Operations Management Chapter 5-Strategic Capacity Planning

the maximum amount of work that a business or organization is capable of doing aka upper limit or ceiling on its load – determined by availability of resources
Four resources that determine the capacity of a business
supply chains
What are the three key questions in capacity planning?
What kind of capacity is needed?
How much is needed?
When is it needed?
Why are capacity decisions strategic?
Meet future market demand
Long term commitment of scarce resources
Becoming and remaining competitive
Initial and operating costs
Successfully managing a business
Step 1 in the capacity planning process
Develop detailed forecasts of demand for long and short term planning
Step 2 in the capacity planning process
Estimate future capacity requirements
Step 3 in the capacity planning process
Evaluate existing capacity & facilities & identify gaps
Step 4 in the capacity planning process
Identify alternatives for meeting requirements
Step 5 in the capacity planning process
Conduct financial analyses of each alternative
Step 6 in the capacity planning process
Assess key qualitative issues for each alt.
Step 7 in the capacity planning process
Select the alternative
Step 8 in the capacity planning process
Implement alternative
Step 9 in the capacity planning process
Monitor results
Leading Strategy
plan to add capacity in *anticipation of future* demand increases
Following Strategy
plan to add capacity when *demand exceeds current capacity*
Tracking Strategy
plan to *incrementally add capacity* to keep pace with increasing demand
Diseconomies of scale
increasing the output beyond the optimal level of output…increasing this output rate increases the average cost per unit
Factors to consider when deciding whether or not to outsource an operation
available capacity
required expertise
impact on quality
nature of demand
total cost
additional risks
Purpose of Cost-Volume analysis (break-even point) in capacity planning
to estimate the income of an organization under different operating conditions…..useful for comparing capacity alternatives.
Assumptions of a simple Cost-Volume Analysis
VC per unit is the same regardless of volume
FC do not change with volume changes
Revenue per unit is the same regardless of volume
Revenue per unit exceeds VC per unit
Only one product is involved
Everything produced can be sold
Design Capacity
maximum output rate of an operation, process or facility based on its design
Effective Capacity
design capacity output rate minus allowances for factors or determinants that negatively impact output rate
Primary determinants of effective capacity
Facility factors
Product/service factors
Process factors
Human factors
Policy factors
Operational factors
Supply chain factors
External factors
Facility factors
issues associated with design, location, layout, and work environment
Product/service factors
issues associated with standardized versus customized products/services
Process factors
issues associated with quantity of output versus quality of output
Human factors
issues of job design and employee training, experience and motivation
Policy factors
upper management decisions regarding operating policies
Operational factors
scheduling, materials inventory, equipment, quality control
Supply chain factors
issues with suppliers, distributors, warehousing, and transportation
External factors
government regulations and environmental standards
Two measures of how well a system is using its current capacity
Utilization and efficiency
Utilization equation
(actual output/design capacity) x 100%
Efficiency equation
(actual output/effective capacity) x 100%

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