Filled Notes For Chapter 5: Strategic Capacity Planning For Products and Services

FILLED NOTES FOR CHAPTER 5:
STRATEGIC CAPACITY PLANNING FOR PRODUCTS AND

SERVICES
Key Concepts:
Capacity is an (upper) bound on the load that a facility or a plant can serve or manufacture. We
measure the capacity of a plant, machine department, worker, hospital, etc., either in terms of output
(number of units or number of pounds manufactured) or in terms of input (number of machine hours
or machines needed to satisfy demand).
Capacity planning refers to the activities of the firm in determining the capacity of a plant or a facility
in terms of equipment, machines, space, workers and processes based on the resource constraints of
the facility. In other words, a major function of capacity planning is to match the capacity of the
machines or facility with the demand for the products of the firm.
Capacity planning can be classified into three planning horizons:
1.
Short range
2.
Medium range
3.
Long range
The amount of time covered by each of the above planning horizons can vary from industry to
industry. Therefore, the lines of demarcation between the three different levels of planning horizons
can be very imprecise. Nevertheless, the long range planning generally considers planning horizons of
one year or longer. A time period of one year or longer is needed to provide sufficient time to build a
new facility, to expand the existing facility or to move to a new facility due to forecasted changes in
demand.
Medium range capacity planning horizon ranges approximately from one month to six months. At this
level of planning, decisions or activities include acquisition of a major piece of machinery and
subcontracting.
Short range planning horizon covers capacity planning activities on a daily or a weekly basis and are
generated as a result of disaggregation of the long or medium range capacity plans. These activities
include machine loading and detailed production scheduling.
The main quantitative technique covered is cost-volume analysis. It may be skipped or may need only
light review if students have had it in another course.
Answers to Discussion and Review Questions
5-1
1. Contrast design capacity and effective capacity:

Design capacity is the maximum possible output. Effective capacity is the maximum
output given product mix, scheduling realities, machine maintenance requirements, and so
on.
3. How do long-term and short-term capacity considerations differ?
Long-term considerations related to the overall level of capacity, while short-term
considerations related to variations in capacity requirements caused by seasonality,
randomness, and so on.
4. Give an example of a good and a service that exhibit these seasonal demand patterns:
a. Annual seasonality in demand for campgrounds, Christmas trees, Mothers Day cards,
snow skis, lawn and garden equipment, snow tires.
b. Monthly seasonal patterns are often created by welfare and social security checks being
sent out and deposited in banks or increased spending, demand for examinations and
registrations at motor vehicle bureaus, subscription renewals and delinquent payment
notices.
c. Weekly seasonal patterns can be noted in motor vehicle traffic, hotel registrations,
supermarket traffic, telephone calls, and demand for auto repair.
d. Daily patterns can be noted in restaurants, telephone calls, motor vehicle traffic,
supermarket traffic, and so on.
5. Give some examples of building flexibility into system design:
Examples of built-in flexibility include buying more land than is currently needed, building
larger plants/offices/homes than currently needed, designing facilities in such a way that future
expansion will require minimal cost and effort (e.g., electrical, plumbing hookups), room for
expanded parking, and so on.
7. What is meant by Capacity in chunks, and shy is that a factor in capacity planning?
Capacity in chunks refers to the large stepwise increases that are frequently encountered
in capacity decisions. An example would be adding a new machine. It is important
because it means that small capacity increases may not be feasible, or that other
alternatives (e.g., working overtime instead of buying another machine) may be worthy of
consideration.
10. How do capacity decisions influence productivity?
Capacity designs establish constraints within which operations must function. They offer an
opportunity to achieve productivity improvements if done carefully. However, mistakes here
can hamper future productivity improvements because poor design can be very difficult to
overcome.
5-2
11.
Why is it important to match process capabilities with product requirements?

It is the most efficient position. If a producer should choose some other combination, such as
an assembly line for a customized product or service, he would find that the highly customized
requirements of the various products were in direct conflict with the more uniform
requirements needed to effectively operate in the assembly-line mode. Matching process
capabilities with product requirements can provide insights to those making process selections
as well as to those managing existing operations. For process choice, decision-makers should
make every attempt to achieve the aforementioned matching of product and process
requirements. For an ongoing operation, a manager should examine existing processes in light
of the table in order to see how well processes and products are matched. Poor matches would
suggest the potential for improvement, perhaps with a substantial increase in efficiency and
lowering of cost.
A second important concept is that products and services often go through life cycles that
begin with low volume that increases as products or services become more well known. When
that happens, a manager must know when to shift from one type of process (e.g., job shop) to
the next (e.g., batch), and perhaps to the next (e.g., assembly line). Of course, some operations
remain at a certain level (e.g., magazine publishing), while others increase (or decrease as
markets become saturated) over time. Again, it is important for a manager to assess his or her
products and services and make a judgment on whether to plan for changes in processing over
time.
12.
Briefly discuss how uncertainty affects capacity decisions.

Uncertainty could have an effect on demand which in turn would have an effect on volume or
desired production which in turn would determine the capacity of the operation. As the level
of uncertainty increases, the need for flexibility in scheduling and the need for larger capacity
also increases.
13.
Discuss the importance of capacity planning in deciding on the number of police officers or
fire trucks to have on duty at a given time.
Capacity of government, not-for-profit service operations such as the number of police
officers, the number of firefighters and the number of emergency vehicles is somewhat
different than the capacity of manufacturing or other types of service operations. In the above
listed not-for-profit service areas, the service need is immediate (i.e., fire, emergency, crime,
weekend, Thanksgiving or Christmas travel) and cannot be delayed or deferred to a later
period. However, in many cases involving manufacturing operations, in the absence of
sufficient capacity, it may be possible to delay production to a later period as long as
backorders are allowed. Therefore, in the above-mentioned cases, the decision-maker may
want to provide additional capacity since the consequences of having inadequate capacity can
be disastrous.
5-3
17.
What is the benefit to a business organization of having capacity measures?

Having capacity measures enables a business organization to know its capabilities and, when
combined with forecasts of future demand, use that knowledge to assess how capacity does or
does not equal demand, and if it does not correlate, develop plans for altering capacity and/or
changing demand through pricing, promotion, etc.
5-4

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FILLED NOTES FOR CHAPTER 5:

STRATEGIC CAPACITY PLANNING FOR PRODUCTS AND

Answers to Discussion and Review Questions

1. Contrast design capacity and effective capacity:

Why is it important to match process capabilities with product requirements?

Briefly discuss how uncertainty affects capacity decisions.

What is the benefit to a business organization of having capacity measures?

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