Presentation

OPS 571

Week 2

4-1

Chapter 4

Strategic Capacity Management

McGraw-Hill/Irwin

Copyright © 2011 The McGraw-Hill Companies, All Rights Reserved

Learning Objectives

1. Recognize the concept of capacity and how important it is to “manage” capacity. 2. Explain the impact of economies of scale on the capacity of a firm. 3. Understand how to use decision trees to analyze alternatives when faced with the problem of adding capacity. 4. Describe the differences in planning capacity between manufacturing firms and service firms.

4-3

Capacity Management in Operations

• Capacity can be defined as the ability to hold, receive, store, or accommodate • Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size

LO 1

4-4

Capacity Planning Time Durations

• Long range: greater than one year • Intermediate range: Monthly or quarterly plans for the next six to 18 months • Short range: less than one month

LO 1

4-5

Capacity Planning Concepts

• Capacity: an attainable rate of output • Best operating level: capacity for which the process was designed • Capacity utilization rate reveals how close a firm is to its best operating level

Capacity used Capacity utilization rate  Best operating level

LO 1

4-6

Example

4-7

Economies and Diseconomies of Scale

• Economies of scale: as a plant gets larger, the average cost per unit drops

– Lower operating and capital costs – Per unit cost of equipment drops=lower operating machine – More specialization of labor

• At some point, the plant becomes too large

– Diseconomies of scale becomes a problem

LO 2

4-8

Other Factors That Affect Plant Size

• • • • •

Internal equipment Labor Capital expenditures Transportation costs Advantages of being close to markets

LO 2

4-9

Capacity Focus

• The concept of the focused factory holds that...