasing total process throughput by maximizing the utilization of all bottleneck work activities and workstations.• Throughput: Amount of money

generated per time period through actual sales.

• Constraint: Anything that limits an organization from moving toward or achieving its goal.

31OM3 Chapter 10  Capacity Management© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 10 CAPACITY MANAGEMENT

Theory of Constraints

• A physical constraint is associated with the capacity of a resource (e.g., machine, employee).

• A bottleneck work activity is one that effectively limits capacity of the entire process.

• A nonbottleneck work activity is one in which idle capacity exists.

• A nonphysical constraint is environmental or organizational (e.g., low product demand or an inefficient management policy or procedure).

32OM3 Chapter 10  Capacity Management© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 10 CAPACITY MANAGEMENT

Exhibit 10.7 Basic Principles of the Theory of Constraints

33OM3 Chapter 10  Capacity Management© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER 10 CAPACITY MANAGEMENT

David Christopher, Orthopedic Surgeon, Case Study

1. What is the clinic’s current weekly workload?

2. Should the clinic hire more surgeons, and if so, how many?

3. What other options and changes could be made to maximize patient throughput and surgeries, and therefore revenue, yet not comprise on the quality of medical care?

4. What are your final recommendations? Explain your reasoning.