Week 3
Capacity Management
Question
What is 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
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Capacity Planning Time Durations
Long range
• Greater than one year
Intermediate range
• Monthly or quarterly plans covering the next six
to eighteen months
Short range
• Less than one month
Strategic Capacity Planning
• Finding the overall capacity level of
capital-intensive resources to best
support the firm’s long-term strategy
• Capital-intensive resources
– Facilities
– Equipment
– Labor force size
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In 1978, Galanz was only a small
workshop in the countryside with
about 7 or 8 workers processing
feathers of fowls into washing down
products. Later, it began to
undertake the textile processing
business for Hong Kong firms and
state-owned foreign trade companies
by means of processing and
compensation trades.
1978年，格兰仕仅是一家拥有七、八
个人，靠回收鹅毛、鸭毛、鸡毛来加
工成为水洗羽绒的乡村小作坊，后来
靠三来一补的贸易方式为港资企业和
国有外贸专业公司承接纺织品的加工
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业务。
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As the heart of microwave
oven and air-conditioner, the
magnetron and compressor
are self-developed, self-
produced and formed a
complete set. The quality has
reached the first level in the
world’s home appliance
industries.
作为微波炉和空调的心脏部件，
磁控管和压缩机也由我们自主
研发、自主生产、自我配套，
并达到了同行业的世界水平。
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Galanz’s Slogan
We can have nothing, but
We can’t live without dream!
We can have nothing, but
We can’t live without passion!
什么都可以没有，但是不可以没有梦想！
什么都可以没有，但是不可以没有激情！
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Capacity Utilization
Capacity used
Capacity utilization rate
Best operating level
Capacity used
– rate of output actually achieved
Best operating level
– capacity for which the process was
designed
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Capacity Planning
• Capacity is the upper limit or ceiling on the load
that an operating unit can handle.
• Capacity also includes
– Equipment
– Space
– Employee skills
• The basic questions in capacity handling are:
– What kind of capacity is needed?
– How much is needed?
– When is it needed?
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Question
It is very important to make the Capacity Decisions
right, why?
1. Impacts ability to meet future demands
2. Affects operating costs
3. Major determinant of initial costs
4. Involves long-term commitment
5. Affects competitiveness
6. Affects ease of management
7. Globalization adds complexity
8. Impacts long range planning
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Capacity
• Design capacity
– maximum output rate or service capacity an
operation, process, or facility is designed for
• Effective capacity
– Design capacity minus allowances such as
personal time, maintenance, and scrap
• Actual output
– rate of output actually achieved--cannot
exceed effective capacity.
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Efficiency and Utilization
Actual output
Efficiency =
Effective capacity
Actual output
Utilization =
Design capacity
Both measures expressed as percentages
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Q
• How many ambulances in Hong Kong as
of 2015?
= 375
• What is the effective capacity?
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Efficiency/Utilization Example
Design capacity = 50 ambulances/day
Effective capacity = 40 ambulances/day
Actual output = 36 units/day
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As plants produce more products, they
The Experience gain experience in the best production
Curve methods and reduce their costs per unit
Yesterday
Cost or Today
price Tomorrow
per unit
Total accumulated production of units
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Best Operating Level
Example: Engineers design engines and assembly lines to
operate at an ideal or “best operating level” to maximize
output and minimize ware
Average
unit cost
of output
Underutilization Overutilization
Best Operating
Level
Volume 61
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Economies & Diseconomies of Scale
Economies of Scale and the Experience Curve working
100-unit
Average plant
unit cost 200-unit
of output plant 400-unit
300-unit
plant
plant
Diseconomies of Scale start working
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Determinants of Effective
Capacity
• Facilities
• Product and service factors
• Process factors
• Human factors
• Policy factors
• Supply chain factors
• External factors
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Strategy Formulation
• Capacity strategy for long-term demand
• Demand patterns
• Growth rate and variability
• Facilities
– Cost of building and operating
• Technological changes
– Rate and direction of technology changes
• Behavior of competitors
• Availability of capital and other inputs
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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
• What if the factory is producing
different products at the same
time? 22
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Plants within Plants
• A focused factory may have several
PWPs, each of which may have separate
organizations, equipment, and process
policies, workforce management policies,
production control methods, and so forth
for different products, even if they are
made under the same roof.
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Question
Capacity Flexibility can be obtained by
what?
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Bottle Neck
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Considerations in Adding Capacity
• Many issues must be considered, 3
main important ones are:
– Maintaining system balance
– Frequency of capacity additions/reductions
– The use of external capacity
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Upgrading Frequently or
infrequently?
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Question
• Frequency of Capacity Addition
– What are the costs of upgrading too
frequently?
• Removing & replacing equipment, training,
buying new equipment
– What are the costs of upgrading too
infrequently
• Excess capacity
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Question
• How much did the new Hong Kong
Airport (1998) cost?
• Ans: US $ 20 B (including highway,
railroad, bridges and all infrastructures)
• How much will it cost to build the 3rd
runway?
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Determining Capacity Requirements
1. Forecast sales within each individual
product line
2. Calculate equipment and labor
requirements to meet the forecasts
3. Project equipment and labor
availability over the planning
horizon
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Time Horizon for Capacity Planning
• Long range
– Greater than 1 year, where resources take a long time to
acquire or dispose of, requires top management support
• Intermediate range
– Monthly or quarterly plans for next 6 to 18 months, capacity
varied: hiring, layoff, new tools..
• Short range
– Less than 1 month. This is tied into the daily scheduling or
weekly scheduling. This includes alternatives such as
overtime, personal transfers, and alternative production
routings.
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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.
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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. These profits, in thousands of dollars
are presented in the table below:
0.1 0.5 0.4
Low Medium High
A 10 50 90
B -120 25 200
C 20 40 60
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Example of Decision Tree Problem (Continued): Step 2. Add
our possible states of nature, probabilities, and payoffs
High demand (0.4) $90k
Medium demand (0.5) $50k
Low demand (0.1) $10k
A High demand (0.4) $200k
B Medium demand (0.5) $25k
Low demand (0.1) -$120k
C
High demand (0.4) $60k
Medium demand (0.5) $40k
Low demand (0.1) $20k
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Example of Decision Tree Problem (Continued):
Step 3. Determine the expected value of each decision
High demand (0.4) $90k
Medium demand (0.5) $50k
$62k Low demand (0.1) $10k
A
EVA=0.4(90)+0.5(50)+0.1(10)=$62k
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Example of Decision Tree Problem (Continued):
Step 4. Make decision
High demand (0.4) $90k
Medium demand (0.5) $50k
$62k Low demand (0.1) $10k
A High demand (0.4) $200k
$80.5k
B Medium demand (0.5) $25k
Low demand (0.1) -$120k
C
High demand (0.4) $60k
$46k Medium demand (0.5) $40k
Low demand (0.1) $20k
Alternative B generates the greatest expected profit, so
our choice is B or to construct a new facility 39
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Planning Service Capacity vs.
Manufacturing Capacity
• Time: Unlike goods, service cannot 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
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Capacity Utilization &
Service Quality
• Best operating point is near 70% of
capacity
• From 70% to 100% of service capacity,
what do you think happens to service
quality?
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Service Quality
• Rate of service utilization and service
quality are directly linked
Service quality
Arrivals exceed declines –
services – many disruptions or high
customers are arrival levels lead to
never served long wait times
Sufficient
capacity to
provide quality
service
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Capacity Utilization &
Service Quality
• Best operating point is near 70% of capacity
– Enough to keep servers busy
– Allows enough time to serve customers
individually
– Keep enough capacity in reserve so as not to
create too many managerial headaches
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Question
• High or low service utilization?
– Hospital emergency rooms
– Fire stations
– Football/basketball stadium
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Any difference from
ordinary passenger
boarding bridge?
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Stampede leaves 1 dead in
Guangzhou Railway Station
• A stampede in Guangzhou Railway Station has left
one passenger dead as stranded passengers rushed to
board trains after days of waiting .
• The Guangzhou police authority confirmed the death
of Li Hongxia, a Guangzhou watch factory worker from
Hubei Province.
• Li arrived at the station at 3 p.m. Friday, when the
square and surrounding area was crowded with
260,000 passengers waiting to board trains.
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How do u pass a sick passenger?
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How to tackle this capacity crisis?
• People's Liberation Army had handed
out 419,000 quilts and 219,000 cotton-
padded coats.
• Convince people do not go back to their
home town, how?
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Shanghai Stampede – 36 killed
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Crowd Control in Shanghai
• http://sh.sina.com.cn/news/b/2015-01-
04/detail-iavxeafr9610609.shtml
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Learning Curve
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Christian Barnard (8 November 1922 – 2 September 2001) was
a South African who performed the world's first successful
human-to-human heart transplant.
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Death Rate - Less than 1 year survival
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Learning Curves
• Underlying Principles of Learning Curves
• Learning Curve Example
• Types of Learning
• From Learning Curves to Performance
Improvement
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Underlying Principles of Learning
Curves
1. Each time you perform a task it takes less
time than the last time you performed the
same task.
2. The extent of task time decreases over
time.
3. The reduction in time will follow a
predictable pattern. 60
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The normal form of learning
equation
Will be
Yx = Kxn provided in the
coming quiz
X= Unit number
Yx= Number of direct labor hours required to produce the
xth unit
K = number of direct labor hours required to produce the
first unit
n=log b/log 2 where b = learning %
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Example of a Learning
Curve
Suppose you start a term Term Time (in
paper typing business. You paper Minutes)
time yourself on the first
paper, then the second, and 1 100
so on.
2 90
Note that only 90 of 100 3 84.62
minutes are used in the 4 81.00
second repetition. This
is an example of a 90% 5 78.30
learning curve. 6 76.16
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Plotting the Learning Curve
90 % Learning Curve
120
Time(Minutes)
100
Production
80
60
40
20
0
0 1000 2000 3000 4000 5000
Unit
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Types of Learning
• Individual Learning
Improvement when individuals gain a
skill or efficiency by repetition of a job.
• Organizational Learning
Improvement from the groups of
individuals from repetition and changes
in administration, equipment, and
product design. 64
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The Shanghai maglev train
The Shanghai maglev train or Shanghai Transrapid is a magnetic
levitation train (maglev) line that operates in Shanghai. It is the oldest
commercial maglev still in operation, and the first commercial high-speed
maglev with cruising speed of 431 km/h (268 mph). It is also the fastest
commercial electric train in the world.
The train line connects Shanghai Pudong International
Airport and Longyang Road Station (in the outskirts of central Pudong),
where passengers can interchange to the Shanghai Metro to continue
their trip to the city center. The line is not part of the Shanghai Metro
network, which operates its own service to Pudong Airport from central
Shanghai and Longyang Road Station. It cost $39.759 million per
kilometer to build (10 billion yuan (1.2 billion US dollars) for the line). The
line's balance of payments has been in huge deficit since its opening.
https://en.wikipedia.org/wiki/Shanghai_maglev_train 65
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The Shanghai maglev train
• The line runs from Longyang Road station in Pudong to Pudong
International Airport; At full speed, the journey takes 7 minutes
and 20 seconds to complete the distance of 30 km
(18.6 mi), although some trains in the early morning and late
afternoon take about 50 seconds longer. A train can reach
300 km/h (186 mph) in 2 minutes and 15 seconds, with the
maximum normal operation speed of 431 km/h (268 mph)
reached after 4 minutes.
https://en.wikipedia.org/wiki/Shanghai_maglev_train
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https://www.globaltimes.cn/page/202108/1231521.shtml
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https://www.project-syndicate.org/commentary/myth-of-forced-technology-transfer-china-by-daniel-gros-2018-11
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From Learning Curves to
Performance Improvement
• Proper selection of workers.
• Proper training.
• Motivation.
• Work specialization.
• Do one or very few jobs at a time.
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From Learning Curves to
Performance Improvement
• Use tools or equipment that assists or
supports performance.
• Provide quick and easy access for help.
• Allow workers to help redesign their
tasks.
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Thank You
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