TECHNICAL NOTE 8 PROCESS CAPABILITY AND STATISTICAL QUALITY
CHAPTER 11 STRATEGIC CAPACITY MANAGEMENT
Review and Discussion Questions
1. What capacity problems were encountered when a new drug was introduced to the market??
The first two problems are the high capital cost of capacity and the opportunity cost of restricting investments in other facilities. These problems are exacerbated by uncertainty over patent infringement, competitor’s response and that there is only a 45% probability of launching the product. If the product is launched it is possible to lose sales because there is not sufficient capacity to meet customer demand. The estimates of demand varied by 600%
and if actual sales are at the high end or the low end of the estimates the project will be a financial disaster unless the correct capacity decision is made.
2. List some practical limits to economies of scale; that is, when should a plant stop growing?
The obvious answer is that a plant should stop growing when its long-run average cost curve hits the inflection point. However, since this determination is often difficult to make (in the short run), other factors such as coordination problems, excess capacity, capacity imbalance, and market shifts indicate a need to consider setting capacity limits.
3. What are some capacity balance problems faced by the following organizations or facilities?
a. An airline terminal.
Waiting areas, distances from boarding gates, ground crew requirements, landing strips.
b. A university computing center.
Input/output time vs. computer processing time; CPU capacity vs. peripheral storage capacity; high speed, high capacity computer vs. multiple low speed, low capacity computers;
computer center consultant’s skill vs. customer requirements.
c. A clothing manufacturer.
Many manufacturers now use highly decentralized shops to make clothes. This means that capacity of multiple sites must be accounted for in planning production.
4. What are some major capacity considerations in a hospital? How do they differ from those of a factory?
Some capacity considerations are size and composition of nursing staff (RNs vs. LPNs), balance between operating room and intensive care units, emergency rooms, etc., and, of course, how many beds are to be available. One of the differences in capacity considerations between a hospital and a factory is that a hospital can add capacity rather quickly in the short run, through “simply” adding more staff and more beds. A factory is usually technologically limited, and, therefore, must plan well in advance to add major chunks of capacity. On the other hand, though, the general uncertainty which surrounds the demand for hospital services
Strategic Capacity Management
on any given day is much greater than would be faced by a factory. Additionally, factory management generally has the ability to backlog demand in such a way as to achieve more efficient levels of capacity utilization than does a hospital.
5. Management may choose to build up capacity in anticipation of demand or in response to developing demand. Cite the advantages and disadvantages of both approaches.
The strategy of building up capacity ahead of demand is a risk-taking stance. Investment is based on projections. This investment involves costs for new facilities, equipment, human resources, and overhead. If the demand materializes, the investment is worthwhile since the firm may capture a large amount of market share. If it does not materialize, the firm must redirect the invested resources. This strategy is most appropriate in high growth areas.
If the demand materializes, but the capacity planning strategy is risk averse, i.e., building capacity only as demand develops, then most likely market share will be lost. The growth in demand will encourage new entrants, resulting in more competition. The risk averse strategy may be most appropriate for small firms who cannot afford to invest in unproven prospects.
To prevent potential loss of market share, firms may choose to incrementally increase capacity to match the increase in demand.
6. What is capacity balance? Why is it hard to achieve? What methods are used to deal with capacity imbalances?
In a perfectly balanced plant, the output of each stage provides the exact input requirement for the subsequent stage. This continues throughout the entire operation. This condition is difficult to achieve because the best operating levels for each stage generally differ.
Variability in product demand and the processes may lead to imbalance, in the short run.
There are various ways of dealing with capacity imbalances. One is to add capacity to those stages that are the bottlenecks. This can be achieved by temporary measures such as overtime, leasing equipment, or subcontracting. Another approach is to use buffer inventories so that interdependence between two departments can be loosened. A third approach involves duplicating the facilities of one department upon which another is dependent.
7. What are some reasons for a plant to maintain a capacity cushion? How about a negative capacity cushion?
A plant may choose to maintain a capacity cushion for a number of reasons. If the demand is highly unstable, maintaining cushion capacity will ensure capacity availability at all times.
Also, capacity cushions can be useful if high service quality levels are established. Some organizations choose to use capacity cushions as a competitive weapon to create barriers to entry for competitors.
Negative capacity cushions may be maintained when demand is expected to decrease rapidly and capacity investment is high enough to discourage short run capacity acquisitions.
Chapter 11
8. At first glance, the concepts of the focused factory and capacity flexibility may seem to contradict each other. Do they really?
This is not necessarily true. This will depend on the available technology of the facility and on the type of industry it competes in. An FMS plant may, for example, use flexible processes to enlarge the variety of products produced and delivered in a very short time. Therefore, it can choose to compete on fast delivery of customized products rather than on cost.
Problems
Problem Type of Problem Difficulty New Problem
Modified Problem
Check Figure in Appendix A Capacity
Analysis
Decision Tree
1 Yes Easy
2 Yes Easy
3 Yes Easy Yes
4 Yes Easy
5 Yes Moderate Yes
6 Yes Moderate
1.
Plastic Year 1 Year 2 Year 3 Year 4
Demand for plastic sprinklers 97 115 136 141
Percentage of capacity used 48.5% 57.5% 68.0% 70.5%
Machine requirements .485 .575 .680 .705
Labor requirements 1.94 2.30 2.72 2.82
Bronze Year 1 Year 2 Year 3 Year 4
Demand for bronze sprinklers 21 24 29 34
Percentage of capacity used 58.3% 66.7% 80.6% 94.4%
Machine requirements 1.75 2.00 2.42 2.83
Labor requirements 3.50 4.00 4.84 5.66
Strategic Capacity Management
2. Requirements for plastic remain unchanged.
Bronze Year 1 Year 2 Year 3 Year 4
Demand for bronze sprinklers 32 36 41 52
Percentage of capacity used 88.9% 100.0% 113.9% 144.4%
Machine requirements 2.67 3 3.42 4.33
Labor requirements 5.33 6 6.84 8.67
It is obvious that not enough capacity is available after year two to meet the increased demand. AlwaysRain will have to consider purchasing additional machines for the bronze operations.
3. No. An additional machine will provide enough capacity cushion until the third year.
AlwaysRain must consider additional ways of meeting the fourth year demand. This can include purchasing or leasing an additional machine, or outsourcing some of the demand.
4.
Year 1 Year 2 Year 3 Year 4
Labor requirements-bronze 5.33 6.00 6.84 8.67
Labor requirements-plastic 1.94 2.30 2.72 2.82
Total labor requirements 7.27 8.30 9.58 11.49
AlwaysRain will face a problem of not having enough trained personnel for running the equipment after the third year. At that time, they will need to either hire new trained employees or initiate a training program for existing employees from other workstations who can be utilized at the bronze or plastic molding machines.
Chapter 11
5.
$12 Million
$14 Million
$10 Million
$10 Million