Operations Management: Chapter 6 and 7

Comprehensive vocabulary flashcards covering the core concepts, strategies, formulas, and tools of long-term capacity planning from Chapter 6 of Operations Management: Processes and Supply Chains.

Capacity

The maximum rate of output of a process or a system.

Capacity Planning (Long-Term)

A long-term aspect of capacity management dealing with economies and diseconomies of scale, capacity timing and sizing strategies, and systematic approaches to capacity decisions.

Constraint Management (Short-Term)

A short-term aspect of capacity management focusing on the theory of constraints, identification and management of bottlenecks, product mix decisions using bottlenecks, and managing constraints in line processes.

Output Measures of Capacity

Capacity metrics best utilized when applied to individual processes within the firm or when the firm provides a relatively small number of standardized services and products.

Input Measures of Capacity

Capacity metrics generally used for low-volume, flexible processes where services or products are customized or diverse.

Utilization

The degree to which equipment, space, or the workforce is currently being used, expressed as a percentage: $\text{Utilization} = \frac{\text{Average output rate}}{\text{Maximum capacity}} \times 100\%$.

Economies of Scale

The concept that the average unit cost of a service or good can be reduced by increasing its output rate, achieved through spreading fixed costs, reducing construction costs, cutting purchasing costs, and finding process advantages.

Diseconomies of Scale

The condition where the average cost per unit increases as the facility's size increases, caused by complexity, loss of focus, and operational inefficiencies.

Capacity Cushion

The amount of reserve capacity a process uses to handle sudden increases in demand or temporary losses of production capacity, measured as $\text{Capacity cushion} = 100\% - \text{Average Utilization rate (\%) }$.

Expansionist Strategy

A capacity timing and sizing strategy that stays ahead of demand by making large, infrequent capacity additions, resulting in planned unused capacity.

Wait-and-See Strategy

A conservative capacity timing and sizing strategy that lags behind demand by making small, frequent capacity additions, relying on short-term options like overtime or subcontracting to meet shortfalls.

Four-Step Systematic Approach to Long-Term Capacity Decisions

A four-step decision process: 1. Estimate future capacity requirements; 2. Identify gaps by comparing requirements with available capacity; 3. Develop alternative plans for reducing the gaps; 4. Evaluate each alternative, both qualitatively and quantitatively, and make a final choice.

Capacity Requirement ($M$)

What a process's capacity should be for some future time period to meet the demand of customers (external or internal) given the firm's desired capacity cushion.

Single-Product Capacity Requirement Formula

The formula used to calculate required capacity units for one product or service: $M = \frac{Dp}{N[1 - (C / 100)]}$, where $D$ is annual demand forecast, $p$ is processing time, $N$ is available operating hours per year, and $C$ is the desired capacity cushion percent.

Setup Time ($s$)

The time required to change a process or an operation from making one service or product to making another.

Multiple-Product Capacity Requirement Formula

The formula used to determine required capacity units when multiple products require processing and setup times: $M = \frac{\sum [Dp + (D/Q)s]}{N[1 - (C / 100)]}$, where $Q$ is the lot size and $s$ is the setup time per lot.

Capacity Gap

The positive or negative difference between projected capacity requirements ($M$) and current capacity.

Base Case

A capacity planning alternative to do nothing and suffer the consequences, such as lost sales from unmet demand beyond existing capacity.

Cash Flow

The difference between the flow of funds into and out of an organization over a period of time.

Waiting-Line Models

Mathematical capacity planning tools that use probability distributions to model customer arrival and service processes, especially useful in high customer-contact processes.

Simulation (in Capacity Planning)

A capacity planning tool useful for modeling and analyzing complex processes that cannot easily be evaluated with standard waiting-line analysis.

Decision Trees

Schematic decision-making models useful in capacity planning when demand is uncertain and sequential decisions are involved.

Constraint

Any factor that limits the performance of a system and restricts its output

Bottleneck

A capacity constraint resource (CCR) whose available

capacity limits the organization’s ability to meet the

product volume, product mix, or demand fluctuation

required by the marketplace

The Theory of Constraints (TOC)

A systematic management approach that focuses on

actively managing those constraints that impede a

firm’s progress toward its goal of maximizing profits

and effectively using its resources

1. Identify the System Bottleneck(s)

2. Exploit the Bottleneck(s)

3. Subordinate All Other Decisions to Step 2

4. Elevate the Bottleneck(s)

5. Do Not Let Inertia Set In

Throughput time

Total elapsed time from the start to the finish of a job

or a customer being processed at one or more work

centers