Supply: Chapter 3

• Capacity Management in Operations
  
  • Capacity is the ability to hold, receive, store, or accommodate.
    
    • The amount of output that a system is capable of achieving over a specific period of time.
      
    • Capacity must be stated relative to some period of time
      
  • 3 time durations:
    
    • Long range -- greater than one year
      
    • Intermediate range -- monthly or quarterly plans for the next 6 to 18 months
      
    • Short range -- less than one month
      
  • Capacity must be defined as the amount of resource inputs available relative to output requirements over a particular period of time.
    
  • Strategic capacity planning -- to provide an approach for determining the overall capacity level of capital-intensive resources -- facilities, equipment, and over all labor force size.
    
• Capacity Planning Concepts
  
  • Capacity talks about how much can be attained, but doesn't say how long that rate can be sustained. The concept of best operating level is used to avoid the problem
    
  • Best operating level -- the level of capacity for which the process was designed and thus the volume of output at which average unit cost is minimized
    
  • Capacity utilization rate -- reveals how close a firm is to its best operating level.
    
    • = capacity used / best operating level
      
  • Economies and Diseconomies of Scale
    
    • As a plant gets larger and volume increases, the average cost per unit of output drops.
      
    • At some point the size of a plant becomes too large and diseconomies of scale become a problem.
      
  • Capacity Focus
    
    • A production facility works best when it focuses on a fairly limited set of production objectives. A firm should not expect to excel in every aspect of manufacturing performance.
      
    • This capacity focus concept can also be operationalized through the mechanism of plants within plants (PWPs).
      
  • Capacity Flexibility
    
    • Having the ability to rapidly increase or decrease production levels, or shift production capacity quickly from one product or service to another
      
    • Flexible plants -- the zero-changeover-time plant. Quickly can adapt to change. Ringling Bros.
      
    • Flexible processes -- flexible manufacturing systems on the one hand and simple, easily set up equipment on the other.
      
    • Economies of scope -- exist when multiple products can be produced at a lower cost in combination than they can separately.
      
    • Flexible workers -- have multiple skills and the ability to switch easily from one kind of task to another.
      
• The Learning Curve
  
  • A line displaying the relationship between unit production and the cumulative number of units produced.
    
  • Cost per burger when cumulative production reaches 10 million? -- If a firm has a 90 percent learning curve, costs will fall to 90% of $.55 or $.495, when accumulated production reaches 10 million.
    
  • Learning curve theory
    
    • Amount of time required to complete a given task or unit of a product will be less each time the task is undertaken
      
    • The unit time will decrease at a decreasing rate
      
    • The reduction in time will follow a predictable pattern
      
  • Plotting Learning Curves
    
    • Problem 3.1 and 3.2
      
• Capacity Planning
  
  • Considerations in adding capacity
    
    • Maintaining system balance -- in a perfectly balanced plant, the output of stage 1 provides the exact input requirement for stage 2
      
    • To deal with imbalance -- add capacity to stages that are bottlenecks. Also buffer inventories in front of the bottleneck stage to ensure that it always has something to work on. Also, duplicate the facilities of one department on which another is dependent.
      
  • Frequency of capacity additions
    
    • Two types of costs to consider when adding capacity -- cost of upgrading too frequently, and upgrading too infrequently.
      
  • External sources of operations and supply capacity
    
    • It may be cheaper sometimes to not add capacity at all, but to use some existing internal source of capacity.
      
    • Two common strategies -- outsourcing and sharing capacity
      
  • Determining Capacity Requirements
    
    • Steps:
      
      • Use forecasting techniques to predict sales for individual products within each product line
        
      • Calculate equipment and labor requirements to meet product line forecasts
        
      • Project labor and equipment availablilities over the planning horizon
        
    • Capacity cushion
      
      • A capacity cushion is an amount of capacity in excess of expected demand.
        
    • Problem 3.3
      
  • Use decision trees to evaluate capacity alternatives
    
    • Problem 3.4
      
• Planning Service Capacity
  
  • Capacity planning in service versus manufacturing
    
    • Time: -- in services managers must consider time as one of their supplies.. The capacity must be available to produce a service when it is needed
      
    • Location -- the service capacity must be located near the customer in face-to-face settings
      
    • Volatility of Demand -- ser vice system has higher volatility of demand than a manufacturing production system. This is because:
      
      • Services cannot be stored
        
      • Customers interact directly with the production system and they often have different needs
        
      • It is directly affected by consumer behavior
        
  • Capacity utilization and service quality