Chapter 4

Strategic Capacity Planning for Products and Services

Capacity Planning

- The upper limit or ceiling on the load that an operating unit can handle

- Capacity needs include

 Equipment
 Space
 Employee skills

Strategic Capacity Planning

To achieve a match between the long-term supply capabilities of an organization and the predicted level
of long-run demand

Overcapacity operating costs that are too high

Undercapacity strained resources and possible loss of customers

Design capacity- maximum output rate or service capacity an operation, process, or facility is designed
for

Effective capacity- Design capacity minus allowances such as personal time, maintenance, and scrap

Actual output- rate of output actually achieved--cannot

Determinants of Effective Capacity

• Facilities

• Product and service factors

• Process factors

• Human factors

• Policy factors

• Supply chain factors

• External factors
Capacity Strategies

Leading- Build capacity in anticipation of future demand increases

Following- Build capacity when demand exceeds current capacity

Tracking- Similar to the following strategy, but adds capacity in relatively small increments to keep pace
with increasing demand

Strategy Formulation

Strategies are typically based on assumptions and predictions about:

– Long-term demand patterns

– Technological change

– Competitor behavior

Capacity Cushion- Extra capacity used to offset demand uncertainty

Steps in Capacity Planning

1. Estimate future capacity requirements

2. Evaluate existing capacity and facilities; identify gaps

3. Identify alternatives for meeting requirements

4. Conduct financial analyses

5. Assess key qualitative issues

6. Select the best alternative for the long term

7. Implement alternative chosen

8. Monitor results

Forecasting Capacity Requirements

Long-term considerations relate to overall level of capacity requirements

Short-term considerations relate to probable variations in capacity requirements

Service capacity planning can present a number of challenges related to:

- The need to be near customers

Convenience

- The inability to store services

Cannot store services for consumption later

- The degree of demand volatility

.Volume and timing of demand

.Time required to service individual customers

Demand Management Strategies- Strategies used to offset capacity limitations and that are intended to
achieve a closer match between supply and demand

In-House or Outsource- Once capacity requirements are determined, the organization must decide
whether to produce a good or service itself or outsource

Economies of Scale- If output rate is less than the optimal level, increasing the output rate results in
decreasing average per unit costs

Diseconomies of Scale- If the output rate is more than the optimal level, increasing the output rate
results in increasing average per unit costs

Constraint- Something that limits the performance of a process or system in achieving its goals

– Categories

• Market

• Resource

• Material

• Financial

• Knowledge or competency

• Policy

Cost-volume analysis- Focuses on the relationship between cost, revenue, and volume of output
Break-Even Point (BEP)- The volume of output at which total cost and total revenue are equal

Cost-volume analysis is a viable tool for comparing capacity alternatives if certain assumptions are
satisfied

Financial Analysis

Cash flow- The difference between cash received from sales and other sources, and cash outflow for
labor, material, overhead, and taxes

Present value- The sum, in current value, of all future cash flow of an investment proposal

CHAPTER 5

PROCESS SELECTION AND FACILITY LAYOUT

PROCESS SELECTION- refers to deciding on the way production of goods or services will be organized.
Capital intensity: the mix of equipment and labor

process flexibility: degree to which the system can be adjusted to changes in processing requirements
due to such factors:

- changes in product or service design

- changes in volume

- changes in technology

TECHNOLOGY -Have major influence on business organization

Technological innovation- refers to the discovery and development of new or improved products,
services or processes for producing or providing them
Three different kinds of technology which can have a major impact on costs, productivity and
competitiveness:

1. Product and service technology - discovery and development of new products and services
2. . Process technology - methods, procedures and equipment used to produce goods and provide
services
3. Information Technology (IT) - science and use of computer and other electronic equipment to
store, process and send information

3 primary questions bear on Process Selection

1. How much VARIETY in products or services will the system need to handle?

2. What degree of equipment FLEXIBILITY will be needed?

3. What is the expected VOLUME of output?

PROCESS TYPES

1. Job shop- usually operates on a relatively small scale.

2. Batch - moderate volume of goods or services is desired.

3. Repetitive - Higher volume of more standardized goods or services are needed.

4. Continuous - when a very high volume of nondiscrete, highly standardized output is desired, a
continuous system is used.

5. Project - used for work that is nonroutine. With a unique set of objectives to be accomplished in a
limited time frame.

Automation- is machinery that has sensing and control devices that enable it to operate automatically.

KINDS OF AUTOMATION

1. Fixed automation- specialized equipment for a fixed sequence of operations

2. Programmable Automation - computer-aided design and manufacturing systems (CAD/CAM)

3. Flexible Automation- evolved from programmable automation. It uses equipment that is more
customized than that of programmable automation.
FACILITIES LAYOUT- Based on convenience availability configuration of departments work centers and
equipment with particular emphasis on movement of work (customers & materials) through the
systems.

BASIC LAYOUT TYPES

1. Product layout - Used to achieve a smooth and rapid flow of large volumes of good or customers
through the system.

2. Process layouts - Layouts that can handle varied processing requirements.

3. Fixed position layouts- Layout in which the product or project remains stationary, and workers,
materials, and equipment are moved as needed

4. Combination layouts - The three basic layout types may be altered to satisfy the needs of a particular
situation

5. Cellular Production - Layout in which machines are grouped into a cell that process items that have
similar processing requirements.

Group Technology- The grouping into part families of items with similar design or manufacturing
characteristics

Flexible manufacturing system (FMS) - A group of machines designed to handle intermittent processing
requirements and produce a variety of similar products.

SERVICE LAYOUT- Many service organizations use process layouts because of variability in customer
processing requirements.

Retail Layouts. The objectives that guide design of manufacturing layouts often pertain to cost
minimization and product flow.

Office Layouts. Office layouts are undergoing transformations as the flow of paperwork is replaced with
the increasing use of electronic communications.

LINE BALANCING- Is the process of assigning tasks to workstations in such a way that the workstations
have approximately equal time requirements.

Cycle time is the maximum time allowed at each workstation to complete its set of tasks on a unit.
CHAPTER 6

OPERATION STRATEGY- It is important for management to make design or work system a key element
of it's operations strategy. It refers to the system an organization implements to achieve it's long term
goals and mission.

Job design involves specifying the content and methods of jobs. Job designers focus on what will be
done in a job, who will do the job, how the job will be done, and where the job will be done.

Ergonomics is the incorporation of human factors in the design of the workplace. It relates to design of
equipment, design of work methods and the overall design of the work environments.

TECHNIQUES OF JOB DESIGN

JOB ENLARGEMENT- Means giving a worker a larger portion of the total task

JOB ROTATION - Means having workers periodically exchange jobs

MOTIVATION- is a key factor in many aspects of work life.

TEAM- The efforts of business organizations to become more productive, competitive and customer
oriented

- SELF-DIRECTED TEAMS- Sometimes referred to as self-managed team, are designed to achieve a

JOB ENRICHMENT- Involves an increase in the level of responsibility for planning and coordination tasks.

METHOD ANALYSIS -One of the techniques used by self-directed teams and work analysis is method
analysis, which focuses on how a job is done.

Work Measurement is concerned with the determining the length of time it should complete the job

STOPWATCH TIME STUDY

- was formally introduced by Frederick Winslow Taylor in the late 19th century
- is used to develop a time standard based on observations of one worker taken over a number of
cycles.

Observed time is simply the average of the recorded times.

Normal time is the observed time adjusted for workers performance

STANDARD TIME- The normal time does not take into account such factors such personal delays

STANDARD ELEMENTAL TIME- Are derived from a firm's own historical time study data.

PREDETERMINED STANDARD TIME- Involve the use of published data on standard elemental times.
Work Sampling is a technique for estimating the proportion of time that a worker or machine spends on
various activities and the idle time.

Compensation is significant for the design of work systems as it helps to attract and retain employees
and motivate workforce that contribute to the competitiveness and success of an organization.

INCREASE EMPLOYEE MOTIVATION- Properly compensating employees shows you value them as
workers and as human beings.