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Chapter 10
Strategic Capacity Planning

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OBJECTIVES
Strategic Capacity Planning Defined
Capacity Utilization & Best Operating
Level
Economies & Diseconomies of Scale
The Experience Curve
Capacity Focus, Flexibility & Planning
Determining Capacity Requirements
Decision Trees
Capacity Utilization & Service Quality
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Strategic Capacity Planning

Defined
Capacity can be defined as the ability to
hold, receive, store, or accommodate
Strategic capacity planning is an
approach for determining the overall
capacity level of capital intensive
resources, including facilities, equipment,
and overall labor force size
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Capacity Utilization
Capacity used
Capacity utilization rate
Best operating level
Where
Capacity used

rate of output actually achieved

Best operating level

capacity for which the process was designed

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Best Operating Level

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

Average
unit cost
of output
Underutilization

Overutilization
Best Operating
Level

Volume

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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 isis this
this plants
plants capacity
capacity
utilization
utilization rate?
rate?

Answer:
Answer:

Capacity
Capacity
Capacityutilization
utilizationrate
rate==
Capacityused
used ..
Best
Best operating
operating level
level
==83/120
83/120
=0.69
=0.69or
or 69%
69%
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Economies & Diseconomies of Scale

Economies
Economiesof
ofScale
Scaleand
andthe
theExperience
ExperienceCurve
Curveworking
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
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The Experience
Curve

As
Asplants
plantsproduce
producemore
moreproducts,
products,they
they
gain
gainexperience
experiencein
inthe
thebest
bestproduction
production
methods
methodsand
andreduce
reducetheir
theircosts
costsper
perunit
unit

Yesterday

Cost or
price
per unit

Today
Tomorrow

Total accumulated production of units

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10

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) (from
Skinner)

Extend focus concept to operating level

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Capacity Flexibility
Flexible plants

Flexible processes

Flexible workers
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Capacity Planning: Balance

Unbalanced
Unbalancedstages
stagesof
ofproduction
production

Units
per
month

Stage 1

Stage 2

Stage 3

6,000
7,000
5,000
Maintaining System Balance: Output of one stage is the
exact input requirements for the next stage
Balanced
Balancedstages
stagesof
ofproduction
production

Units
per
month

Stage 1

Stage 2

6,000

6,000

Stage 3
6,000
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Capacity Planning
Frequency of Capacity Additions

External Sources of Capacity

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Determining Capacity Requirements

1. Forecast sales within each individual
product line
2. Calculate equipment and labor
requirements to meet the forecasts
3. Project equipment and labor
availability over the planning horizon
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Example of Capacity Requirements

A manufacturer produces two lines of
mustard, FancyFine and Generic line. Each is
sold in small and family-size plastic bottles.
The following table shows forecast demand
for the next four years.
Year:
FancyFine
Small (000s)
Family (000s)
Generic
Small (000s)
Family (000s)

50
35

60
50

80
70

100
90

100
80

110
90

120
100

140
110

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Example of Capacity Requirements

(Continued): Product from a Capacity
Viewpoint
Question:
Question:Are
Arewe
we really
really producing
producing two
two
different
different types
types of
of mustards
mustards from
from the
the standpoint
standpoint
of
of capacity
capacity requirements?
requirements?
Answer:
Answer: No,
No, its
itsthe
the same
same product
product just
just
packaged
packaged differently.
differently.

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Example of Capacity Requirements

(Continued) : Equipment and Labor
Requirements
Year:
Small (000s)
Family (000s)

1
150
115

2
170
140

3
200
170

4
240
200

Three 100,000 units-per-year machines are available

for small-bottle production. Two operators required
per machine.
Two 120,000 units-per-year machines are available
for family-sized-bottle production. Three operators
required per machine.
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Question:
Question:What
Whatare
arethe
theYear
Year11values
valuesfor
forcapacity,
capacity,machine,
machine,
and
andlabor?
labor?

Year:
Small (000s)
Family (000s)

1
150
115

2
170
140

3
200
170

4
240
200

Small
Mach. Cap.
300,000
Labor
6
Family-size
Mach. Cap.
240,000
Labor
6
150,000/300,000=50%
At 1 machine for 100,000, it
Small
takes 1.5 machines for 150,000
Percent capacity used
50.00%
Machine requirement
1.50
Labor requirement
3.00
At 2 operators for
Family-size
100,000, it takes 3
operators for 150,000
Percent capacity used
47.92%
Machine requirement
0.96
Labor requirement
2.88
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Question:
Question:What
Whatare
arethe
thevalues
valuesfor
forcolumns
columns2,
2,33and
and44in
inthe
thetable
tablebelow?
below?

Year:
Small (000s)
Family (000s)
Small
Family-size
Small
Percent capacity used
Machine requirement
Labor requirement
Family-size
Percent capacity used
Machine requirement
Labor requirement

1
150
115

2
170
140

3
200
170

4
240
200

Mach. Cap.
Mach. Cap.

300,000
240,000

Labor
Labor

6
6

50.00% 56.67%
1.50 1.70
3.00 3.40

66.67%
2.00
4.00

80.00%
2.40
4.80

47.92% 58.33%
0.96 1.17
2.88 3.50

70.83%
1.42
4.25

83.33%
1.67
5.00

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20

Example of a Decision Tree Problem

AAglass
glassfactory
factoryspecializing
specializingin
incrystal
crystalis
isexperiencing
experiencingaa
substantial
substantialbacklog,
backlog,and
andthe
thefirm's
firm'smanagement
managementis
is
considering
consideringthree
threecourses
coursesof
ofaction:
action:
A)
A) Arrange
Arrangefor
forsubcontracting
subcontracting
B)
B) Construct
Constructnew
new facilities
facilities
C)
C) Do
Donothing
nothing(no
(nochange)
change)
The
Thecorrect
correctchoice
choicedepends
dependslargely
largelyupon
upondemand,
demand,which
which
may
maybe
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
and0.4.
0.4.

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Example of a Decision Tree Problem

(Continued): The Payoff Table
The
The management
management also
also estimates
estimates the
the profits
profits
when
when choosing
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
levels of
of
demand.
demand. These
These profits,
profits, in
in thousands
thousands of
of dollars
dollars
are
are presented
presented in
in the
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
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Example of a Decision Tree Problem

(Continued): Step 1. We start by drawing
the three decisions
A
B
C

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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
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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

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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
choiceis
isBBor
orto
toconstruct
constructaanew
newfacility
facility
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Planning Service Capacity vs.

Manufacturing Capacity
Time: Goods can not be stored for later use and
capacity must be available to provide a service
when it is needed
Location: Service goods must be at the
customer demand point and capacity must be
located near the customer
Volatility of Demand: Much greater than in
manufacturing
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Capacity Utilization &

Service Quality
Best operating point is near 70% of capacity

From 70% to 100% of service capacity, what do

you think happens to service quality?

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End of Chapter 10

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