Chapter 6 - Planning Capacity

Topics: Capacity utilization, Economics of production, Costs Pages: 6 (1591 words) Published: April 18, 2013
chapter 6: Planning capacity
Capacity the maximum rate of output of a process or a system. Acquisition of new capacity requires extensive planning, and often involves significant expenditure of resources and time. Capacity decisions must be made in light of several long-term issues such as the firm’s economies and diseconomies of scale, capacity cushions, timing and sizing strategies, and trade-offs between customer service and capacity utilization.

Planning capacity across the organization
Accounting provide cost information needed to evaluate capacity expansion Finance financial analysis of proposed capacity expansion investments and raises funds Marketing demand forecasts needed to identify capacity gaps. Operations selection of capacity strategies that can be implemented to effectively meet future demand. Human Resources hiring and training employees needed to support internal capacity plans. planning long-term capacity

When choosing a capacity strategy: How much of a cushion is needed to handle variable or uncertain demand? Should we expand capacity ahead of demand, or wait until demand is more certain? measures of capacity and utilization

Output Measures Are best utilized when applied to individual processes within the firm, or when the firm provides a relatively small number of standardized services and products. For example, a car manufacturing plant may measure capacity in terms of the number of cars produced per day. Inputs Measures Are used for low-volume, flexible processes (custom products). For example a custom furniture maker might measure capacity in terms of inputs such as number of workstations or number of workers. The problem of input measures is that demand is expressed as an output rate. If the furniture maker wants to keep up with demand, he must convert the business’s annual demand for furniture into labor hours and number of employees required to fulfill those hours. Utilization Degree to which a resource (equipment, space, worker) is currently being used. Utilization= Average Output RateMaximum Capacityx 100%

The numerator and the denominator should be measured in the same units. A process can be operated above the 100%, with overtime, extra shifts, overstaffing, subcontracting, etc, but this is not sustainable for long. Economies of scale

Economies of scale The average unit cost of a service or good can be reduced by increasing its output rate. Why? * Spreading fixed costs same fixed costs divided by more units * Reducing construction costs doubling the size of the facility usually doesn’t double construction costs (building permits, architect’s fees, rental) * Cutting costs of purchased materials better bargaining position and quantity discounts * Finding process advantages speed up the learning effect, lowering inventory, improving process and job designs, and reducing the number of changeovers. diseconomies of scale

Diseconomies of scale The average cost per unit increases as the facility’s size increases. The reason is that excessive size can bring complexity, loss of focus, and inefficiencies.

capacity timing and sizing strategies
sizing capacity cushions
Capacity cushion=100%-Average Utilization rate (%)
When the average utilization rate approaches 100% for long periods, it’s a signal to increase capacity or decrease order acceptance to avoid declining productivity. The optimal capacity cushion depends on the industry. Particularly, in front-office processes where customers expect fast service times, large cushions are vital (more variable demand). For capital-intensive firms, minimizing the capacity cushion is vital (unused capacity costs money). timing and sizing expansion

Two strategies:
* Expansionist strategy large, infrequent jumps in capacity. Is ahead of demand, and minimizes the chance of sales lost to insufficient capacity * Wait-and-see strategy smaller, more frequent jumps. It lags behind demand. To meet any shortfalls,...
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