Operations Management Chapter 5-Strategic Capacity Planning

External factors

government regulations and environmental standards

Utilization equation

(actual output/design capacity) x 100%

Efficiency equation

(actual output/effective capacity) x 100%

Four resources that determine the capacity of a business

facilities employees equipment supply chains

Diseconomies of scale

increasing the output beyond the optimal level of output...increasing this output rate increases the average cost per unit

Facility factors

issues associated with design, location, layout, and work environment

Process factors

issues associated with quantity of output versus quality of output

Product/service factors

issues associated with standardized versus customized products/services

Human factors

issues of job design and employee training, experience and motivation

Supply chain factors

issues with suppliers, distributors, warehousing, and transportation

Design Capacity

maximum output rate of an operation, process or facility based on its design

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.

Policy factors

upper management decisions regarding operating policies

Effective Capacity

design capacity output rate minus allowances for factors or determinants that negatively impact output rate

Step 6 in the capacity planning process

Assess key qualitative issues for each alt.

Step 5 in the capacity planning process

Conduct financial analyses of each alternative

Capacity

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

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

Primary determinants of effective capacity

Facility factors Product/service factors Process factors Human factors Policy factors Operational factors Supply chain factors External factors

Step 4 in the capacity planning process

Identify alternatives for meeting requirements

Step 8 in the capacity planning process

Implement alternative

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 9 in the capacity planning process

Monitor results

Step 7 in the capacity planning process

Select the alternative

Two measures of how well a system is using its current capacity

Utilization and efficiency

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

What are the three key questions in capacity planning?

What kind of capacity is needed? How much is needed? When is it needed?

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

Tracking Strategy

plan to *incrementally add capacity* to keep pace with increasing demand

Leading Strategy

plan to add capacity in *anticipation of future* demand increases

Following Strategy

plan to add capacity when *demand exceeds current capacity*

Operational factors

scheduling, materials inventory, equipment, quality control