Chapter 5: Capacity Planning
Operations Management: Processes and Supply Chains Chapter 5: Capacity Planning
Learning Goals
5.1 Define long-term capacity and its relationship with economies and diseconomies of scale.
5.2 Understand the main differences between the expansionist and wait-and-see capacity timing and sizing strategies.
5.3 Identify a systematic four-step approach for determining long-term capacity requirements and associated cash flows.
5.4 Describe how the common tools for capacity planning such as waiting-line models, simulation, and decision trees assist in capacity decisions.
Capacity Planning
Definition of Capacity: Capacity is the upper limit or ceiling on the load that an operating unit can handle.
What is Capacity Management?
Components of Capacity Management:
Capacity planning (long-term)
Economies and diseconomies of scale
Capacity timing and sizing strategies
Systematic approach to capacity decisions
Constraint management (short-term)
Theory of constraints
Identification and management of bottlenecks
Product mix decisions using bottlenecks
Managing constraints in a line process
Impacts of Capacity Decisions
Affects the ability to meet future demands.
Influences operating costs.
Impacts the entire supply chain.
Serves as a major determinant of initial costs.
Involves long-term commitment.
Affects competitiveness within the market.
Influences ease of management.
Globalization adds complexity to capacity decisions.
Plays a crucial role in long-range planning.
Fundamental Questions in Capacity Planning
What kind of capacity is needed?
When is it needed?
How much is needed?
Capacity - Qualitative and Quantitative Concerns
Qualitative Concerns: Includes uncertainties about demand, competitive reactions, technological changes, and cost estimates.
Quantitative Concerns: Relates to cash flows and other quantitative measures that affect capacity planning.
Capacity Timing Strategies
Expansionist: This strategy anticipates future demand by expanding capacity.
Wait and See: A more conservative approach that waits for clear indicators of demand before committing resources to capacity expansion.
Intermediate - Follow the Leader: This strategy follows the lead of competitors regarding capacity decisions.
How Much Capacity?
Output Measures of Capacity: Best suited for individual processes or firms with a small number of standardized services/products (high volume).
Input Measures of Capacity: Typically utilized for low-volume, flexible processes.
Measures of Capacity and Utilization
Utilization: The degree to which equipment, space, or workforce is currently being utilized. Defined as:
Utilization = (Average Output Rate) / (Maximum Capacity) × 100%.
Capacity Cushions
Definition of Capacity Cushion: The amount of reserve capacity used to manage sudden increases in demand or temporary losses of production capacity.
Calculation of Capacity Cushion:
Capacity cushion = 100% − Average Utilization Rate (%).
Industry Variances:
Capital-intensive industries prefer cushions typically well under 10%.
Less capital-intensive sectors, such as the hotel industry, can accommodate 30% to 40% cushions.
Economies and Diseconomies of Scale
Economies of Scale: Benefits achieved by increasing production, including:
Spreading fixed costs over more units.
Reducing construction costs per unit.
Cutting costs of purchased materials.
Gaining process advantages leading to economies.
Diseconomies of Scale: Negative factors that arise from increased scale, including:
Complexity of operations.
Loss of organizational focus.
Inefficiencies in production and process management.
Short-Term Capacity Planning Strategies
Methods for adjusting capacity in the short term:
Utilizing overtime.
Implementing extra shifts.
Employing temporary workers.
Temporarily outsourcing production tasks.
Systematic Approach to Long-Term Capacity Decisions
Estimate future capacity requirements (referenced in Chapter 8).
Identify gaps by comparing required capacity with currently available capacity.
Develop alternative plans to bridge the gaps.
Evaluate each alternative both qualitatively and quantitatively to reach a final decision.
Tools for Evaluating Optimal Capacity Planning Decisions
Waiting-Line Models: Useful in high customer-contact processes where customer flow needs management.
Simulation: Applied when models are too complex for simple waiting-line analysis, simulating real-world operations.
Decision Trees: Employed when demand is uncertain and decisions are sequential in nature. It is suggested these tools will be discussed further in MGMT 325.