Strategic Capacity Management

and Learning Curves

Selected Slides from Jacobs et al, 9th Edition
Operations and Supply Management
Chapter 5 and 5A
Edited, Annotated and Supplemented by
Peter Jurkat

Capacity
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 used
rate of output actually
achieved

Best operating level

capacity for which the
process was designed

Capacity utilization rate

Capacity used

Best operating level

5-3

Best Operating Level

Example: Engineers design engines and assembly lines to

operate at an ideal or best operating level to maximize
output and minimize wear

Average
unit cost
of output

Underutilization

Overutilization
Best Operating
Level

Volume

5-4

Economies & Diseconomies of Scale

Economies of Scale and the Learning Curve working

Average
unit cost
of output

100-unit
plant
200-unit
plant

300-unit
plant

400-unit
plant

Diseconomies of Scale start working

Volume

5-5

The Learning Curve

As plants produce more products, they gain

experience in the best production methods
and reduce their costs per unit

Yesterday

Cost or
price
per unit

Today

Tomorrow

Cannot be
a straight
line why
not?

Total accumulated production of units

5A-6

Example of a Learning Curve

Suppose you start a term

paper typing business. You
time yourself on the first
paper, then the second, and
so on.

Time (in
Minutes)
100
90
84.62
81.00
78.30
76.16

90 % Learning Curve

Production
Time(Minutes)

Term
paper
1
2
3
4
5
6

Note that only 90 of 100

minutes are used in the
second repetition. This is an
example of a 90% learning
curve.

120
100
80
60
40
20
0
0

1000

2000

3000

4000

5000

Unit

Plot is typical for a learning curve: starts high, drops steeply for first few units, then
learning slows down, but the production time nevertheless continues to drop.
See Ch05A_Learning_Curves.xlsx for calculation tool now you do 5A.5 and 5A.8

Existing Learning Coefficients

Aerospace 85%
Shipbuilding 80-85%
Complex machine tools for new model 75-85%
Repetitive electronics manufacturing 90-95%
Repetitive machining or punch-press op 90-95%
Repetitive welding operations 90%
Raw material manufacturing 93-96%
Purchased parts fabrication 85-88%
p149

5-8

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 (core
competencies)
Plants Within Plants (PWP)

Extend focus concept to operating

level

Focus and Flexibility

The concept of the focused
factory holds that
production facilities work
best when they focus on a
fairly limited set of
production objectives
(core competencies)
Plants Within Plants (PWP)
Extend focus concept to
operating level

Flexible plants

Easy re-configuration
No fixed equipment

Flexible processes

Multiple products
Easy setup and switch over
Best when multiple products
with different seasons can
be made with same process

Flexible workers
Multiple skills
Broad training
Work cells

5-10

Capacity Planning

Balancing Capacity across Process Steps

Minimizes bottle necks

Outputs from prior steps are inputs to next
Imbalance leads to in process inventory, pure
cost

Frequency of Capacity Additions

Too frequent, unnecessary costs
Not frequent enough, lost sales

External Sources of Capacity

May be cheaper to outsource/subcontract

than to increase capacity if increase in sales
may not be permanent
Sharing resources

5-11

Visualizing Capacity Change

5-12

Determining Capacity Requirements

1. Forecast sales within each individual product

line will consider in detail later, for now
given
2.Consolidate like production even if it ends up
in different products for marketing purposes

Calculate equipment and labor requirements to

meet the forecasts
3. Project equipment and labor availability over
the planning horizon - if enough capacity,
good if not, evaluate options
See JC&A12thCh5CapacityRequirementsExample.xlsx now you do 5.2 and 5.4

5-13

Example of a Decision Tree Problem

A glass factory specializing in crystal is experiencing a

substantial backlog, and the firm's management is
considering three courses of action:
A) Arrange for subcontracting
B) Construct new facilities
C) Do nothing (no change)
The correct choice depends largely upon demand, which
may be low, medium, or high. By consensus,
management estimates the respective demand
probabilities as 0.1, 0.5, and 0.4.

5-14

Example of a Decision Tree Problem (Continued): The Payoff Table

The management also estimates the profits when

choosing from the three alternatives (A, B, and C)
under the differing probable levels of demand (states
of nature). These profits, in thousands of dollars are
presented in the table below:

A
B
C

0.1
Low
10
-120
20

0.5
Medium
50
25
40

0.4
High
90
200
60

5-15

Example of a Decision Tree Problem (Continued): Step 1. We start by drawing the

three decisions

A
B
C

5-16

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)

$90k
$50k
$10k
$200k
$25k
-$120k

C
High demand (0.4)
Medium demand (0.5)
Low demand (0.1)

$60k
$40k
$20k

5-17

Example of Decision Tree Problem (Continued): Step 3. Determine the

expected value of each decision

High demand (0.4)

Medium demand (0.5)
$62k

Low demand (0.1)

$90k
$50k
$10k

EVA=0.4(90)+0.5(50)+0.1(10)=$62k

5-18

Example of Decision Tree Problem (Continued): Step 4. Make decision

High demand (0.4)
Medium demand (0.5)
Low demand (0.1)

$62k

High demand (0.4)

Medium demand (0.5)

B
$80.5k

Low demand (0.1)

$90k
$50k
$10k
$200k
$25k
-$120k

C
High demand (0.4)
Medium demand (0.5)
$46k

Low demand (0.1)

$60k
$40k
$20k

Alternative B generates the greatest expected profit,

so our choice is B or to construct a new facility
Now you do 5.6

5-19

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

5-20

Service Utilization and Service Quality

Waiting Line Theory (details later)
l customers per unit time demand
m customers per unit time service
r utilization rate = l/m
Best operating point is near 70% of
capacity
From 70% to 100% of service capacity,
what do you think happens to service
quality?
Even 70% is high since there may be
customer independent overhead to
keep service available (e.g., computer
n/w)