1. Review the accompanying case Seagate for discussion.

Write a brief
summary of the capacity planning process at Seagate.

The Seagate Technologies has a broad range of memory devices categorized

based on the usage in personal computers, Desktop, Workstation, Server/Multi-user
systems. Each category has a different objective in terms of performance, price and
reliability. The price per Mega Byte is reduced due to highly volatile /fluctuating
demand. Hence to be competitive in market, Seagate aims to reduce the price while
increasing the product offerings. It introduces new product in a timely manner to
keep the production cost low.
Since the demand is fluctuating, the facility operates at full capacity. The key
elements of Seagates management strategy is high volume with low cost of
assembly and test. In order to achieve high manufacturing yield with advanced
production process, it is desirable to transfer volume production of disc drives and
related components between facilities, including transfer overseas (Singapore,
Thailand, Malaysia and China) where labor costs and other manufacturing costs are
significantly lower than in the U.S.
Capital investments are the result of an extensive Capacity Requirement
Planning (CRP) process, which typically starts with a demand forecast (estimates
monthly worldwide demand for each product) and then passed to the Master
Production Scheduler (MPS). MPS gives the monthly production quantities. As such,
demand forecast and the MPS serves as the important tool for Capacity planning for
Seagate.

2. Why is the number of beds in a hospital NOT a measure of its capacity?

Capacity is a measure of the output rate per unit time. But the number of beds in a
hospital is an input parameter. The bed numbers simply implies the stock of the
hospital. In addition to the number of beds, factors such as, in-patient facility
available, number of doctors, nurses etc., determine whether the service has been
given to any patient. For example, if a hospital has 500 beds with 1 doctor, capacity
measure of 500 is absurd. At the same time, a hospital with 50 beds and 10 doctors
is said to have more capacity in terms of health care service provided. Hence we
cannot measure just one parameter (bed number) to determine the capacity of a
hospital. Ideally, a Hospitals capacity should be the collective measure of all
facilities given to a patient. In other words, hospital capacity is a measure of the
number of patients who received the service per unit time.

3. Over the last few years, Japanese automakers have built a significant
number of assembly plants in North America. Most of these plants
produce 2 or 3 models of cars as opposed to a single model or many
different models.
i.
Explain briefly operational consequences of making a single product
versus a large variety of products within a facility
Single product facility
Single product facility remains focused
and excel in one product with

Multi product within a facility

Offers higher production rates and low
overhead cost, with a disadvantage of
1

maximum
performance
and
a
systematic operations in place. But
such facility faces issues when the
market /demand varies erratically,
which will in turn question the flexibility
of the system.

ii.

accommodating variety of product lines

with variety of production process, thus
makes operations very complex, difficult
to maintain and may turn out to
perform poorly in all product lines. But
such facilities can absorb demand
variation within product lines. This
approach
will
lead
to
vertical
integrations and outsourcing.

Give arguments that would support the intermediate variety

strategy when a firm has a network of many plants. Use the
flexibility example from class

When the firm has a network of many plants, some plants make some products, leaving
the advantage of full flexibility as long as we form the chain of plants and link the
products creatively. For example, if 5 plants are there, it makes 5 products when linked in
chain. Thus intermediate variety strategy achieve full flexibility as long as the flow is
streamlined.

4. The annualized cost of acquiring capacity for the new Barracuda drives at
Seagate is calculated as $25 per unit and the contribution margin for the
product is $45 per unit.
a. What service level (percentile of demand met) should Seagate target
for in building capacity? How much capacity will it build? The demand
forecast for the Barracuda drives is uniform between 100 and 200.
Statistics refresher: For uniform distribution of data, the answer for this is typically Capacity
= LL + (UL-LL)*SL where UL is lower limit, UL is upper limit and SL is service level. So for a
Uniform demand (40, 80), LL =40 and UL = 80; for a service level of 75%, the Capacity to
Build is 40+0.75*(80-40) =70 Units.

Contribution margin = $45 per unit

Annualized cost of acquiring capacity = $25 per unit
Hence R, the service level the firm should provide = 45/ (45+25) =
0.6428 ~ 0.64
2

Service Level for building the capacity is 64th percentile

For uniform distribution of demand forecast between 100 and 200,
service level 64 %, the Capacity to build = 100 + 0.64 (200-100) = 164
units.

b. How does this service level change, if Seagate outsources

manufacturing to China, to arrive at an annualized cost of capacity of
$10 per unit? How much capacity will it build?
Service Level = 45/(45+10) = 0.8181 ~ 0.82
Service level for building the capacity is 82nd percentile
Capacity to build is 100 + 0.82 (200-100) = 182 units
c. How does this service level change if the inbound shipment cost per
unit from China to US reduces the margin per unit to $35? How much
capacity will it build?
Service level the firm should provide = 35/ (35+25) = 0.5833 ~ 0.58
Service Level for building the capacity is 58th percentile
For uniform distribution of demand forecast between 100 and 200,
service level 64 %, the Capacity to build = 100 + 0.58 (200-100) = 158
units.
d. Conduct the capacity calculations in all 3 scenarios above when the
forecast for the Barracuda drives is expected to follow the following
distribution:
Demand will be less
than
100
120
140
160
180
200

Probability

Cumulative Probability

0.1
0.2
0.3
0.1
0.15
0.15

0.1
0.3
0.6
0.7
0.85
1.0

For a. if the service level is 64 th percentile, Capacity to build = 160

For b. if the service level is 82nd percentile, Capacity to build = 180
For a. if the service level is 58th percentile, Capacity to build = 140