Operations Management: Long Term Expansion Strategies

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Operation Management

+ Strategies for Capacity Planning/
Substantial Expansion
K.J.Sanjit Roll No#59 PGPME-14, Great lakes IEMR, Gurgaon

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INDEX
Table of Contents

K.J.Sanjit Roll No: 59 PGPME-14, GLIEMR

INTRODUCTION & SUMMARY .............................................................. 3 CHAPTER#1: CAPACITY PLANNING ..................................................... 4 Break-even analysis ........................................................................................................... 4 Long-term capacity planning on the basis of different variables ....................................... 6

CHAPTER#2: CAPACITY EXPANSION STRATEGIES ................................. 8 Capacity leading demand strategy .................................................................................... 8 Capacity lagging demand strategy .................................................................................... 9 Capacity matching/averaging demand strategy .............................................................. 11 Single step large expansion vs. Multi-step incremental expansion .................................. 12

CHAPTER#3: CAPACITY PLANNING FRAMEWORK ............................... 14 CASE STUDY: HEATHROW AIRPORT .................................................... 17 CONCLUSION ................................................................................... 19 REFERENCES .................................................................................... 20

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Introduction
Long-Term Capacity Planning

K.J.Sanjit Roll No: 59 PGPME-14, GLIEMR

The capacity of a process or a plant is defined as the maximum output it could produce in a given time. An efficient long-term capacity planning is very important for any manufacturing firm. It involves making decisions on the capacity of a process to efficiently cater for the demand. In a manufacturing plant the strategy on capacity is formulated, keeping in view the long-term demand changes, to decide on whether to increase or reduce the capacity. In simpler terms it is the art of matching the long-term capacity with the demand. This involves forecasting the future trends in demand and making decisions accordingly. Capacity expansion demands depends upon a number of factors, the most important of which are- volume and certainty of anticipated demand, strategic objectives and cost of expansion and operation. Keeping all these factors in minds a company’s strategists decide on its long-term capacity.

Summary
If a firm wants to develop a long-term capacity plan, it needs to make the essential economic trade-off between the cost of increasing the capacity and the opportunity cost of not having adequate capacity. It has to evaluate whether a one time large expansion is better or several smaller periodic expansions. On top of this the capacity planning should also be in parallel with the strategic direction of the organization. It should take care of the nature and demands of products or services that the firm offers. While planning the capacity, a firm not only seeks to produce enough to satisfy the regular demand of the product but also takes care of the reserves to cater to the demand during unanticipated events such as demand surges, materials shortages and breakdowns. There are four basic strategies for expanding capacity over some fixed time horizon: a) One large capacity increase b) Small capacity increases that match average demand c) Small capacity increases that lead demand d) Small capacity increases that lag demand. Each of these strategies is explained further. The company has to choose one or a combination of these to improve their efficiency, productivity and revenues. Thus, a good forecasting model, which could follow the market demand trends to predict the future, is of utmost importance for a firm to evaluate the options and make a decision on capacity expansion. 3

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CHAPTER#1
Capacity Planning...
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