CHAPTER 4
Strategic Capacity Management
Copyright © 2011 The McGraw-Hill Companies, All Rights Reserved
Learning Objectives
1.
2.
3.
4.
Recognize the concept of capacity and how
important it is to “manage” capacity.
Explain the impact of economies of scale on the
capacity of a firm.
Understand Decision Making considerations when
choosing a technique
Understand how to use decision trees to analyze
alternatives when faced with the problem of adding
capacity.
Capacity Management in Operations
• 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
Capacity Planning Time Durations
• Long range
• Intermediate range:
• Short range:
Economies and Diseconomies of Scale
• Economies of scale: as a business gets larger, the
average cost per unit drops
• Lower operating and capital costs
• Per unit cost of equipment drops
• More specialization of labor
• At some point, the business becomes too large
• Diseconomies of scale becomes a problem
LO 2
Other Factors That Affect Business Size
• Internal equipment
• Labor
• Capital expenditures
• Transportation costs
• Advantages of being close to markets
LO 2
Planning Service 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
LO 4
Capacity Utilization and
Service Quality
• Must consider the day-to-day relationship
between service utilization and service quality
• Optimal utilization rate is very context specific
• Low rates are appropriate when both the degree of
uncertainty and stakes are high
• Relatively predictable services or service facilities
without customer contact can operate much nearer 100
percent utilization
LO 4
DECISION MAKING
How Much Certainty exists?
Complete
• Break-even
• Calculus
• Linear Prog
• Integer Prog.
• Goal Prog.
•
Risk
decision theory
AOV
Queuing Theory
Decision Trees
Simulation
PERT and CPM
Extreme
• Game theory
• Coin Flip
Six-Step Problem-Solving Process
• Step 1: Identify and Select the problem
• Step 2: Analyze the problem
• Step 3: Generate Potential Solutions
• Step 4: Select and Plan the Solution
• Step 5: Implement the Solution
• Step 6: Evaluate the Solution
Using Decision Trees to Evaluate
Capacity Alternatives
• Decision tree: a schematic model of the sequence of
steps in a problem and the conditions and consequences
of each step
• Decision tree helps understand problem and helps find
solution
• Decision trees are composed of decision nodes with
branches
• Squares represent decision points
• Circles represent chance events
LO 3
Decision Trees
E1 [P(E1)]
Payoff 1
E2 [P(E2)]
E3 [P(E3)]
Payoff 2
Payoff 3
Alternative 3
1
1st
decision
= Event node
2
Ei = Event i
P(Ei) = Probability of event i
Payoff 2
Alternative 5
Payoff 3
Possible
2nd decision
E2 [P(E2)]
E3 [P(E3)]
= Decision node
Alternative 4
Payoff 1
Payoff 1
Payoff 2
Decision Trees
1
Decision Trees
Low demand [0.4]
$200
Don’t expand
$223
2
Expand
$270
1
Decision Trees
Low demand [0.4]
$200
Don’t expand
$223
2
Expand
$270
1
Do nothing
$40
3
Modest response [0.3]
Advertise
Sizable response [0.7]
High demand [0.6]
$800
$20
$220
Decision Trees
Low demand [0.4]
$200
Don’t expand
$223
2
Expand
$270
1
Do nothing
$40
3
Modest response [0.3]
Advertise
Sizable response [0.7]
High demand [0.6]
$800
$20
$220
Decision Trees
Low demand [0.4]
$200
Don’t expand
$223
2
Expand
$270
1
0.3(20) + 0.7(220)
Do nothing
$40
3
Modest response [0.3]
Advertise
Sizable response [0.7]
High demand [0.6]
$800
$20
$220
Decision Trees
Low demand [0.4]
$200
Don’t expand
$223
2
Expand
$270
1
0.3(20) + 0.7(220)
Do nothing
$40
3
Modest response [0.3]
Advertise
Sizable response [0.7]
$160
High demand [0.6]
$800
$20
$220
Decision Trees
Low demand [0.4]
$200
Don’t expand
$223
2
Expand
$270
$270
1
Do nothing
$40
3
Modest response [0.3]
Advertise
$160
Sizable response [0.7]
$160
High demand [0.6]
$800
$20
$220
Decision Trees
Low demand [0.4]
$200
Don’t expand
$223
2
Expand
$270
$270
1
Do nothing
$40
3
Modest response [0.3]
Advertise
$160
Sizable response [0.7]
($160)
High demand [0.6]
$800
$20
$220
Decision Trees
Low demand [0.4]
$200
0.4(200) + 0.6(270)
Don’t expand
$223
2
Expand
$270
$270
1
Do nothing
$40
3
Modest response [0.3]
Advertise
$160
Sizable response [0.7]
0.4(160)($160)
+ 0.6(800)
High demand [0.6]
$800
$20
$220
Decision Trees
Low demand [0.4]
$200
0.4(200) + 0.6(270)
Don’t expand
$242
$223
2
Expand
$270
$270
1
Do nothing
$40
3
Modest response [0.3]
Advertise
$160
Sizable response [0.7]
0.4(160)($160)
+ 0.6(800)
$544
High demand [0.6]
$800
$20
$220
Decision Trees
Low demand [0.4]
$200
Don’t expand
$242
$223
2
Expand
$270
$270
1
Do nothing
$40
$544
3
Advertise
$160
Sizable response [0.7]
$160
$544
Modest response [0.3]
High demand [0.6]
$800
$20
$220
Decision Trees
Low demand [0.4]
$200
Don’t expand
$242
$223
2
Expand
$270
$270
1
Do nothing
$40
$544
3
Advertise
$160
Sizable response [0.7]
$160
$544
Modest response [0.3]
High demand [0.6]
$800
$20
$220
ANY QUESTIONS?