Amity Business School

Amity Business School

Amity
AmityBusiness
BusinessSchool
School
MBA
MBAGeneral
GeneralSemester
Semester22
Operations
OperationsManagement
Management
Dr.
Dr.Ranjit
RanjitRoy
RoyGhatak
Ghatak

OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 – 11
 Amity Business School
Amity Business School

CAPACITY MANAGEMENT

OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 – 22
 Amity Business School
Amity Business School

learning outcomes
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.

OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 – 33
 Amity Business School
Amity Business School

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.

OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 – 44
 Amity Business School
Amity Business School

Understanding Capacity
The resources available to the organization—facilities,
equipment, and labor—how they are organized, and
their efficiency as determined by specific work methods
and procedures determine capacity.
Capacity can be viewed in one of two ways:
1. As the maximum rate of output per unit of time, or
2. As units of resource availability.

OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 – 55
 Amity Business School
Amity Business School

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)(400

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

OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 – 66
 Amity Business School
Exhibit 10.1 Examples of Short- and Long-Term Capacity
Amity Decisions
Business School

OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 – 77
 Amity Business School
Amity Business School

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.

OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 – 88
 Amity Business School
Amity Business School

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.

OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 – 99
 Amity Business School
Amity Business School

Understanding Capacity
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]

OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 –10
10
 Amity Business School
Exhibit 10.2 The Demand versus Capacity
AmityProblem Structure
Business School

OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 –11
11
 Amity Business School
Amity Business School

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]
OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 –12
12
 Amity Business School
Amity Business School

Capacity Measurement in Job Shops

• Setup times normally represent a substantial
percentage of the total capacity of most job
shops. Every effort must be made to reduce
setup time to the lowest possible amount so as
to “free up capacity” for creating output.

OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 –13
13
 Amity Business School
Exhibit 10.3 Dental Office ProceduresAmity
and Times for Today
Business School

OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 –14
14
 Amity Business School
Exhibit 10.4 Dental Office Demand-Capacity Analysis
Amity Business School

*Example computation: C = Si + Pi × Qi) = 15 × 2 + 90 × 2 = 210 minutes, assuming a setup for each patient.

OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 –15
15
 Amity Business School
Amity Business School

Long-Term Capacity Strategies

• In developing a long-range capacity plan, a
firm must make the basic economic trade-off
between the cost of capacity and the
opportunity cost of not having adequate
capacity.
• Long-term capacity planning must be closely
tied to the strategic direction of the
organization—what products and services it
offers.

OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 –16
16
 Amity Business School
Amity Business School

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, as illustrated in Exhibit
10.5.

OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 –17
17
 Amity Business School
Exhibit 10.5 Seasonal Demand and Complementary Goods
Amity or Services
Business School

OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 –18
18
 Amity Business School
Amity Business School

Long-Term Capacity Strategies

Four basic strategies for expanding capacity over
some fixed time horizon:

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).

OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 –19
19
 Amity Business School
Exhibit 10.6 Capacity Expansion
Amity Options
Business School

OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 –20
20
 Amity Business School
Short-Term Capacity Management
Amity Business School

Short-term capacity adjustments to capacity might include:

• 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: hiring the right people.
• Shift work to slack periods
OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 –21
21
 Amity Business School
Amity Business School

Managing Capacity by Shifting and Stimulating Demand

• Vary the price of goods or services: price is the most
powerful way to influence demand.
• Provide customers information: best times to call or
visit.
• Advertising and promotion: a vital role on influencing
demand; promotions are strategically distributed to
increase demand during periods of low sales or excess
capacity.
• Add peripheral goods and/or services: change
demand during slack periods.
• Provide reservations: a promise to provide a good or
service at some future time and place.
OM, Ch. 1
10Goods,
Capacity
Services,
Management
and Operations Management
©2009 South-Western, a part of Cengage Learning 5 –22
22