Chapter 4: Planning capacity
Capacity = the maximum rate of output of a process or a system.
Operations is involved in the selection of capacity strategies that can be implemented to effectively
meet future demand.
Capacity management:
Capacity planning (long-term) Constraint management (short-term)
Economies and diseconomies of scale Theory of constraints
Capacity timing and sizing strategies Identification and management of bottlenecks
Systematic approach to capacity decisions Product mix decisions using bottlenecks
Managing constraints in a line process
Planning long-term capacity
Long-term capacity plan: deals with investments in new facilities and equipment at the organizational
level and require top management participation and approval.
Plan covers at least 2 years into the future.
Long-term capacity planning is central to the success of an organization.
When choosing a capacity strategy, managers must consider questions as:
How much of a cushion is needed to handle variable, or uncertain, demand?
Should we expand capacity ahead of demand?
Measures of capacity and utilization
Output measures of capacity: best utilized when applied to individual processes within the firm or
when the firm provides a relatively small number of standardized services and products.
Input measures of capacity: used for low-volume, flexible processes.
Used when the amount of customization and variety in the product increases.
Problem with input measures: demand is invariably expressed as an output rate.
Utilization: the degree of which a resource such as equipment, pace or the workforce is currently
being used, and is measured as the ratio of average output rate to maximum capacity (expressed as a
percent).
The average output rate and the capacity must be measured in the same terms.
Utilization rate: indicates the need for adding extra capacity or eliminating unneeded capacity.
Utilization = Average output rate * 100%
Maximum capacity
A process can be operated above its capacity level using marginal methods of production, such as
overtime, extra shift, and temporarily reduced maintenance activities, overstaffing, and subcontracting.
Economies of scale
Economies of scale = a concept that states the average unit cost of service or good can be reduced
by increasing its output rate.
1
Capacity = the maximum rate of output of a process or a system.
Operations is involved in the selection of capacity strategies that can be implemented to effectively
meet future demand.
Capacity management:
Capacity planning (long-term) Constraint management (short-term)
Economies and diseconomies of scale Theory of constraints
Capacity timing and sizing strategies Identification and management of bottlenecks
Systematic approach to capacity decisions Product mix decisions using bottlenecks
Managing constraints in a line process
Planning long-term capacity
Long-term capacity plan: deals with investments in new facilities and equipment at the organizational
level and require top management participation and approval.
Plan covers at least 2 years into the future.
Long-term capacity planning is central to the success of an organization.
When choosing a capacity strategy, managers must consider questions as:
How much of a cushion is needed to handle variable, or uncertain, demand?
Should we expand capacity ahead of demand?
Measures of capacity and utilization
Output measures of capacity: best utilized when applied to individual processes within the firm or
when the firm provides a relatively small number of standardized services and products.
Input measures of capacity: used for low-volume, flexible processes.
Used when the amount of customization and variety in the product increases.
Problem with input measures: demand is invariably expressed as an output rate.
Utilization: the degree of which a resource such as equipment, pace or the workforce is currently
being used, and is measured as the ratio of average output rate to maximum capacity (expressed as a
percent).
The average output rate and the capacity must be measured in the same terms.
Utilization rate: indicates the need for adding extra capacity or eliminating unneeded capacity.
Utilization = Average output rate * 100%
Maximum capacity
A process can be operated above its capacity level using marginal methods of production, such as
overtime, extra shift, and temporarily reduced maintenance activities, overstaffing, and subcontracting.
Economies of scale
Economies of scale = a concept that states the average unit cost of service or good can be reduced
by increasing its output rate.
1
