OPMT 303 Ch 5. Capacity Planning

leading capacity strategy

Build capacity in anticipation of future demand increases

Cost-Volume Relationships

Capacity alternatives may involve step costs, which are costs that increase stepwise as potential volume increases. The implication of such a situation is the possible occurrence of multiple break-even quantities.

Reasons for diseconomies of scale

Distribution costs increase due to traffic congestion and shipping from a centralized facility rather than multiple smaller facilities Complexity increases costs Inflexibility can be an issue Additional levels of bureaucracy

Techniques for Evaluating Alternatives

Cost-volume analysis Financial analysis Decision theory Waiting-line analysis Simulation

In the context of forecasting capacity requirements, identify some of the basic demand patterns

Cyclical and stable

Cost-volume analysis

Focuses on the relationship between cost, revenue, and volume of output

Two useful definitions of capacity

Design capacity and Effective capacity

Effective capacity

Design capacity minus allowances such as personal time and maintenance

effective capacity

Design capacity minus allowances such as personal time and maintenance

With ____________, increasing the output rate results increasing the average unit cost, if the output rate is more than the optimal rate.

Diseconomies of Scale

Economies of Scale

If output rate is less than the optimal level, increasing the output rate results in decreasing average per unit costs

Diseconomies of Scale

If the output rate is more than the optimal level, increasing the output rate results in increasing average per unit costs

Tactical Level

Involves the details of individual engagements

With cost-volume analysis, what is the assumption regarding variable cost per unit?

It is the same regardless of volume

Strategies are typically based on assumptions and predictions about:

Long-term demand patterns Technological change Competitor behavior

Design capacity

Maximum output rate or service capacity an operation, process, or facility is designed for

The sum of all future cash flows of an investment proposal, expressed at their current value?

Present value

What is the formula for break-even point?

Q = FC / (R-v)

Some basic questions in capacity planning are:

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

In which of the following cases can the emphasis on efficiency, over utilization, be misleading?

When the effective capacity is low compared to design capacity

Utilization is the ratio of actual output to _________ capacity. It measures what % of time a resource is _______

design ; Percent

If the output rate is increased but the average unit costs also increase we are experiencing:

diseconomies of scale

Globalization simplifies capacity decisions because there are more, cheaper options

false

increasing ________________ allows the firm to be more responsive to changing market conditions.

flexibility

Long-term capacity needs require

forecasting demand over a time horizon and then converting those forecasts into capacity requirements

A reason for the importance of capacity decisions is that capacity:

is a long-term commitment of resources

The three primary capacity strategies are?

leading, following and tracking

Short-term capacity needs are

less concerned with cycles or trends than with seasonal variations and other variations from average

Strategic Level

managers develop overall business strategies, goals, and objectives as part of the company's strategic plan

Design capacity is the _______ output rate a process is _______ for.

maximum ; designed

How many products does cost-volume analysis involve?

one

Actual output

rate of output actually achieved - cannot exceed effective capacity

Capacity Strategy

refers to several aspects of capacity management, including: the timing of expansion or contraction the amount of capacity cushion the size of facilities the linkage with marketing/business plans the linkage with competitive priorities

what statements about variability makes capacity planning challenging?

service requests and times

constraint is

something that limits the performance of a process or system in achieving its goals

Capacity planning can be discussed at the

strategic level, tactical level, and operational level.

Before increasing capacity, it is important to make sure an organization's

supply chain

Capacity decisions are important and are based on

the forecast of customer demands.

Capacity also must be matched with the ______________ of demand.

timing

Capacity cushion is used when there is ______ about future

uncertainty

A basic question in capacity planning is:

what kind is needed how much is needed when is it needed

A hotel room illustrates several of the challenges associated with planning service capacity. Which of the following illustrate these?

-A hotel room must be in a location a customer would like to stay-There is high demand during certain times of the year-An empty room cannot be stored for future use

Which of the following statements accurately reflect the strategic importance of capacity decisions?

-Capacity decisions can affect competitiveness, -Capacity decisions impact how well a firm can meet demand -Capacity decisions affect operating cost

Which are additional questions that should be asked when making capacity planning decisions, beyond the initial key questions?

-How much capacity is needed?-When is the capacity needed?-What kind of capacity is needed?

constraints on order

-Identify the most pressing constraint. If it cannot be easily overcome, go to the next step-Change the operation to achieve maximum benefit, given the constraint-Make sure all other parts of the process support the constraint-Explore and evaluate alternatives for overcoming the constraint-Repeat until the level of constraints is acceptable

Which of the following situations causes a misjudgment of a firm's capacity requirements?

-Marketing personnel overly optimistic in their predictions -Predictions focus mainly on the potential revenue that will be earned

Assumptions of Cost-Volume Analysis

-One product is involved -Everything produced can be sold -The variable cost per unit is the same regardless of the volume -Fixed costs do not change with volume changes -The revenue per unit is the same regardless of volume

Long-term capacity alternatives include which of the following?

-Opening branch facilities -Closing branch facilities -Expanding an existing facility -Relocating existing operations -Contracting an existing facility

Which of the following statements about variability in capacity planning/forecasting is true?

-Service systems have considerable variability in service time making capacity planning challenging. -Service systems have considerable variability in service requests making capacity planning challenging.

Which of the following improvements will typically increase capacity?

-Standardizing output -Reducing changeover times -increase productity

Forecasting for capacity requirements involves

-The long-term versus the short-term capacity needs. -How the long-term capacity relates to the overall level of capacity, such as a facility's size, trends, and cycles. -How the short-term capacity relates to variations from seasonal, random, and irregular fluctuations in demand

Which of the following are points for consideration when deciding whether to outsource or produce in-house?

-the fixed costs-demand patterns-the level of expertise in-house

Steps in Capacity Planning

1.Estimate future capacity requirements 2.Evaluate existing capacity and facilities; identify gaps 3.Identify alternatives for meeting requirements 4.Conduct financial analyses 5.Assess key qualitative issues 6.Select the best alternative for the long term 7.Implement alternative chosen 8.Monitor results

An alternative will have fixed costs of $10,000 per month, variable costs of $50 per unit, and revenue of $70 per unit. The break-even point volume is:

500

Given the following information, what would efficiency be? Effective capacity = 50 units per day Design capacity = 100 units per day Actual output = 30 units per day

60

This is an example of what type of capacity: suppose that the effective capacity is 7 ½ hours. However, if the electricity goes out and some work time is lost. As a result the actual output will most probably decrease.

Actual Output

Efficiency=

Actual Output / Effective Capacity

Utilization=

Actual Output /Design Capacity

______________ is the quantity at which two competing alternative are equivalent.

An indifference point

Bottleneck Operation

An operation in a sequence of operations whose capacity is lower than that of the other operations

in house or outsource factors to consider

Available capacity Expertise Quality considerations The nature of demand Cost Risks

Which of the following are factors that determine design capacity?

Batch processing, product standardization, layout of the work area

Demand Patterns

Charting demand patterns Predictable cycles Random demand fluctuations Demand patterns by market segment

This is an example of what type of capacity: Suppose an employee works from 8 a.m. to 5 p.m. every day, and the design capacity is 9 hours. However, because of Occupational Safety and Health Administration (OSHA) rules and the company regulations the employee should take one hour for lunch, and two 15 minute breaks, one in the morning and one in the afternoon. Because of policies and regulations the effective capacity is 7 ½ hours.

Effective Capacity

Which of the following factors affect the effective capacity?

Employee absenteeism, inventory shortages, machine breakdowns

Determinants of Effective Capacity

Facilities Product and service factors Process factors Human factors Policy factors Operational factors Supply chain factors External factors

The more uniform production output is, the less effective capacity the operation has

False

Reasons for economies of scale:

Fixed costs are spread over a larger number of units Construction costs increase at a decreasing rate as facility size increases Processing costs decrease due to standardization

Demand Management Strategies

Strategies used to offset capacity limitations and that are intended to achieve a closer match between supply and demand

Operational Level

The bottom level of an organization, where the routine, day-to-day business processes and interactions with customers occur.

Capacity

The upper limit or ceiling on the load that an operating unit can handle

Break-Even Point (BEP)

The volume of output at which total cost and total revenue are equal

In evaluating capacity alternatives, both financial qualitative analyses must be performed.

True

Which of the following are assumptions for cost-volume analysis?

_per unit revenue exceeds per unit variable cost. -The variable cost per unit does not change. -There is only one product -fixed cost do not change with volume changes.

Utilization =

actual output/design capacity

Efficiency =

actual output/effective capacity

Decision theory

analyzing possible future conditions, developing alternatives, and determining the payoff for each alternative under each possible future condition.

Financial Analysis

analyzing the cash flow of different facilities with different capacities; determining the present value of the investment and return on investment, and analyzing the viability, stability, and profitability of a facility.

Waiting-line analysis

analyzing the elements of the waiting line to see if capacity needs to be increased. Any time there is more customer demand for a product or service than can be provided, a waiting line occurs.

A bottleneck operation is the step whose ______ is ________ than that of other steps in the sequence of operations.

capacity ; lower