Chapter 5: Strategic Capacity Management

Capacity

the ability to hold, receive, store, or accommodate

T/F: Capacity management needs to consider both inputs and outputs

True

Capacity Planning Time Durations

1. Short range (daily, weekly)
2. Intermediate range (monthly, quarterly)
3. Long range (annually)

Strategic Capacity Planning

Determining the overall level of capacity-intensive resources that best supports the company's long-range competitive strategy

T/F: Capacity level selected has a critical impact on response rate, cost structure, inventory policies, and management and staff support requirements

True

Capacity utilization rate

a measure of how close the firm is to its best possible operating level

Capacity utilization rate equation

(?��??���?���?���?���?���?��??��? ?��??���?���?���)/(?��??���?���?��? ?���?���?���?���?���?��??���?���?��� ?���?���?��??���?���)

Economies of scale

the idea that as a planet gets larger and volume increases, the average cost per unit tends to drop

Diseconomies of scale

at some point, the plant becomes too large and average cost per unit begins to increase

In general, the best operating point for services is ________% of capacity

near 70

Capacity focus

the idea that a production facility works best when it is concentrated on a limited set of production objectives
(Ex: Focused factory or plant within a plant (PWP) concept)

Capacity flexibility

the ability to rapidly increase or decrease product levels or the ability to shift rapidly from one product or service to another
(ex: Comes from the plant, processes, and workers or from strategies that use the capacity of other organizations)

Capacity Flexibility

1. Flexible Plants
2. Flexible Processes
3. Flexible Workers

Flexible Plants

~ Ability to quickly adapt to change
~ Zero-changeover time

Flexible Processes

~ Flexible manufacturing systems
~ Simple, easily set up equipment

Flexible Workers

~ Ability to switch from one kind of task to another quickly
~Multiple skills (cross training)

Capacity Bottlenecks

Bottleneck operation when demand is greater that what can be produce

Frequent versus Infrequent Capacity Expansions

pp on pg 19

Determining Capacity Requirements

1. Use forecasting to predict sales for individual products --->
2. Calculate labor and equipment requirements to meet forecasts -->
3. Project labor and equipment availability over the planning horizon

Planning Service Capacity vs. Manufacturing Capacity

1. Time
2. Location
3. Volatility of Demand

Planning Service Capacity vs. Manufacturing Capacity: Time

Service goods can not be stored for later use and capacity must be available to provide a service when it is needed

Planning Service Capacity vs. Manufacturing Capacity: Location

Service goods must be at the customer demand point and capacity must be located near the customer

Planning Service Capacity vs. Manufacturing Capacity: Volatility of Demand

Much greater than in manufacturing

Capacity Cushion

Level of capacity in excess of the average utilization rate or level of capacity in excess of the expected demand .

Large Capacity Cushion

~ Required to handle uncertainty in demand
~ Service industries
~ High level of uncertainty in demand (in terms of both volume and product-mix)
~ To permit allowances for vacations, holidays, supply of materials delays, equipment breakdowns, etc.
~ If sub

Small Capacity Cushion

~ Unused capacity still incurs the fixed costs
~ highly capital intensive businesses
~ time perishable capacity

Using Decision Trees to Evaluate Capacity Alternatives

a schematic model of the sequence of steps in a problem - including the conditions and consequences of each step

T/F: Decision trees do NOT help analysts understand the problem and assist in identifying the best solution

False

Decision tree components

Decision nodes - represented with squares
Chance nodes - represented with circles
Paths - links between nodes

T/F: For a Decision Tree you must work from the end of the tree backwards to the start of the tree

True

Manufacturing Capacity

~ Goods can be stored for later use
~ Goods can be shipped to other locations
~ Volatility of demand is relatively low

Service Capacity

~ Capacity must be available when service is needed - cannot be stored
~ Service must be available at customer demand point
~ Much higher volatility is typical

Arrival rate

the average number of customers that come to a facility during a specific period of time

Service rate

the average number of customers that can be processed over the same period of time

Optimal levels of utilization are context specific

~Low rates are appropriate when the degree of uncertainty (in demand) is high and/or the stakes are high (e.g., emergency rooms, fire departments)
~Higher rates are possible for predictable services or those without extensive customer contact (e.g., commu