Operations Management: Capacity Planning and Constraints

These flashcards cover key terms and concepts related to capacity planning and constraints in operations management.

Capacity Utilization

The degree to which available capacity is being used, typically calculated as Utilization = (Average output rate / Maximum capacity) × 100%.

Capacity Cushion

The amount of reserve capacity a process uses to handle sudden increases in demand or temporary losses of production capacity.

Economies of Scale

Cost advantages that a business obtains due to the scale of its operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units.

Diseconomies of Scale

A situation where the cost per unit increases as production scales up, typically due to inefficiencies that develop with higher levels of output.

Long-Term Capacity Planning

A process that involves making investments in new facilities and equipment and planning for capacity needs over a minimum of two years into the future.

Wait-and-See Capacity Strategy

A capacity expansion strategy that lags behind market demand, relying on short-term options such as overtime or subcontractors.

Expansionist Capacity Strategy

A capacity expansion strategy that anticipates future demand, expanding capacity ahead of demand in order to gain economies of scale.

Bottleneck

A capacity-constrained resource that limits the organization’s ability to meet production demands.

Theory of Constraints (TOC)

A management philosophy that focuses on identifying and managing constraints that limit a system's performance to achieve higher throughput.

Safety Stock Inventory

Surplus inventory held to protect against uncertainties in demand and supply.

Economic Order Quantity (EOQ)

The optimal order quantity that minimizes total inventory holding and ordering costs.

Contribution Margin

The amount each product contributes to overall profitability, calculated as sales revenue minus variable costs.

Independent Demand

Demand that is influenced by market conditions and is estimated through forecasting.

Dependent Demand

Demand for items that are related to the production of independent demand items, calculated based on a Bill of Materials (BoM).

Capacity Timing

The process of determining when to expand or contract capacity in response to demand forecasts.

Anticipation Inventory

Inventory built in anticipation of future demand spikes.

Pipeline Inventory

Inventory that exists in transit, on order, or not yet received, necessary to cover lead times.

ABC Analysis

A method for categorizing inventory items based on their importance, often using the Pareto Principle where a small percentage of items account for a large percentage of value.