midterms

• Capacity

  Maximum rate of output for a facility; refers to an upper limit or ceiling on the load that an operation unit can handle
• According to the dictionary, capacity is the ability to hold, receive, store or accommodate
• Capacity (in general business sense)


  The amount of output that a system is capable of achieving over a specific period of time
• Two levels of capacity plans

  • Long-term capacity plans
  • Short-term capacity plans
• Long-term capacity plans


  • Deal with investments in new facilities and equipment
  • Cover at least two years into the future but construction lead times alone can force much longer time horizons
• Short-term capacity plans


  • Focus on work-force size, overtime budgets, inventories and other types of decisions
• Basic questions in capacity plans

  • What kind of capacity is needed?
  • How much is needed?
  • When is it needed?
• Output measures


  • Usual choice for line flow processes
  • Less useful as the amount of customization and variety in the product mix becomes excessive
• Input measures


  • Usual choice for flexible flow processes
  • Demand must be converted to an input measure to compare demand requirement and capacity on an equivalent basis
• Utilization


  Degree to which equipment, space or labor is currently being used
• Peak capacity


  • Maximum output that a process or facility can achieve under ideal conditions
  • Can be sustained for only a short time
• Effective capacity


  Maximum output that a process or firm can economically sustain under normal conditions
• Bottleneck


  An operation that has the lowest effective capacity of any operation in the facility and thus limits the system's output
• Economies of scale


  The average unit cost of a good or service can be reduced by increasing its output rate
• 4 principal reasons why economies of scale can drive costs down

  • Spreading fixed costs
  • Reducing construction costs
  • Cutting costs of purchased materials
  • Finding process advantages
• Diseconomies of scale


  The average cost per unit increases as the facility's size increases
• Capacity cushion


  Amount of reserve capacity that a firm maintains to handle sudden increases in demand or temporary losses of production capacity
• Economies of scale


  Higher volumes can reduce the costs of purchased materials and services. They give the purchaser a better bargaining position and the opportunity to take advantage of quantity discounts
• Process advantages


  Firms may be able to justify the expense of more efficient technology or more specialized equipment
• Reason for diseconomies of scale

  Excessive size can bring complexity, loss focus and inefficiencies that raise the average unit cost of a product or service
• Capacity strategies

  1. Sizing capacity cushion

  2. Timing and sizing expansion

  3. Linking capacity and other decisions
• Capacity cushion


  Amount of reserve capacity that a firm maintains to handle sudden increases in demand or temporary losses of production capacity; it measures the amount by which the average utilization (in terms of effective capacity) falls below 100%
• Capacity cushions


  • Businesses find large cushions when demand varies and when future demand is uncertain, particularly if resource flexibility is low
• Expansion strategies

  1. Expansionist strategy (large, infrequent jumps in capacity)

  2. Wait-and-see strategy (smaller, more frequent jumps)

  3. Follow-the-leader (intermediate strategy, expanding when others do)
• Demand increasing and time between increments increasing


  Size of increments must also increase
• Competitive priorities emphasizing faster deliveries


  Requires a larger capacity cushion to allow for quick response and uneven demand
• Higher quality levels


  Allows for a smaller capacity cushion due to less uncertainty caused by yield losses
• More capital-intensive processes


  Increases pressure to have a smaller capacity cushion to get an acceptable return on investment
• Less worker flexibility


  Requires a larger capacity cushion to compensate for the operation overloads that are more likely to occur
• Less reliance on inventory to smooth output


  Requires a larger capacity cushion to meet increased demands during peak periods
• More stable environment


  Allows a smaller capacity cushion because products or services can be scheduled with more assurance
• Steps in capacity planning

  1. Estimate capacity requirements

  2. Identify gaps

  3. Develop alternatives

  4. Evaluate the alternatives
• Always round up the fractional part unless it is cost efficient to use short-term options such as overtime or stockouts to cover any shortfalls
• Capacity gap


  Any difference (positive or negative) between projected demand and current capacity
• Evaluating capacity alternatives

  1. Qualitative concerns (how each alternative fits overall capacity strategy and other business aspects)

  2. Quantitative concerns (estimate change in cash flows for each alternative)
• Cash flows


  Difference between the flow of funds into and out of an organization over a period of time
• Waiting line models

  Use probability distributions to provide estimates of average customer time, average length of waiting lines, and utilization of the work center
• Decision trees


  Can be particularly valuable for evaluating different capacity expansion alternatives when demand is uncertain and sequential decisions are involved
• Location decisions

  Decisions made by organizations about where to locate their operations
• Location decisions


  • Made infrequently but have significant impact on the organization
  • Closely tied to an organization's strategies
  • Can impact capacity and flexibility
  • Entail long-term commitment
  • Have impact on investment requirements, operating costs and revenues, and operations