MGMT 339 Ch. 6 - Capacity planning

What is the definition of capacity in operations management?

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

What are the three primary resources that define capacity?

Equipment, space, and employee skills.

When are output measures of capacity most appropriate?

When applied to individual processes or firms providing a small number of standardized services and products.

When are input measures of capacity most appropriate?

When dealing with low-volume, flexible processes.

How is utilization calculated?

Utilization = Avg Output Rate/Maximum Capacity * 100%

What are economies of scale?

The phenomenon where the average unit cost of a service or good decreases as the output rate increases.

List four ways to achieve economies of scale.

Spreading fixed costs, reducing construction costs, cutting costs of purchased materials, and finding process advantages.

What are diseconomies of scale?

The phenomenon where the average cost per unit increases as the facility size increases, often due to complexity, loss of focus, or inefficiencies.

What is a capacity cushion?

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

What is the formula for calculating a capacity cushion?

Capacity cushion = 100% - Average Utilization rate (%).

How do capacity cushion preferences differ between capital-intensive and hotel industries?

Capital-intensive industries prefer cushions well under 10 percent, while the hotel industry can manage with 30 to 40 percent.

What is the expansionist strategy in capacity planning?

A strategy involving large, infrequent jumps in capacity to stay ahead of demand.

What is the wait-and-see strategy in capacity planning?

A strategy involving smaller, more frequent increments of capacity, often lagging behind demand to minimize risk.

What are the four steps in the systematic approach to long-term capacity decisions?

1. Estimate future capacity requirements, 2. Identify gaps, 3. Develop alternative plans, 4. Evaluate alternatives and make a final choice.

What variables are required to calculate the number of machines (M) needed for a process?

Demand forecast (D), processing time (p), total available operating hours (N), and desired capacity cushion (C).

What is the role of setup time in capacity requirement calculations?

It accounts for the time required to change a process or operation from producing one product or service to another.

Why is capacity planning considered a long-term decision?

Because it involves significant capital investment in equipment and space that cannot be easily or cheaply reversed.

What is a capacity gap?

The difference between the required capacity to meet future demand and the currently available capacity.

How does a capacity cushion relate to utilization?

A higher capacity cushion results in lower average utilization, providing more flexibility to handle demand spikes.

What tools are commonly used to assist in capacity planning decisions?

Waiting-line models, simulation, and decision trees.

What is the primary objective of capacity management?

To ensure that the organization's capacity is sufficient to meet customer demand while maintaining efficiency and cost-effectiveness.

How does complexity contribute to diseconomies of scale?

As a facility grows, the management and coordination of operations become more difficult, leading to inefficiencies that raise unit costs.

What does 'N' represent in the capacity requirement formula?

The total number of hours per year during which the process operates.

When calculating the number of machines required for a capacity requirement, what should be done if the result is a fraction?

Round up to the next integer.

What is the 'base case' in capacity planning?

The strategy of doing nothing and suffering the consequences.

What are some qualitative concerns when evaluating capacity alternatives?

Uncertainties about demand, competitive reaction, technological change, and cost estimates.

What are quantitative concerns in capacity planning?

Measures such as cash flows, which represent the difference between funds flowing into and out of an organization.

How is incremental cash flow calculated when expanding capacity?

It is the extra meals served due to increased capacity multiplied by the profit per meal.

What is the formula for Net Present Value (NPV)?

NPV = 1 / (1 + r), where r is the discount rate.

When are waiting-line models most useful in capacity planning?

In high customer-contact processes.

When is simulation used for capacity analysis?

When models are too complex for waiting-line analysis.

When are decision trees most useful in capacity planning?

When demand is uncertain and sequential decisions are involved.

If a capacity gap is calculated as 1.83 machines, how many machines should be purchased?

Two machines, unless short-term options are used to fill the gap.

What is the primary purpose of the Capacity Requirements Solver in OM Explorer?

To confirm capacity calculations using specific demand forecast scenarios.

What is a two-stage expansion in capacity planning?

An alternative where capacity is increased in increments over time rather than all at once.

How do you calculate the net cash flow for a period involving an investment?

Net Cash Flow = Cash Outflow - Cash Inflow

Why might a single-stage expansion be preferred over a two-stage expansion?

It may result in a higher Net Present Value (NPV) on a purely monetary basis.

What must be considered alongside monetary metrics like NPV when choosing between capacity alternatives?

Qualitative factors, such as demand uncertainty and competitive reactions.

How is the before-tax profit margin determined for a meal?

Before-Tax Profit Margin = VC - meal price

What happens to potential sales if a business does nothing to address a capacity gap?

The business loses all potential sales beyond its current maximum capacity.

What does 'year 0' represent in a capacity investment project?

The initial period when the investment is made.

What is the main advantage of using the NPV method in capacity planning?

It accounts for the time value of money.

What is the difference between kitchen capacity and dining room capacity in the Grandmother's Chicken Restaurant example?

The kitchen capacity is 80,000 meals, while the dining room capacity is 105,000 meals.

In the two-stage expansion example, what triggers the second stage of expansion?

If sales in years 1 and 2 meet expectations.

What is the primary goal of conducting a capacity gap analysis?

To determine if current capacity is sufficient to meet projected demand.