MGMT 339 Ch. 5

  1. Determinants of Effective Capacity
    • Facilities- Design, Location, Environment, Layout
    • Operational- Scheduling, materials, maintenance
    • Process- Quality, Quantity
    • Human- Skill, Compensation, Motivation, Training, Labor turnover
    • Policy- Mgmt can increase by using overtime, 2nd & 3rd shifts
    • Supply Chain- Distributor, transportation, warehouse
    • External- Environmental Policy, Unions (Cap on work hrs)
    • Products- Design --> Standardized = more quantity
  2. Capacity Strategy Formulation
    • Leading, Following & Tracking
    • Growth rate & demand variability
    • Competition Behavior
    • Direction of Technology
    • Cost of Building- property tax, electricity
    • Availability of capital & Inputs

    Slide 9
  3. Key Decisions of Capacity Planning
    • How much capacity needed? Capacity cushion, offset demand uncertainty
    • Flexibility of facilities
    • Timing of Changes - availability of capital
    • Balance the changes to rest of system

    Slide 10
  4. Steps for Capacity Planning
    • forecast future capacity
    • Evaluate current capacity for gaps
    • Alternatives (Identify)
    • financial analysis
    • Assess key qualitative issues for each choice - picking up new equipment-> layoff some workers = current workers moral hurt
    • Choose best one
    • Implement
    • Monitor Results

    Slide 11
  5. Forecasting Capacity Requirements
    • Long term vs. Short Term
    • Long- overall level of capacity. facility size, trends & cycles
    • Short- Seasonal, Irregular (oil shortage, storms, equipment breakdown, health hazards), random

    Pg. 192 slide 12
  6. Examples of Seasonal Demand Patterns

    Beer sales, toy sales, airline traffic, vacation, tourism, , power usage, gas consumption, sports and recreation, education


    Welfare and social security checks, bank transactions


    Retail sales, restaurant meals, automobile traffic, automotive rentals, hotel registrations


    Telephone calls, power usage, automobile traffic, public transportation, classroom utilization, retail sales, restaurant meals

    pg. 193 slide 12
  7. How to calculate processing requirements. Ex: how many machines needed to produce so & so? what is the equation?
    Total processing time (hrs)/ capacity of machine (hrs) = how many machines of the type is needed.
  8. Important factors in planning service capacity
    • Need to be near customer - convenience
    • Can't store services- Timing demand. Ex: Airline, bus tickets. Speed of delivery
    • Volatility of Demand- Major peaks due to weather, social or cultural. Ex: fix; add more workers during peak hrs.

    pg. 194 slide 14
  9. What are some factors to consider when choosing to In-House or Outsource?
    • Available capacity
    • Expertise (e.g. Dell’s printers and monitors)
    • Quality considerations- firms that specialize can provide better quality.
    • Nature of demand- if high & steady do inhouse. small or wide fluctuation = out.
    • Cost: cheaper to outsource?- fixed costs, transportation.
    • Risk: e.g. loss of operational control, knowledge sharing, info. liability--> customer--> damage--> reputation

    pg. 195 slide 15
  10. Developing Capacity Alternatives
    • Design flexibility into systems- adding water lines in advance
    • life cycle- Intro, Growth, Maturity, Decline
    • Big Picture- Links. Ex: adding more hotel rooms--> More parking, food, housekeeping?
    • Prepare to deal with capacity “chunks”- not smooth. do u under/over capacity to match demand?
    • Attempt to smooth out capacity requirements- find patterns and offset. ex: snow skis & water skis.
    • Identify optimal operating level- Economies of scale/ diseconomies of scale

    pg. 198 slide 16
  11. What is economies of scale?
    If output is less than the optimal level, increasing output = decreasing average unit costs
  12. Why is there economies of scale?
    • why does output increase = decrease cost?
    • fixed costs are spread out over more units
    • processing costs less cuz more customization
    • Construction costs increase at a decreasing rate

    pg. 200 slide 22
  13. What is Diseconomies of scale?
    If the output rate is more than the optimal level, increasing the output rate results in increasing average unit costs
  14. Why is there diseconomies of scale
    • Distribution & Complexity- shipping frm one location, control & communication
    • Inflexibility
    • additional levels of bureaucracy = slow decision making

    pg. 200 slide 22
  15. Bottle neck operation
    • An operation in a sequence of operations whose capacity is lower than that of the other operations.
    • The whole system is limited to that bottle neck output

    pg. 196 slide 17
  16. Waiting Line Analysis
    Ex: Theme Parks & Fast food

    Analysis of amount of ppl in line to facilitate efficient amount of workers
  17. Breakeven
    TR = TC
  18. BEP Analysis
    Q = P+FC / R-V
  19. What do the following represent?
    • Q = Quantity
    • P = Total Profit NOT PRICE!
    • FC = Fixed Costs
    • V = Variable
    • R = Revenue
Card Set
MGMT 339 Ch. 5
Capacity Planning