Strategic Capacity Management Dr Ron Lembke Operations Management
Strategic Capacity Management Dr. Ron Lembke Operations Management
Ideal Capacity of a Process 50/hr 20/hr 10/hr 40/hr What is the capacity of the system? n Should we add any capacity? n How should we run the system? n Where should we keep inventory? n
Ideal Capacity of a Process 6 min n 5 min 4 min 5 min What is the capacity of the system?
Productivity = Outputs / Inputs n Partial: Output/Labor or Output/Capital n Multifactor: n Output / (Labor + Capital + Energy ) n Total Measure: Output / Inputs
Automotive Productivity n Book Data: ¨ Jaguar: 14 cars/employee ¨ Volvo: 29 cars/employee ¨ Mini: 39 cars/employee
Growth of Service Economy
US Productivity Growth
Improving Productivity Develop productivity measurements– you can’t improve what you can’t measure n Identify and Improve bottleneck operations first n Establish goals, document and publicize improvements n
U. S. Work and Productivity Source: International Labor Organization, 1999
What Would Henry Say? n n Ford introduced the $5 (per day) wage in 1914 He introduced the 40 hour work week “so people would have more time to buy” It also meant more output: 3*8 > 2*10 ¨ “Now we know from our experience in changing from six to five days and back again that we can get at least as great production in five days as we can in six, and we shall probably get a greater, for the pressure will bring better methods. ¨ Crowther, World’s Work, 1926
Forty Hour Week Ernst Abbe, Karl Zeiss optics n 1896: as much done in 9 as in 8. n
Marginal Output of Time n n As you work more hours, your productivity per hour goes down Eventually, it goes negative. Chapman, 1909
“Crunch Mode” n Ea_spouse: 12/04 ¨ “Pre-crunch” ¨ SO was working 7 * 13: 91 per week! ¨ Maybe time off at 6 pm Saturday ¨ $5 k signing bonus, couldn’t quit ¨ Class action: April ‘ 06 $14. 9 m n Igda. org “Why Crunch Mode Doesn’t Work: 6 Lessons”
Learning Curves time/unit goes down consistently n Down by 10% as output doubles n We can use Logarithms to approximate this n If you ever need this, email me, and we can talk as much as you want n
Example 3. 3 Paul’s 1 2 3 4 5 n Bottles 60 100 150 200 250 n Bags 100 200 300 400 500 n Newman’s n Bottles 75 85 95 97 98 n Bags 200 400 650 680 n
Example 3. 3 Bottles 135 185 245 297 348 n Bags 300 600 900 1, 050 1, 180 n 3 bottle machines 150 k each/yr = 450 k n 5 bag machines, 250 k each/yr = 1, 250 k n
Example 3. 3 n n n n Bottles 135 185 245 297 348 Machines 1 2 2 2 3 Mach. usage 0. 9 1. 23 1. 63 1. 98 2. 32 Workers 1. 8 2. 46 3. 27 3. 96 4. 64 Bags 300 600 900 1, 050 1, 180 Machines 2 3 4 5 5 Mach Usage 1. 2 2. 4 3. 6 4. 2 4. 7 Workers 3. 6 7. 2 10. 8 12. 6 14. 1
Capacity Tradeoffs 120, 000 4 -door cars 150, 000 Two-door cars n Can we make combinations in between?
How much do we have? We can only sustain so much effort. n “Best Operating Level” n ¨ Output level process designed for ¨ Lowest cost per unit Capacity utilization = capacity used best operating level n Hard to run > 1. 0 for long n
Time Horizons Long-Range: over a year – acquiring, disposing of production resources n Intermediate Range: Monthly or quarterly plans, hiring, firing, layoffs n Short Range – less than a month, daily or weekly scheduling process, overtime, worker scheduling, etc. n
Service Differences Arrival Rate very variable n Can’t store the products - yesterday’s flight? n Service times variable n Serve me “Right Now!” n Rates change quickly n Schedule capacity in 10 minute intervals, not months n How much capacity do we need? n
Capacity Levels in Service =100% Zone of non-service Mean arrival rate, < l a ic e n Zo it r C Zone of service Mean service rate, =70%
Adding Capacity Expensive to add capacity n A few large expansions are cheaper (per unit) than many small additions n Large expansions allow of “clean sheet of paper” thinking, re-design of processes n ¨ Carry unused overhead for a long time ¨ May never be needed n Small expansions may “pave the cow path”
Capacity Planning n n n How much capacity should we add? Conservative Optimistic Forecast possible demand scenarios (Chapter 10) Determine capacity needed for likely levels Determine “capacity cushion” desired
Reengineering “Business Process Reengineering” (Hammer and Champy) n Companies grow over time, adding plants, lines, facilities, etc. n Growth may not end in optimal form n Re-design processes from ground up n
Capacity Sources n In addition to expanding facilities: ¨ Two or three shifts ¨ Outsourcing non-core activities ¨ Training or acquisition of faster equipment
Decision Trees Consider different possible decisions, and different possible outcomes n Compute expected profits of each decision n Choose decision with highest expected profits, work your way back up the tree. n
Decision Trees Example 3. 4, p. 65 n n n Computer store thinks demand may grow. Expansion costs $87 k, new site $210 k, and would cost same if wait a year New site: ¨ ¨ n 55% chance of profits of $195 k. 45% chance of $115 k profits. Expand Current ¨ ¨ 55% chance of $190 k profits 45% chance of $100 k profits n Wait and see- enlarge store next year if demand grows n If high demand, $190 k with expanded store If high demand, $170 with current store If weak demand, $105 k with current store Find the expected profits over 5 years, choose best one. ¨ ¨ ¨
Decision Trees Decision point n Chance events n Outcomes n Calculate expected value of each chance event, starting at far right n Working our way back toward the beginning, choosing highest expected outcome at each decision n
Decision Trees Move Hackers’ Computer Store Expand Strong Growth 0. 55 Weak Growth 0. 45 Revenue - Move Cost Strong Growth 0. 55 Revenue – Expand Cost Weak Growth 0. 45 Revenue – Expand Cost Expand Wait and See Strong Growth 0. 55 Do nothing Weak Growth 0. 45 Revenue Rev – Expand Cost Rev - Expand Cost
Possible 5 year Revenues New, growth: 195*5 – 210 = 765 n New, low: 115*5 – 210 = 365 n Expand, growth: 190*5 – 87 = 863 n Expand, low: 100*5 – 87 = 413 n Wait, strong, expand: 170+190*4 -87=843 n Wait, strong, do nothing: 170*5 = 850 n Wait, low, do nothing: 105*5 = 525 n
Decision Trees Move Hackers’ Computer Store Expand Strong Growth 0. 55 765 Weak Growth 0. 45 365 Strong Growth 0. 55 863 Weak Growth 0. 45 413 Expand Wait and See Strong Growth 0. 55 Weak Growth 0. 45 Do nothing 525 843 850
Making the Decision Starting at the far right, look at the “Wait and See” option. If demand is strong, we would obviously not expand. n $850 k is better than $843. n Eliminate the “Expand option” n
Decision Trees Move Hackers’ Computer Store Expand Strong Growth 0. 55 765 Weak Growth 0. 45 365 Strong Growth 0. 55 863 Weak Growth 0. 45 413 Expand Wait and See Strong Growth 0. 55 Weak Growth 0. 45 Do nothing 525 843 850
Expected Values n Move: ¨ 0. 55* n 765 + 0. 45*365 = $585, 000 Wait and See: ¨ 0. 55*850 n Expand: ¨ 0. 55 n + 0. 45*525 = $703, 750 * 863 + 0. 45 * 413 = $660, 500 Highest expected value is to Wait and see, and either way, do nothing!
Decision Trees $585, 000 Move Hackers’ Computer Store 660, 500 Expand Wait and See Strong Growth 0. 55 765 Weak Growth 0. 45 365 Strong Growth 0. 55 863 Weak Growth 0. 45 413 Expand 703, 750 Strong Growth 0. 55 Weak Growth 0. 45 Do nothing 525 843 850
Other considerations n Another criteria to use is to pick the one with the highest down side. ¨ Under this, do nothing still wins. We could also consider the expected value of the future cash streams. n PV = $100/(1+r) = $100/(1. 16)=$86. 27 n
Present Values - p. 377 n At 16%, Next year is worth 0. 862 ¨ =(1+rate)^(-years) ¨ Year 2: 0. 743 ¨ Year 3: 0. 641 ¨ Year 4: 0. 552 ¨ Year 5: 0. 476 n 195 per year for 5 years: 195 * (3. 274)
Decision Tree-NPV $310, 613 Move Hackers’ Computer Store 402, 507 Expand Wait and See Strong Growth 0. 55 428, 487 Weak Growth 0. 45 166, 544 Strong Growth 0. 55 535, 116 Weak Growth 0. 45 240, 429 460, 857 Strong Growth 0. 55 Weak Growth 0. 45 Expand Do nothing 343, 801 529, 874 556, 630
Real Options Assess the value to me of being able to change my mind in the future n Changed problem slightly n ¨ Reduced benefit doing nothing, high demand
Decision Trees $465, 000 Hackers’ Computer Store Move 533, 000 0. 25 Strong 765 0. 75 Weak 365 0. 25 Strong 863 0. 75 Weak Expand 604, 500 0. 25 Expand Strong Wait and See 598, 750 Do Nothing 413 Do nothing 0. 75 Weak 0. 25 Strong 0. 75 Weak 525 820 525 843 820
Real Options If we didn’t have the wait and see option, we would Do Nothing. n Option to wait and see is worth $5, 750 n Wait and See 604, 500 Do Nothing 598, 750 Expand 533, 000 Move 465, 000 $5, 750
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